PASADENA, Calif., March 4, 2020 /PRNewswire/ -- Western Asset Mortgage Capital Corporation (the "Company" or "WMC") (NYSE: WMC) today reported its results for the fourth quarter and the year ended December 31, 2019.

FOURTH QUARTER 2019 FINANCIAL HIGHLIGHTS

  • December 31, 2019 book value per share of $10.55, net of fourth quarter common dividend of $0.31 per share declared on December 19, 2019.
  • GAAP net income of $12.5 million, or $0.23 per basic and diluted share.
  • Core earnings plus drop income of $15.8 million, or $0.30 per basic and diluted share.1,2
  • Economic return on book value was a 2.5%1,3 for the quarter.
  • 1.72% annualized net interest margin on our investment portfolio. 1,4,5
  • 5.4x leverage excluding non-recourse debt as of December 31, 2019 (8.0x leverage including non-recourse debt).

OTHER FOURTH QUARTER 2019 HIGHLIGHTS

  • Issued $50.0 million aggregate principal amount of 6.75% convertible senior unsecured notes.
  • Acquired $479.0 million in credit sensitive investments, consisting of:
    • $180.5 million million in Non-Agency CMBS
    • $249.2 million in Residential Whole Loans, and
    • $49.3 million in Commercial Whole Loans.

FULL YEAR 2019 FINANCIAL HIGHLIGHTS

  • Maintained a consistent $0.31 per share quarterly common dividend throughout 2019 for total annual common dividends of $1.24 per share.
  • GAAP net income of $70.7 million, or $1.37 per basic and diluted share.
  • Core earnings plus drop income of $62.1 million, or $1.21 per basic and diluted share.1,2
  • Economic return on book value was 12.8%1,3 for the year.
  • 1.95% annualized net interest margin on our investment portfolio. 1,4,5

OTHER FULL YEAR HIGHLIGHTS

  • $49.3 million of common equity raised in secondary offering, net of offering costs.
  • Completed a securitization of $945.5 million of our Residential Whole Loan investments involving the issuance of $919.0 million of mortgage-backed notes.
  • Issued $90.0 million aggregate principal amount of 6.75% convertible senior unsecured notes.
  • Obtained two new longer term financing facilities, consisting of $200.0 million commercial whole loan financing facility and $700.0 million residential whole loan financing facility.

 

1

Non – GAAP measure.

2

Drop income is income derived from the use of 'to-be-announced' forward contract ("TBA") dollar roll transactions which is a component of our gain (loss) on derivative instruments on our consolidated statement of operations, but is not included in core earnings. Drop income was approximately $986 thousand for the three months and year ended December 31, 2019, respectively.

3

Economic return is calculated by taking the sum of: (i) the total dividends declared; and (ii) the change in book value during the period and dividing by the beginning book value.

4

Includes interest-only securities accounted for as derivatives and the cost of interest rate swaps.

5

Excludes the consolidation of VIE trusts required under GAAP.

MANAGEMENT COMMENTARY

"We delivered strong 2019 results for our shareholders, as the scale and scope of Western Asset's capabilities continue to provide us with strategic benefits," said Jennifer Murphy, Chief Executive Officer of the Company. "Total shareholder return for the year was 38.7%, driven by strong investment portfolio performance and consistent dividends, which we have maintained for 15 consecutive quarters. We generated an economic return on book value of 2.5% for the fourth quarter and 12.8% for the full year, reflecting our focus on active portfolio positioning and risk management. We continue to be committed to our primary objective of generating attractive total returns for our shareholders, while also providing for greater book value stability."

"We completed several significant capital markets transactions during the year. In May, we completed a $50 million equity offering, and in August and December, we issued an additional $90 million in total of our 6.75% convertible senior unsecured notes due in 2022, all enabling us to further invest in attractive assets. We believe this additional capital allowed us to enhance the overall earnings potential of the portfolio and supports our long-term goal of growing the company to gain better scale, which we believe will benefit our shareholders.

