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

CORPORATE UPDATE

The Company significantly improved its balance sheet in the second quarter by reducing debt and leverage, increasing liquidity and shareholder equity, and completing new financing arrangements that significantly reduce the Company's exposure to short term repurchase agreements. For the quarter ended June 30, 2020, these measures included, but were not limited to, the following:

  • In June, we completed a securitization of $355.8 million of our Residential Whole Loan investments, enabling the Company to secure $341.7 million of long-term financing at a weighted average interest rate of 2.0%.
  • In May, we closed a 12 month term financing arrangement, with a 12 month extension at the counterparty's option, for Non-Agency RMBS and Non-Agency CMBS, significantly mitigating exposure to margin volatility.
  • In April, we closed an 18 month term financing arrangement without margin requirements for the entire unsecuritized Residential Whole Loan portfolio. This financing reduced our exposure to repurchase agreement financing and eliminated associated margin calls.
  • Reduced repurchase agreement financings in the second quarter by 76.2% to $369.1 million.
  • Raised $22.0 million of equity capital through the sale of 6.0 million shares at a premium to book value through our At-The-Market Program.
  • In July, 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.
  • Sold approximately $423.2 million of Agency MBS, $42.6 million of Non-Agency MBS, $144.3 million in conforming whole loans, and $18.2 million other securities and repaid associated repurchase agreement financing to significantly reduce margin call exposure.
  • Our Manager waived management fees for April 2020 and May 2020.

SECOND QUARTER 2020 FINANCIAL RESULTS

  • GAAP book value per share of $3.17.
  • GAAP net loss of $15.6 million, or $0.29 per basic and diluted share.
    • Included in GAAP net loss is an accrual for a premium recapture fee which is payable to the counterparty of our Residential Whole Loan Facility of $20.5 million upon termination or maturity of the facility. This fee was incurred as a result of refinancing $355.8 million of Residential Whole Loans financed on the facility through the securitization.
  • Economic book(2) value per share of $4.04
  • Core earnings of $5.8 million, or $0.11 per basic and diluted share.1
  • Economic return on GAAP book value was negative 7.0% for the quarter.1,3
  • 1.91% annualized net interest margin on our investment portfolio. 1,4,5
  • Reduced recourse leverage to 3.0x leverage down from 9.5x at March 31, 2020.

 

1

Non – GAAP measure.

2

Economic book value is a non-GAAP financial measure. See page 16 for 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 and the cost of interest rate swaps.

5

Excludes the consolidation of VIE trusts required under GAAP.

MANAGEMENT COMMENTARY 

"The second quarter of 2020 stood in sharp contrast to the first as global risk sentiment, equity and credit markets rebounded from their lows in March," said Jennifer Murphy, Chief Executive Officer of the Company. "However, the recovery in asset prices has been uneven, with sectors that have received direct government support, like Agency RMBS and CMBS, generally seeing more recovery than credit-oriented residential and commercial mortgage loans and securities. In this still challenging environment for credit-oriented mortgage assets, we have taken actions to fortify the Company's balance sheet and improve the future earnings power of the portfolio, including reducing our portfolio leverage to 3.0x recourse debt (down from 9.5x as of the first quarter), securing longer-term fixed rate financing at attractive levels, significantly reducing our reliance on short term repurchase agreement financing arrangements, 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 position WMC's shareholders to benefit from what we anticipate to be the eventual recovery of asset values and improved earnings sustainability of the portfolio. Our priority is to put the Company in a position to resume paying an attractive dividend supported by sustainable core earnings."

"For the past several years, our investment strategy has focused on high quality borrowers and assets, as well as a diversified investment approach. We believe there continues to be the potential for meaningful improvement in the prices of our assets, as well as the Company's book value, if as we expect the pandemic subsides and economic activity resumes. To assist investors in assessing one aspect of this potential, this quarter we are including a calculation of WMC's "Economic Book Value." Economic Book Value removes the consolidated assets and liabilities of three securitizations from our balance sheet (including the two sponsored by the Company) and adds back the fair market value of the retained and acquired interest in these securitizations. This calculation results in an Economic Book Value of $4.04 per share as of June 30, 2020.

