Conference Call and Webcast Scheduled for
Tomorrow, Friday, November 5, 2021 at 12:00 p.m. Eastern Time/9:00
a.m. Pacific Time
Western Asset Mortgage Capital Corporation (the “Company” or
"WMC") (NYSE: WMC) today reported its results for the third quarter
ended September 30, 2021.
THIRD QUARTER 2021 RESULTS
During the third quarter we continued strengthening our balance
sheet by refinancing a significant portion of our 6.75% Convertible
Senior Unsecured notes due in October 2022 (2022 Notes"), and
separately improving liquidity.
BUSINESS UPDATE
- In August 2021, the Company repurchased $22.3 million aggregate
principal amount of its 2022 Notes at an approximate 2.8% discount
to par value, plus accrued interest.
- In September 2021, the Company issued $86.3 million aggregate
principal amount of 6.75% Convertible Senior Unsecured Notes ("2024
Notes"), for net proceeds of $83.4 million. The notes mature on
September 15, 2024, unless earlier converted, redeemed or
repurchased by the holders pursuant to their terms. Contemporaneous
with the issuance of the 2024 Notes, the Company used the net
proceeds and $20.2 million in cash on hand to repurchase $100.3
million of the 2022 notes at par plus accrued interest. As of
September 30, 2021 there were $45.7 million outstanding in 2022
Notes and $86.3 million outstanding in 2024 Notes.
- During the three months ended September 30, 2021, the Company
acquired $233.2 million of residential whole loans.
- During the three months ended September 30, 2021, approximately
$157.2 million of Commercial Loans and Non-Agency CMBS investments
paid off in full.
THIRD QUARTER 2021 FINANCIAL RESULTS
Our financial results were negatively impacted by a further
decline in fair value of two of our commercial investments.
- GAAP book value per share was $3.45 at September 30, 2021.
- Economic book value(1) per share of $3.20 at September 30,
2021.
- GAAP net loss of $4.2 million or a net loss of $0.07 per basic
and diluted share.
- Distributable Earnings(2) of $3.8 million, or $0.06 per basic
and diluted share.
- Economic return(3) on GAAP book value was negative 1.1% for the
quarter.
- 1.81% annualized net interest margin (1)(4)(5) on our
investment portfolio.
- Recourse leverage was 2.9x at September 30, 2021.
- On September 23, 2021, we declared a third quarter common
dividend of $0.06 per share.
(1)
Economic book value is a non-GAAP
financial measure. Refer to page 16 of this press release for the
reconciliation of GAAP book value to non-GAAP economic book
value.
(2)
In the second quarter of 2021, the non –
GAAP financial measure of Core Earnings was renamed Distributable
Earnings. Refer to page 14 of this press release for a
reconciliation of GAAP Net Income (Loss) to Non-GAAP Distributable
Earnings.
(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.
(5)
Excludes the consolidation of VIE trusts
required under GAAP.
MANAGEMENT COMMENTARY
“Continuing our efforts from the previous quarter, we took
additional actions to strengthen our balance sheet. We reduced
convertible note debt by $36.4 million through a series of
transactions. In August, we repurchased $22.3 million aggregate
principal amount of our existing 2022 Notes at a weighted average
discount to par value of 2.8%; and in September, we issued $86.3
million of 2024 Notes and used the net proceeds, together with
approximately $20.2 million of cash on hand, to repurchase an
additional $100.3 million of our 2022 Notes. At quarter-end $45.7
million of the 2022 Notes remained outstanding. Through these
transactions, we improved our liquidity and leverage profile,
thereby strengthening our ability to execute on our investment
strategy,” said Bonnie Wongtrakool, Chief Executive Officer of the
Company
“During the third quarter, we experienced positive performance
in a number of our residential and commercial investments. Our
distributable earnings for the third quarter were $3.8 million, or
$0.06 per share, an improvement of $1.0 million from the second
quarter. At the same time, our financial results were negatively
impacted by the further decline in fair value on one non-performing
commercial whole loan, as well as spread widening on certain
Non-Agency CMBS holdings, which resulted in a GAAP net loss of $4.2
million, or $0.07 per share, and a decrease in our GAAP book value
per share of 2.8% from the second quarter," Ms. Wongtrakool
concluded.