"In May, we completed a securitization of a portion of our residential whole loans involving the issuance of $919 million in mortgage-backed notes. This transaction represented the Company's first securitization and enabled us to finance assets with longer-term fixed rate financing at attractive levels. Our successful execution of this securitization reflected the Company's ability to leverage Western Asset's investment and operating platform, a strategic advantage for the Company and our shareholders," Ms. Murphy concluded.

Harris Trifon, Chief Investment Officer of the Company, commented, "Our positive performance for the fourth quarter and full year were driven by contributions across our diverse holdings in a number of subsectors of the mortgage market and reflects our efforts to increase our exposure to credit sensitive investments. During the quarter, we acquired $479 million of credit sensitive assets, including $49 million of Commercial Whole Loans, $249 million of Residential Whole Loans and $181 million of Non-Agency CMBS, all areas where we continue to see opportunities to achieve attractive risk-adjusted returns."

"Our current expectations are for continued, yet moderate, U.S. economic growth along with subdued inflation expectations and an ongoing accommodative Federal Reserve monetary policy. We believe that credit spread sectors will continue to perform well in 2020, and we will maintain our focus on areas where we see the best relative value within our target universe. We believe that the current moderate growth environment is accretive for real estate and consumers, and we remain constructive on both residential and commercial real estate. The U.S. housing sector continues to advance with demand driven by ongoing job growth, high consumer confidence and increased household formations, all against a backdrop of a very tight supply of entry-level homes. Commercial real estate fundamentals, meanwhile, remain positive, driven by the ongoing economic expansion. As such, we believe that our strategically diverse investment portfolio, focused on risk management, positions us well to continue generating strong core earnings while preserving our book value, with the overriding goal of providing our shareholders favorable risk-adjusted returns," concluded Mr. Trifon.

2019 Quarterly Results

The below table reflects a summary of our operating results (dollars in thousands, except per share data):

For the Three Months Ended

GAAP Results

December 31, 2019

September 30, 2019

June 30, 2019

March 31, 2019








Net Interest Income

$

18,927

$

16,570

$

15,860

$

15,633

Other Income (Loss):






Realized gain (loss) on sale of investments, net

11,992

21,399

(8)

(5,105)

Other than temporary impairment

(2,228)

(1,819)

(3,295)

(1,232)

Unrealized gain (loss), net

(52,896)

35,030

74,614

50,781

Gain (loss) on derivative instruments, net

42,007

(47,056)

(71,530)

(27,148)

Other, net

518

918

532

236

Other Income (loss)

(607)

8,472

313

17,532

Total Expenses

5,209

5,377

5,081

5,277

Income (loss) before income taxes

13,111

19,665

11,092

27,888

Income tax provision (benefit)

622

(55)

478

12

Net income (loss)

$

12,489

$

19,720

$

10,614

$

27,876








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

$

0.23

$

0.37

$

0.21

$

0.58

Non-GAAP Results






Core earnings plus drop income(1)

$

15,790

$

15,014

$

15,758

$

15,492

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

$

0.30

$

0.28

$

0.31

$

0.32

Weighted average yield(2)(4)

4.60

%

4.53

%

4.94

%

5.17

%

Effective cost of funds(3)(4)

3.09

%

3.05

%

2.94

%

3.25

%

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

1.72

%

1.69

%

2.14

%

2.36

%


(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.