Ms. Murphy continued, "We recorded a GAAP net loss of $15.6 million, or $0.29 per share, and a sequential decline in book value per share of 7.0%. This included $20.5 million of expense related to a profit participation fee incurred on the securitization of $355.8 million of Non-QM Residential Whole Loans. This fee was fully expensed in the second quarter and represented more than 100% of the quarter's loss and book value decline, but the benefits of the securitization are expected to be realized by the Company for years to come. Through the securitization, we financed these $355.8 million of Non-QM Whole Loans for 35 years at an attractive weighted average rate of 2.0%. This was an important milestone that enabled us to strengthen our capital structure and positions us for improved cash flows from these assets for a long period of time."

"Our core earnings were $0.11 per share during the second quarter, reflecting a smaller asset base and lower portfolio leverage. We made the decision to retain those earnings and not pay a second quarter dividend to build additional liquidity and equity, which we believe will benefit shareholders over the long term. Our commitment to shareholders continues to be to protect and grow the value of the portfolio and position the Company to resume delivering on our long-term objectives of generating sustainable core earnings that support an attractive dividend, with the overall goal of 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 rallied in the second quarter, driven by improved liquidity conditions across financial markets and the reopening of the economy, which translated into higher valuations on a number of our portfolio holdings. However, the pace of the recovery in asset prices has been uneven across the residential and commercial mortgage credit markets and current valuations appear to indicate broad and significant real estate price declines and permanent impairments that we don't expect to materialize. Our view remains that the current recession will eventually pass and give way to an economic recovery, although the timing and strength of that recovery remain dependent on the future trajectory of COVID-19 and fiscal and monetary stimulus. In the meantime, we have positioned our portfolio to benefit from a recovery by investing in high quality assets where our borrowers have resources to withstand a protracted downturn." 

"Although we believe valuations in mortgage credit assets are favorable relative to the fundamental outlook for residential and commercial real estate despite the uncertainty in the near term, our primary focus is on maintaining sufficient liquidity and positioning the portfolio for potential future appreciation. We consider our current stance is the best way to put us back on course towards achieving our long-term objectives and enhancing shareholder value," concluded Mr. Trifon.   

OPERATING RESULTS

The below table reflects a summary of our operating results:



For the Three Months Ended

GAAP Results


June 30, 2020


March 31, 2020



(in thousands-except share and per share data)






Net Interest Income


$

8,535



$

18,741


Other Income (Loss):





Realized gain (loss) on investments, net


(6,960)



89,186


Unrealized gain (loss), net


16,040



(296,111)


Gain (loss) on derivative instruments, net


(8,143)



(189,691)


Other, net


(45)



461


Other Income (Loss)


892



(396,155)


Total Expenses


24,805



4,534


Income (loss) before income taxes


(15,378)



(381,948)


Income tax provision (benefit)


255



(93)


Net income (loss)


$

(15,633)



$

(381,855)


Net income attributable to non-controlling interest


2



2


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


$

(15,635)



$

(381,857)







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


$

(0.29)



$

(7.15)


Non-GAAP Results





Core earnings plus drop income (1)


$

5,802



$

15,779


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


$

0.11



$

0.29


Weighted average yield(2)(4)


5.40

%


4.90

%

Effective cost of funds(3)(4)


3.69

%


3.28

%

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


1.91

%


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.

Portfolio Composition

As of June 30, 2020, the Company owned an aggregate investment portfolio with a fair market value totaling $2.2 billion. The following tables sets forth additional information regarding the Company's investment portfolio as of June 30, 2020:

Portfolio Characteristics

Credit Sensitive Portfolio

The Company's Non-QM residential portfolio, in our Manager's view, is performing well, given the severe economic background.  The loans in a forbearance plan at the end of June 2020 represented less than 16% of the total outstanding.  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 approximate LTV of 62.5% and despite being concentrated in retail and hotel assets, over 70.0% 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 65.4% 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 June 30, 2020 (dollars in thousands): 


Principal Balance


Amortized Cost


Fair Value


 Weighted
Average Coupon(1)

Non-Agency RMBS

$

38,863



$

23,648



$

21,693



4.6

%

Non-Agency RMBS IOs and IIOs

N/A



6,847



5,278



0.5

%

Non-Agency CMBS

274,267



245,884



189,317



5.2

%

Residential Whole Loans

1,147,860



1,173,259



1,124,051



5.2

%

Residential Bridge Loans(1),(2)

28,028



28,044



26,505



9.5

%

Securitized Commercial Loans  

519,735



520,509



465,694



3.3

%

Commercial Loans

332,576



332,378



323,474



6.6

%

Other Securities

51,668



51,489



40,466



4.4

%


$

2,392,997



$

2,382,058



$

2,196,478



3.8

%



(1)

Includes Residential Bridge Loans carried at amortized cost of $2.3 million as of June 30, 2020. The fair value of these loans was $2.2 million as of June 30, 2020.