Greg Handler, Chief Investment Officer of the Company, added,
“The residential credit markets continued to improve in the third
quarter, and this translated into higher valuations on a number of
our portfolio holdings. Our residential portfolio has performed
well as the housing market remains strong and we invested an
additional $233.2 million in Residential Whole Loans during the
third quarter, which helped drive our higher distributable
earnings. Additionally, the majority of our commercial real estate
investments continue to perform in line with our expectations.
During the quarter, we received $157.2 million of full payoffs from
three Commercial Whole Loans and two Non-agency CMBS investments.
However, some of our other commercial real estate investments have
not yet recovered in value. While we expect these near-term
challenges will eventually subside as the economy further improves
and these properties begin to return to more normal levels of
operations, these investments have significant challenges, and
there can be no assurances they will recover.”
“We continue to work diligently on reaching positive resolutions
on our two challenged investments as well as positioning the
remainder of our portfolio for potential future appreciation. We
believe this should enable us to enhance our ability to generate
sustainable earnings that support an attractive dividend, with the
overall goal of protecting and enhancing value for the benefit of
our shareholders,” Mr. Handler concluded.
OPERATING RESULTS
The below table reflects a summary of our operating results:
For the Three Months
Ended
GAAP Results
September 30, 2021
June 30, 2021
March 31, 2021
($ in thousands)
Net Interest Income
$
7,163
$
6,590
$
9,248
Other Income (Loss):
Realized gain (loss), net
(1,526
)
(116
)
(5,725
)
Unrealized gain (loss), net
(6,003
)
(42,318
)
9,050
Gain (loss) on derivative instruments,
net
515
175
26
Other, net
277
200
(28
)
Other Income (Loss)
(6,737
)
(42,059
)
3,323
Total Expenses
5,128
4,591
4,518
Income (loss) before income taxes
(4,702
)
(40,060
)
8,053
Income tax provision (benefit)
(218
)
101
98
Net income (loss)
$
(4,484
)
$
(40,161
)
$
7,955
Net income (loss) attributable to
non-controlling interest
$
(271
)
2
2
Net income (loss) attributable to common
stockholders and participating securities
$
(4,213
)
$
(40,163
)
$
7,953
Net income (loss) per Common Share –
Basic/Diluted
$
(0.07
)
$
(0.66
)
$
0.13
Non-GAAP Results
Distributable Earnings (1)
$
3,792
$
2,761
$
6,143
Distributable Earnings per Common Share –
Basic/Diluted(1)
$
0.06
$
0.05
$
0.10
Weighted average yield(2)(3)
4.93
%
4.72
%
5.55
%
Effective cost of funds(3)
3.77
%
3.94
%
4.10
%
Annualized net interest margin(2)(3)
1.81
%
1.51
%
2.19
%
(1)
For a reconciliation of GAAP Income to
Distributable Earnings, refer to page 14 of this press release.
(2)
Includes interest-only securities
accounted for as derivatives.
(3)
Excludes the consolidation of VIE trusts
required under GAAP.
INVESTMENT PORTFOLIO
Portfolio Composition
As of September 30, 2021, the Company owned an aggregate
investment portfolio with a fair market value totaling $2.7
billion. The following table summarizes certain characteristics of
our portfolio by investment category as of September 30, 2021
(dollars in thousands):
Principal Balance
Amortized Cost
Fair Value
Weighted Average
Coupon(2)
Non-Agency RMBS
$
36,879
$
22,442
$
25,731
4.3
%
Non-Agency RMBS IOs and IIOs
N/A
5,742
2,280
0.3
%
Non-Agency CMBS
212,440
196,966
134,650
5.0
%
Agency RMBS IO and IIOs
N/A
63
1,342
1.3
%
Residential Whole Loans
908,512
933,973
949,417
4.8
%
Residential Bridge Loans(1)
6,654
6,655
5,960
9.7
%
Securitized Commercial Loans
1,385,591
1,268,567
1,377,005
4.4
%
Commercial Loans(3)(4)
192,172
192,170
128,766
2.6
%
Other Securities
51,269
48,066
52,093
5.3
%
$
2,793,517
$
2,674,644
$
2,677,244
4.1
%
(1)
As of September 30, 2021, the Company had
real estate owned ("REO") properties with an aggregate carrying
value of $1.1 million related to foreclosed Bridge Loans. The REO
properties are classified in "Other assets" in the Consolidated
Balance Sheets.