Portfolio Composition

As of December 31, 2019, the Company owned an aggregate investment portfolio with a fair market value totaling $4.9 billion. The following tables set forth additional information regarding the Company's investment portfolio as of December 31, 2019:

Portfolio Characteristics

Agency Portfolio

The following table summarizes certain characteristics of our Agency portfolio by investment category as of December 31, 2019 (dollars in thousands):

Principal Balance

Amortized Cost

Fair Value

Net Weighted
Average Coupon

Agency CMBS

$

1,347,929

$

1,374,443

$

1,435,477

3.4

%

Agency CMBS Interest-Only Strips, accounted for as derivatives

N/A

N/A

3,092

0.4

%

Total Agency CMBS

1,347,929

1,374,443

1,438,569

3.1

%








Agency RMBS

327,814

333,287

340,771

3.5

%

Agency RMBS Interest-Only Strips

N/A

8,661

10,343

2.8

%

Agency RMBS Interest-Only Strips, accounted for as derivatives

N/A

N/A

5,572

3.0

%

Total Agency RMBS

327,814

341,948

356,686

3.3

%

Total

$

1,675,743

$

1,716,391

$

1,795,255

3.1

%

Credit Sensitive Portfolio

The following table summarizes certain characteristics of our credit sensitive portfolio by investment category as of December 31, 2019 (dollars in thousands):

Principal Balance

Amortized Cost

Fair Value

 Weighted
Average Coupon(1)

Non-Agency RMBS

$

52,767

$

37,003

$

38,131

4.8

%

Non-Agency RMBS IOs and IIOs

N/A

7,705

7,683

0.6

%

Non-Agency CMBS

354,458

314,533

316,019

5.1

%

Residential Whole Loans

1,325,443

1,351,192

1,375,860

5.2

%

Residential Bridge Loans

37,196

37,257

36,419

9.5

%

Securitized Commercial Loans(1)

943,379

910,096

909,040

3.4

%

Commercial Loans

370,213

369,704

370,213

7.2

%

Other Securities

71,896

73,975

80,161

6.7

%

$

3,155,352

$

3,101,465

$

3,133,526

4.3

%


(1)

The Company acquired Non-Agency CMBS securities with certain control rights, which resulted in the consolidation of three variable interest entities and the recording $909.0 million in securitized commercial loans.

Portfolio Financing and Hedging

Financing

Repurchase Agreements

As of December 31, 2019, the Company had borrowings under 21 of its 34 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 its $700.0 million residential whole loan and $200.0 million commercial whole loan financing facilities, as of December 31, 2019 (dollars in thousands):

Repurchase Agreements

Balance

Weighted Average
Interest Rate (end
of period)

Weighted Average
Remaining
Maturity (days)

Short Term Borrowings:





Agency RMBS

$

348,274

1.99

%

52

Agency CMBS

1,352,248

2.05

%

26

Non-Agency RMBS

30,481

3.56

%

9

Non-Agency CMBS

190,390

3.05

%

35

Residential Whole Loans

102,029

3.51

%

27

Residential Bridge Loans

29,869

3.93

%

28

Commercial Loans

62,746

4.04

%

28

Securitized commercial loans

116,087

3.93

%

49

Other Securities

56,762

3.23

%

34

Subtotal

$

2,288,886

2.41

%

32

Long Term Borrowings:





Residential Whole Loans (1)

$

374,143

3.27

%

898

Commercial Loans (1)

161,848

3.88

%

590

Subtotal

$

535,991

3.45

%

805

Repurchase agreements borrowings

$

2,824,877

2.61

%

179

Less unamortized debt issuance costs

76

N/A

N/A

Repurchase agreements borrowings, net

$

2,824,801

2.61

%

179


(1)

Certain Residential Whole Loans and Commercial Loans were financed under two longer financing facilities. These facilities automatically roll 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. 

Convertible Senior Unsecured Notes

At December 31, 2019, the Company had $205.0 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.

Mortgage-Backed Notes

The following table summarizes the residential mortgage-backed notes issued by the Company's securitization trust (the "Arroyo Trust") at December 31, 2019 (dollars in thousands):

Classes

Principal Balance

Coupon

 Carrying Value

Contractual
Maturity

Offered Notes:(1)



Class A-1

$

681,668

3.3%

$

681,666

4/25/2049

Class A-2

36,525

3.5%

36,524

4/25/2049

Class A-3

57,866

3.8%

57,864

4/25/2049

Class M-1

25,055

4.8%

25,055

4/25/2049

Subtotal

$

801,114

$

801,109

Less: Unamortized Deferred Financing Costs

N/A

5,298

Total

$

801,114

$

795,811



(1)

The subordinate notes were retained by the Company.