(2)

As of June 30, 2020, the Company had real estate owned ("REO") properties with an aggregate carrying value of $2.2 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 June 30, 2020 (dollars in thousands): 


Principal Balance


Amortized Cost


Fair Value


Net Weighted
Average Coupon

Agency RMBS Interest-Only Strips

N/A



$

142



$

180



2.6

%

Agency RMBS Interest-Only Strips, accounted for as derivatives

N/A



N/A



1,795



2.6

%

Total Agency RMBS



142



1,975



2.6

%









Total

$



$

142



$

1,975



2.6

%

PORTFOLIO FINANCING AND HEDGING

Financing Activity

Repurchase Agreements

The market disruptions surrounding COVID-19 resulted in the decline of the Company's asset values making it challenging to obtain repurchase agreement financing with favorable terms or at all.  The Company's repurchase agreement counterparties have increased borrowing rates and increased haircuts. In the second quarter in order to manage the severe market conditions and the resulting large margin demands from lenders and pressure on the Company's liquidity, the Company entered into two longer term financing arrangements as it sought to reduce its exposure to short-term financings with daily mark to market exposure.  Below is a summary of each of the these financing arrangements;

Residential Whole Loan Facility

On April 21, 2020, the Company entered into amendments with respect to certain of its loan warehouse 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 is approximately 84% of the aggregate unpaid principal balance of the loans. The facility matures on October 20, 2021. All principal payments and income generated by the loans during the term of the facility are 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 will be 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 is not involved in the disposition of the loans.

Initially, the Company's aggregate borrowings under this facility with respect to its Residential Whole Loans were approximately $385.0 million and the market value of such loans was approximately $430.0 million.  On June 29, 2020, the Company securitized approximately $355.8 million of the Residential Whole Loans and paid down the facility by approximately $339.4 million (see "Securitized Debt" below for additional details).   As noted above part of the financing arrangements the Company agreed to pay the lender a fee of 30% of all realized value on the Residential Whole Loans above the counterparty's amortized basis upon securitization or sale.  As a result of refinancing the Residential Whole Loans through a securitization, the Company accrued the premium recapture fee of approximately $20.5 million, which is payable at the maturity of the facility, and is recorded in "Financing transaction costs" in the Consolidated Statements of Operations.  Approximately $74.4 million in non QM loans remain in the facility which are also subject to the recapture premium at sale or securitization and the amount of such liability is contingent on the realizable value at time of sale or securitization.

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 5.00% 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 June 30, 2020, the Company had borrowings under 6 master repurchase agreements. The following table sets forth additional information regarding the Company's portfolio financing under the master repurchase agreements as of June 30, 2020 (dollars in thousands):



Outstanding
Borrowings


Weighted Average
Interest Rate               


Weighted Average
Remaining Days to
Maturity

Short Term Borrowings:







Agency RMBS


$

1,491



1.41

%


60

Non-Agency CMBS


9,118



3.69

%


10

Residential Whole-Loans


16,075



5.18

%


11

Residential Bridge Loans


21,159



3.04

%


36

Commercial Loans


36,575



3.42

%


78

Other Securities


2,496



5.49

%


7

Subtotal


86,914



3.71

%


46

Long Term Borrowings







Non-Agency CMBS


78,033



5.50

%


280

Non-Agency RMBS


15,515



5.50

%


219

Residential Whole-Loans (1)


23,627



5.50

%


478

Commercial Loans (1)


150,581



2.32

%


456

Other securities


14,491



5.50

%


310

Subtotal


282,247



3.80

%


389

Repurchase agreements borrowings


$

369,161



3.78

%


308

Less unamortized debt issuance costs


65



N/A



N/A


Repurchase agreements borrowings, net


$

369,096



3.79

%


308



(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 repurchase agreements 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 June 30, 2020.

Convertible Senior Unsecured Notes

At June 30, 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.

