PASADENA, Calif.,– 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
OTHER FOURTH QUARTER 2019 HIGHLIGHTS
FULL YEAR 2019 FINANCIAL HIGHLIGHTS
OTHER FULL YEAR HIGHLIGHTS
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 |
|||||||||||
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 |
|||||||||||
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 |
Weighted Average |
|||||||
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 |
||||
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 |
Average |
Average |
||||||||
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 |
Average Fixed |
Average |
||||||||
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.