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.

As of December 31, 2019, the Company had three consolidated variable interest entities that had an aggregate securitized debt balance of $681.7 million. The securitized debt of these trusts can only be settled with the collateral held by the trusts and is non-recourse to the Company.

Hedging

Interest Rates Swaps

As of December 31, 2019, the Company had $2.6 billion notional value of pay-fixed interest rate swaps and $1.4 billion notional value of variable pay rate swaps, which have variable maturities between May 2, 2020 and June 13, 2039.

The following table summarizes the average fixed pay rate, average floating receive rate and average maturity for the Company's fixed pay interest rate swaps as of December 31, 2019 (dollars in thousands):

Remaining Interest Rate Swap Term

Notional Value

Average
Fixed Pay
Rate

Average
Floating Receive
Rate

Average
Maturity
(Years)

1 year or less

$

200,000

1.8

%

1.9

%

0.4

Greater than 3 years and less than 5 years

622,400

2.6

%

1.9

%

4.1

Greater than 5 years

1,728,600

2.1

%

2.0

%

8.9

Total

$

2,551,000

2.2

%

2.0

%

7.1

The following table summarizes the average variable pay rate, average fixed receive rate and average maturity for the Company's variable pay interest rate swaps as of December 31, 2019 (dollars in thousands):

Remaining Interest Rate Swap Term

Notional Amount

Average
Variable Pay
Rate

Average Fixed
Receive Rate

Average
Maturity
(Years)

Greater than 1 year and less than 3 years

810,000

2.0

%

2.0

%

1.6

Greater than 3 years and less than 5 years

550,000

1.9

%

1.6

%

5.0

Greater than 5 years

45,000

1.9

%

2.3

%

19.5

Total

$

1,405,000

2.0

%

1.9

%

3.5

Other Derivatives Instruments

The following table summarizes the Company's other derivative instruments at December 31, 2019 (dollars in thousands):

Other Derivative Instruments

Notional Amount

Fair Value

Credit default swaps, asset

$

60,100

$

948

TBA securities, asset

1,000,000

1,146

Other derivative instruments, assets


2,094





Credit default swaps, liability

$

90,900

$

(3,795)

TBA securities, liability

1,000,000

(2,074)

Total other derivative instruments, liabilities


(5,869)

Total other derivative instruments, net


$

(3,775)

Dividend

On December 19, 2019, 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 $17.78 per share in a combination of cash and stock.

Conference Call

The Company will host a conference call with a live webcast tomorrow, March 5, 2020, at 11:00 a.m. Eastern Time/8:00 a.m. Pacific Time, to discuss financial results for the fourth quarter and year ended December 31, 2019.

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/10138813 and enter in their contact information. Investors will then be issued a personalized phone number and pin to dial into the live conference call. Individuals can pre-register any time prior to the start of the conference call tomorrow.

A telephone replay will be available through March 19, 2020 by dialing (877) 344-7529 from the United States, or (412) 317-0088 from outside the United States, and entering conference ID 10138813. 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 Credit Risk Transfer Securities and Residential Whole, 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 ("LeggMason").