On July 1, 2020, the Company issued an aggregate of 1,354,084 shares of its common stock, in exchange for $5,000,000 aggregate principal amount of its 6.75% Convertible Senior Notes pursuant to separate privately negotiated exchange agreement.

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 June 30, 2020 (dollars in thousands):

Classes

Principal  Balance

Coupon

Carrying Value

Contractual
Maturity

Offered Notes:(1)





Class A-1

$

592,742


3.3%

$

592,740


4/25/2049

Class A-2

31,760


3.5%

31,759


4/25/2049

Class A-3

50,317


3.8%

50,315


4/25/2049

Class M-1

25,055


4.8%

25,055


4/25/2049


699,874



699,869



Less: Unamortized Deferred Financing Cost

N/A  



4,851



Total

$

699,874



$

695,018



The Company retained the subordinate bonds and these bonds had a fair market value of $51.7 million at June 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 June 30, 2020 (dollars in thousands):

Classes

Principal  Balance

Coupon

Carrying Value

Contractual Maturity

Offered Notes:(1)





Class A-1A

$

266,790


1.7%

$

266,843


3/25/2055

Class A-1B

31,658


2.1%

31,658


3/25/2055

Class A-2

13,518


2.9%

13,521


3/25/2055

Class A-3

17,963


3.3%

17,967


3/25/2055

Class M-1

11,739


4.3%

11,739


3/25/2055

Subtotal

341,668



341,728



Less: Unamortized Deferred Financing Costs

N/A  



2,727



Total

$

341,668



$

339,001



The Company retained the subordinate bonds and these bonds had a fair market value of $28.1 million at June 30, 2020. The retained Arroyo 2020-1 subordinate bonds are eliminated in consolidation.

RETL 2019 Trust

The following table summarizes RETL 2019 Trust's commercial mortgage pass-through certificates at June 30, 2020 (dollars in thousands):

Classes

Principal  Balance

Coupon

 Fair Value

Contractual Maturity

Class A

$

64,835


1.3%

$

61,678


3/15/2021

Class B

101,200


1.7%

91,382


3/15/2021

Class C

308,400


2.3%

271,126


3/15/2021

Class HRR

45,300


8.7%

41,477


3/15/2021

Class X-EXT(1)

N/A  


1.2%

31


3/15/2021


$

519,735



$

465,694





(1)

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

The Company acquired the HRR bond and the bond had a fair market value of $41.5 million at June 30, 2020. The HRR bond is eliminated in consolidation.

Derivatives Activity

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

Other Derivative Instruments


Notional Amount


Fair Value

Credit default swaps, asset


$

3,520



$

714


Total derivative instruments, assets




714







Credit default swaps, liability


4,140



(943)


Total derivative instruments, liabilities




(943)


Total derivative instruments, net




$

(229)


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.

CONFERENCE CALL

The Company will host a conference call with a live webcast tomorrow, August 6, 2020 at 11:00 a.m. Eastern Time/8:00 a.m. Pacific Time, to discuss financial results for the second 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/10146563 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 August 20, 2020 by dialing (877) 344-7529 from the United States, or (412) 317-0088 from outside the United States, and entering conference ID 10146563. 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)




June 30, 2020


March 31, 2020

Assets:





Cash and cash equivalents


$

19,363



$

10,342


Restricted cash


26,430



33,229


Agency mortgage-backed securities, at fair value ($1,975 and $430,628 pledged as collateral, at fair value, respectively)


1,975



430,628


Non-Agency mortgage-backed securities, at fair value ($197,326 and $265,647 pledged as collateral, at fair value, respectively)


216,288



276,606


Other securities, at fair value ($40,466 and $47,307 pledged as collateral, at fair value, respectively)


40,466



47,411


Residential Whole Loans, at fair value ($1,124,051 and $1,309,795 pledged as collateral, at fair value, respectively)


1,124,051



1,309,795


Residential Bridge Loans ($24,171 and $26,050 at fair value and $25,371 and $27,571 pledged as collateral, respectively)


26,505



28,634


Securitized commercial loans, at fair value


465,694



477,131


Commercial Loans, at fair value ($323,474 and $320,308 pledged as collateral, at fair value, respectively)


323,474



320,308


Receivable under reverse repurchase agreements




24,826


Investment related receivable


12,029



72,826


Interest receivable


11,595



14,805


Due from counterparties


5,177



117,670


Derivative assets, at fair value


714



33,675


Other assets


6,262



5,697


Total Assets (1)