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

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; and legislative and regulatory changes that could adversely affect the business of the Company. 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)



December 31, 2019

December 31, 2018

Assets:



Cash and cash equivalents

$

31,331

$

21,987

Restricted cash

52,948

55,808

Agency mortgage-backed securities, at fair value ($1,756,917 and $1,505,979 pledged as collateral, at fair value, respectively)

1,795,255

1,505,979

Non-Agency mortgage-backed securities, at fair value ($292,613 and $237,107 pledged as collateral, at fair value, respectively)

361,833

250,856

Other securities, at fair value ($80,031 and $59,780 pledged as collateral, at fair value, respectively)

80,161

59,906

Residential Whole-Loans, at fair value ($1,375,860 and $1,041,885 pledged as collateral, at fair value, respectively)

1,375,860

1,041,885

Residential Bridge Loans ($33,269 and $211,999 at fair value and $34,897 and $221,486 pledged as collateral, respectively)

36,419

221,719

Securitized commercial loan, at fair value

909,040

1,013,511

Commercial Loans, at fair value ($350,213 and $196,123 pledged as collateral, at fair value, respectively)

370,213

216,123

Investment related receivable

19,931

42,945

Interest receivable

19,413

21,959

Due from counterparties

98,947

39,623

Derivative assets, at fair value

5,111

2,606

Other assets

4,509

2,488

Total Assets (1)

$

5,160,971

$

4,497,395

Liabilities and Stockholders' Equity:



Liabilities:



Repurchase agreements, net

$

2,824,801

$

2,818,837

Convertible senior unsecured notes, net

197,299

110,060

Securitized debt, net ($681,643 and $949,626 at fair value and $142,905 and $246,802 held by affiliates, respectively)

1,477,454

949,626

Interest payable (includes $647 and $816 on securitized debt held by affiliates, respectively)

15,001

8,532

Due to counterparties

709

17,781

Derivative liability, at fair value

6,370

10,130

Accounts payable and accrued expenses

3,188

3,858

Payable to affiliate

2,148

4,615

Dividend payable

16,592

14,916

Other liabilities

52,948

56,031

Total Liabilities (2)

4,596,510

3,994,386

Commitments and contingencies



Stockholders' Equity:



Common stock, $0.01 par value, 500,000,000 shares authorized, and 53,523,876 and 48,116,379 outstanding, respectively

535

481

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

—

—

Additional paid-in capital

889,227

833,810

Retained earnings (accumulated deficit)

(325,301)

(331,282)

Total Stockholders' Equity

564,461

503,009

Total Liabilities and Stockholders' Equity

$

5,160,971

$

4,497,395

 

Western Asset Mortgage Capital Corporation and Subsidiaries
Consolidated Balance Sheets (Continued)

(in thousands—except share and per share data)



December 31, 2019

December 31, 2018

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



Cash and cash equivalents

$

7,589

$

674

Restricted cash

52,948

55,808

Residential Whole-Loans, at fair value ($1,375,860 and $1,041,885 pledged as collateral, at fair value, respectively)

1,375,860

1,041,885

Residential Bridge Loans ($31,748 and $211,766 at fair value and $34,897 and $221,486 pledged as collateral, respectively)

34,897

221,486

Securitized commercial loan, at fair value

909,040

1,013,511

Commercial Loans, at fair value ($90,788 and $196,123 pledged as collateral, respectively)

90,788

196,123

Investment related receivable

19,138

42,945

Interest receivable

10,829

15,540

Other assets

90

178

Total assets of consolidated VIEs

$

2,501,179

$

2,588,150

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



Securitized debt, net ($681,643 and $949,626 at fair value and $142,905 and $246,802 held by affiliates, respectively)

$

1,477,454

$

949,626

Interest payable (includes $647 and $816 on securitized debt held by affiliates, respectively)

3,886

2,419

Accounts payable and accrued expenses

185

708

Other liabilities

52,948

$

56,033

Total liabilities of consolidated VIEs

$

1,534,473

$

1,008,786

 

Western Asset Mortgage Capital Corporation and Subsidiaries

Consolidated Statements of Operations

(in thousands—except share and per share data)



Three Months Ended(1)

The Year
Ended


December 31,
2019

September 30,
2019

June 30,
2019

March 31,
2019

December 31,
2019

Net Interest Income









Interest income

$

55,761

$

55,652

$

53,818

$

52,033

$

217,264

Interest expense

36,834

39,082

37,958

36,400

150,274

Net Interest Income

18,927

16,570

15,860

15,633

66,990

Other Income (Loss)