$

2,280,023



$

3,203,583







Liabilities and Stockholders' Equity:





Liabilities:





Repurchase agreements, net


$

369,096



$

1,553,715


Convertible senior unsecured notes, net


198,669



197,984


Securitized debt, net ($424,217 and $396,824 at fair value and $43,904 and $53,527 held by affiliates, respectively)


1,458,236



1,139,121


Interest payable (includes $49 and $536 on securitized debt held by affiliates, respectively)


7,710



6,429


Due to counterparties


16



24,811


Derivative liability, at fair value


943



43,967


Accounts payable and accrued expenses


4,082



6,307


Payable to affiliate


4,701



3,237


Dividend payable





  Other liabilities


47,856



45,779


Total Liabilities (2)


2,091,309



3,021,350







Commitments and contingencies










Stockholders' Equity:





Common stock: $0.01 par value, 500,000,000 shares authorized, 59,458,617 and 53,423,876 outstanding, respectively


595



535


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


911,488



889,392


Retained earnings (accumulated deficit)


(722,793)



(707,158)


Total Stockholders' Equity


188,712



182,191


Non-controlling interest


2



42


Total Equity


188,714



182,233


Total Liabilities and Equity


$

2,280,023



$

3,203,583


 

Western Asset Mortgage Capital Corporation and Subsidiaries

Consolidated Balance Sheets (Continued)

(in thousands—except share and per share data)

(Unaudited)




June 30, 2020


March 31, 2020

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





Cash and cash equivalents


$



$

4,542


Restricted Cash


26,430



33,229


Residential Whole Loans, at fair value ($1,124,051 and $1,309,795 pledged as collateral, at fair value, respectively)


1,124,051



1,309,795


Residential Bridge Loans ($23,037 and $24,987 at fair value and $25,371 and $27,571 pledged as collateral, respectively)


25,371



27,571


Securitized commercial loans, at fair value


465,694



477,131


Commercial Loans, at fair value ($72,335 and $71,684 pledged as collateral, at fair value, respectively)


72,335



71,684


Investment related receivable


12,029



24,738


Interest receivable


8,640



10,226


Other assets


92



101


Total assets of consolidated VIEs


$

1,734,642



$

1,959,017







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





Securitized debt, net ($765,945 and $681,643 at fair value and $43,904 and $142,905 held by affiliates, respectively)


$

1,458,236



$

1,139,121


Interest payable (includes $49 and $647 on securitized debt held by affiliates, respectively)


3,144



3,215


Accounts payable and accrued expenses


118



128


Other liabilities


26,430



33,229


Total liabilities of consolidated VIEs


$

1,487,928



$

1,175,693


 

Western Asset Mortgage Capital Corporation and Subsidiaries

Consolidated Statements of Operations

(in thousands—except share and per share data)

 (Unaudited)




Three months ended



June 30, 2020


March 31, 2020

Net Interest Income





Interest income


$

31,494



$

54,846


Interest expense


22,959



36,105


Net Interest Income


8,535



18,741







Other Income (Loss)





Realized gain (loss) on sale of investments, net


(6,960)



89,186


Unrealized gain (loss), net


16,040



(296,111)


Gain (loss) on derivative instruments, net


(8,143)



(189,691)


Other, net


(45)



461


Other Income (Loss)


892



(396,155)







Expenses





Management fee to affiliate


464



1,039


Financing fee


20,540




Other operating expenses


796



1,000


General and administrative expenses:





  Compensation expense


692



662


  Professional fees


1,541



1,480


  Other general and administrative expenses


772



353


Total general and administrative expenses


3,005



2,495


Total Expenses


24,805



4,534







Income before income taxes


(15,378)



(381,948)


Income tax provision (benefit)


255



(93)


Net income (loss)


(15,633)



(381,855)


Net income attributable to non-controlling interest


2



2


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


$

(15,635)



$

(381,857)







Net income (loss) per Common Share – Basic


$

(0.29)



$

(7.15)


Net income (loss) per Common Share – Diluted


$

(0.29)



$

(7.15)


 

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 June 30, 2020 and March 30, 2020:




Three months ended

(dollars in thousands)


June 30, 2020


March 31, 2020

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


$

(15,635)



$

(381,857)


Income tax provision (benefit)


255



(93)


Net income (loss) before income taxes


(15,380)



(381,950)







Adjustments:





Investments:





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


(16,040)



296,111


Realized (gain) loss on sale of investments


6,960



(89,186)


One-time transaction costs


20,652



280







Derivative Instruments:





Net realized (gain) loss on derivatives


13,152



180,156


Net unrealized (gain) loss on derivatives


(4,973)



8,807







Amortization of discount on convertible senior unsecured notes


273



273


Other non-cash adjustments


988




Non-cash stock-based compensation


170



165


Total adjustments


21,182



396,606


Core Earnings


$

5,802



$

14,656


Basic and Diluted Core Earnings per Common Share and Participating Securities


$

0.11



$

0.27


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


$

0.11



$

0.29


Basic weighted average common shares and participating securities


54,921,847



53,670,550


Diluted weighted average common shares and participating securities


54,921,847



53,670,550


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)


June 30, 2020


March 31, 2020

Net interest income


$

8,535



$

18,741


Interest income from IOs and IIOs accounted for as derivatives


69



91


Net interest income from interest rate swaps




(1,133)


Adjusted net interest income


8,604



17,699


Total expenses


(24,805)



(4,534)


Other non-cash adjustments


988




Non-cash stock-based compensation


170



165


One-time transaction costs


20,652



280


Amortization of discount on convertible unsecured senior notes


273



273


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


(78)



775


Income attributable to non-controlling interest


(2)



(2)


Core Earnings


$

5,802



$

14,656


 

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

(dollars in thousands)

(Unaudited)




June 30, 2020


March 31, 2020



$ Amount


Per Share


$ Amount


Per Share

GAAP Book Value at March 31, 2020 and December 31, 2019


$

182,191



$

3.41



$

564,461



$

10.55


Proceeds from At-the-Market program, net


21,986



0.02






Stock repurchase






(578)



N/A




204,177



3.43



563,883



10.55


Portfolio Income








0


Net Interest Margin


8,557



0.14



18,870



0.35


Realized gain (loss), net


(20,147)



(0.34)



(127,011)



(2.38)


Unrealized gain (loss), net


21,016



0.36



(269,275)



(5.03)


Net portfolio income


9,426



0.16



(377,416)



(7.06)











Financing fee


(20,540)



(0.35)






Operating expenses


(1,260)



(0.02)



(2,039)



(0.04)


General and administrative expenses, excluding equity based compensation


(2,836)



(0.05)



(2,330)



(0.04)


Provision for taxes


(255)





93




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


$

188,712



$

3.17



$

182,191



$

3.41











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



Deconsolidation of VIEs assets


(1,555,962)



(26.17)



(1,263,407)



(23.65)


Deconsolidation VIEs liabilities


1,486,107



25.00



1,174,422



21.98


Interest in securities of VIEs owned, at fair value


121,315



2.04



133,885



2.51


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


$

240,172



$

4.04



$

227,091



$

4.25


"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, 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, 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 June 30, 2020 and March 30, 2020:



Three months ended

(dollars in thousands)


June 30, 2020


March 31, 2020

Coupon interest income


$

33,007



$

57,761


Premium amortization, discount accretion and amortization of basis, net


(1,513)



(2,915)


Interest income


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


340



636


Amortization of basis


(271)



(545)


Subtotal


69



91


Total adjusted interest income


$

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 June 30, 2020 and March 30, 2020:



Three months ended



June 30, 2020


March 31, 2020

 (dollars in thousands)


Reconciliation


Cost of
Funds/Effective
Borrowing Costs


Reconciliation


Cost of
Funds/Effective
Borrowing
Costs

Interest expense


$

22,959



3.73

%


$

36,105



3.34

%

Adjustments:









Interest expense on Securitized debt from consolidated VIEs1


(4,661)



(3.92)

%


(6,754)



(4.42)

%

Net interest (received) paid - interest rate swaps




%


1,133



0.10

%

Effective Borrowing Costs


$

18,298



3.69

%


$

30,484



3.28

%

Weighted average borrowings


$

1,994,405





$

3,733,045






(1)

Excludes third-party sponsored securitized debt interest expense.

 

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SOURCE Western Asset Mortgage Capital Corporation

Copyright 2020 PR Newswire

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