Realized gain (loss) on sale of investments, net

11,992

21,399

(8)

(5,105)

28,278

Other than temporary impairment

(2,228)

(1,819)

(3,295)

(1,232)

(8,574)

Unrealized gain (loss), net

(52,896)

35,030

74,614

50,781

107,529

Gain (loss) on derivative instruments, net

42,007

(47,056)

(71,530)

(27,148)

(103,727)

Other, net

518

918

532

236

2,204

Other Income (Loss)

(607)

8,472

313

17,532

25,710

Expenses









Management fee to affiliate

1,987

1,800

1,832

1,735

7,354

Other operating expenses

1,079

1,589

1,253

1,598

5,519

General and administrative expenses:









Compensation expense

671

671

705

544

2,591

Professional fees

1,031

973

761

1,215

3,980

Other general and administrative expenses

441

344

530

185

1,500

Total general and administrative expenses

2,143

1,988

1,996

1,944

8,071

Total Expenses

5,209

5,377

5,081

5,277

20,944

Income (loss) before income taxes

13,111

19,665

11,092

27,888

71,756

Income tax provision (benefit)

622

(55)

478

12

1,057

Net income (loss)

$

12,489

$

19,720

$

10,614

$

27,876

$

70,699

Net income (loss) per Common Share – Basic

$

0.23

$

0.37

$

0.21

$

0.58

$

1.37

Net income (loss) per Common Share – Diluted

$

0.23

$

0.37

$

0.21

$

0.58

$

1.37

Dividends Declared per Share of Common Stock

$

0.31

$

0.31

$

0.31

$

0.31

$

1.24

(1) Consolidated Statements of Operations for each of the three months ended March 31, 2019, June 30, 2019 September 30, 2019 and December 31, 2019 are unaudited.

 

Reconciliation of GAAP Net Income to Non-GAAP Core Earnings

(Unaudited)

(in thousands—except share and per share data)

The table below reconciles Net Income (Loss) to Core Earnings for each of the three months ended March 31, 2019, June 30, 2019, September 30, 2019 and December 31, 2019 and the year ended December 31, 2019:



Three Months Ended

The Year Ended

(dollars in thousands)

December 31,
2019

September 30,
2019

June 30,
2019

March 31,
2019

December 31,
2019

Net Income (loss) – GAAP

$

12,489

$

19,720

$

10,614

$

27,876

$

70,699

Income tax provision

622

(55)

478

12

1,057

Net income (loss) before income tax

13,111

19,665

11,092

27,888

71,756











Adjustments:









Investments:









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

52,896

(35,030)

(74,614)

(50,781)

(107,529)

Other than temporary impairment

2,228

1,819

3,295

1,232

8,574

Realized (gain) loss on sale of investments

(11,992)

(21,399)

8

5,105

(28,278)

One-time transaction costs

154

531

130

269

1,084











Derivative Instruments:









Net realized (gain) loss on derivatives

(35,918)

51,577

65,025

42,885

123,569

Unrealized (gain) loss on derivatives

(6,097)

(2,499)

10,519

(11,313)

(9,390)











Amortization of discount on convertible senior note

257

186

138

137

718

Non-cash stock-based compensation expense

165

164

165

70

564

Total adjustments

1,693

(4,651)

4,666

(12,396)

(10,688)

Core Earnings – Non-GAAP

$

14,804

$

15,014

$

15,758

$

15,492

$

61,068

Basic and Diluted Core Earnings per Common Share and Participating Securities

$

0.28

$

0.28

$

0.31

$

0.32

$

1.19

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

$

0.30

$

0.28

$

0.31

$

0.32

$

1.21

Basic weighted average common shares and participating securities

53,482,765

53,376,531

50,823,683

48,236,647

51,499,871

Diluted weighted average common shares and participating securities

53,482,765

53,376,531

50,823,683

48,236,647

51,499,871

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)

December 31,
2019

 September 30,
2019

June 30,
2019

March 31,
2019

Net interest income

$

18,927

$

16,570

$

15,860

$

15,633

Interest income from IOs and IIOs accounted for as derivatives

103

133

164

189

Net interest income from interest rate swaps

(347)

1,715

3,850

4,283

Adjusted net interest income

18,683

18,418

19,874

20,105

Total expenses

(5,209)

(5,377)

(5,081)

(5,277)

Non-cash stock-based compensation

165

164

165

70

One-time transaction costs

154

531

130

269

Amortization of discount on convertible unsecured senior notes

257

186

138

137

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

754

1,092

532

188

Core Earnings

$

14,804

$

15,014

$

15,758

$

15,492

 

Reconciliation of Interest Income and Effective Cost of Funds

(Unaudited, in thousands)

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 December 31, 2019, September 30, 2019, June 30, 2019 and March 31, 2019:



Three Months Ended

The Year
Ended

(dollars in thousands)

December 31,
2019

September 30,
2019

June 30,
2019

March 31,
2019

December 31,
2019

Coupon interest income

$

59,586

$

60,411

$

57,792

$

54,771

$

232,560

Premium amortization, discount accretion and amortization of basis, net

(3,825)

(4,759)

(3,974)

(2,738)

(15,296)

Interest income

$

55,761

$

55,652

$

53,818

$

52,033

$

217,264

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









Coupon interest income

951

723

819

784

3,277

Amortization of basis (Non-GAAP Financial Measure)

(848)

(590)

(655)

(595)

(2,688)

Subtotal

103

133

164

189

589

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

$

55,864

$

55,785

$

53,982

$

52,222

$

217,853


(1)

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

The following table reconciles the Effective Cost of Funds (Non-GAAP financial measure) with interest expense for each of the three months ended December 31, 2019, September 30, 2019, June 30, 2019 and March 31, 2019:



Three Months Ended


December 31, 2019

September 30, 2019

June 30, 2019

March 31, 2019

 (dollars in thousands)

Interest

Effective
Borrowing

Costs

Interest

Effective

Borrowing

Costs

Interest

Effective

Borrowing

Costs

Interest

Effective

Borrowing

Costs

Interest expense

$

36,834

3.18

%

$

39,082

3.35

%

$

37,958

3.54

%

$

36,400

3.94

%

Adjustments:















Interest expense on Securitized debt from consolidated VIEs

(6,283)

(3.95)

%

(6,657)

4.18

%

(8,215)

(4.62)

%

(9,157)

(4.22)

%

Net interest (received) paid - interest rate swaps

347

0.03

%

(1,715)

(0.15)

%

(3,850)

(0.36)

%

(4,283)

(0.46)

%

Effective Borrowing Costs

$

30,898

3.09

%

$

30,710

3.05

%

$

25,893

2.17

%

$

22,960

3.25

%

Weighted average borrowings

$

3,971,551



$

4,000,534



$

3,527,942



$

2,868,327



The following table reconciles the Effective Cost of Funds (Non-GAAP financial measure) with interest expense for the years ended December 31, 2019 and 2018:



The Year Ended


December 31, 2019

December 31, 2018

 (dollars in thousands)

Interest

Effective

Borrowing

Costs

Interest

Effective

Borrowing

Costs

Interest expense

$

150,274

3.48

%

$

138,240

3.19

%

Adjustments:







Interest expense on Securitized debt from consolidated VIEs

(30,312)

(4.15)

%

(42,440)

(4.43)

%

Net interest (received) paid - interest rate swaps

(9,501)

(0.22)

%

(6,158)

(0.14)

%

Effective Borrowing Costs

$

110,461

3.07

%

$

89,642

2.65

%

Weighted average borrowings

$

3,594,021



$

3,376,557


 

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SOURCE Western Asset Mortgage Capital Corporation

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