(2)
The calculation of the weighted average
coupon rate includes the weighted average coupon rates of IOs and
IIOs accounted for as derivatives using their notional amounts.
(3)
As of September 30, 2021, the Company had
an REO property related to the foreclosure of a Commercial Loan
collateralized by a hotel property. The REO property is held in an
SPE that is consolidated. The REO has an aggregate carrying value
of $42.5 million and is classified in "Other assets" in the
consolidated balance sheet. The SPE is not wholly owned by the
Company and the other member's interest in reflected as
"Non-controlling" in the consolidated financial statements.
(4)
As of September 30, 2021, the Company's
$90 million Commercial Mezzanine loan with the fair value of $27.5
million was non-performing and accordingly is in non-accrual
status.
Portfolio Performance
The Company's Non-QM residential portfolio, in our view, is
performing well, given the challenging economic background. The
loans in a forbearance plan at September 30, 2021, excluding loans
that were in forbearance that are now paying principal and
interest, represented approximately 0.1% of the total outstanding
loans. 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 Non-Agency CMBS portfolio is performing in line
with expectations under the current pandemic conditions. The
Non-Agency CMBS portfolios have an original LTV of 64.7%. The
Company believes there is a reasonable likelihood that many of the
delinquent loans that serve as collateral for our Non-Agency CMBS
portfolio will return to performing status in the coming months,
although there is no assurance that this will be the case.
The Company's Commercial Loans have an original LTV of 59.7%,
and all but the two loans discussed below remain current. During
the quarter three of the Company's commercial loans with an
aggregate principal balance of $101.2 million were paid off in full
by the borrower. Two of the Commercial Loans were collateralized by
nursing facilities and one by an apartment complex.
The Company's CRE mezzanine loan with an outstanding principal
balance of $90.0 million became non-performing in May 2021 upon
depletion of the interest reserve in May 2021. Additionally, on May
10, 2021, the administrative agent for the senior mortgage loan on
the Property (the “Administrative Agent”) notified us, as
administrative agent for the junior mezzanine loan, of the
Administrative Agent’s intent to accept an assignment in lieu of
foreclosure with respect to the Property if the junior mezzanine
lenders did not elect to purchase the senior mortgage loan within
30 days pursuant to the terms set forth in an intercreditor
agreement among the Administrative Agent, the Company and the
senior mezzanine lender. The senior mezzanine lender was provided
with a similar notice on May 10, 2021. Since the original notice
provided by the Administrative Agent on May 10, 2021, the
Administrative Agent has extended the deadline for the junior
mezzanine lenders and the senior mezzanine lender to exercise their
purchase right with respect to the senior mortgage loan a total of
three times, with the most recent extension expired on July 14,
2021 and neither the junior mezzanine lenders nor the senior
mezzanine lender offered to purchase the senior mortgage loan.
The Company is currently in discussions with the borrower and
certain other lenders regarding alternatives to address the
situation which might include modifications of loan terms, deferral
of payments and the funding of new advances. There can be no
assurance that these discussions will result in an outcome in which
the Company would be repaid any amount of the loan and the Company
may suffer further declines in fair value with respect to this
mezzanine investment. For the three months ended September 30,
2021, the Company recorded a further decline of $5.2 million in the
fair value of this investment. The Company could experience a total
loss of its investment under various scenarios, which at current
levels would result in a $27.5 million reduction in the Company’s
book value.
In October 2020, the Company commenced foreclosure proceedings
for its delinquent commercial loan with an outstanding principal
balance of $30.0 million, secured by a hotel. However, on February
24, 2021, the borrower filed for bankruptcy protection halting the
foreclosure process. In August 2021, the bankruptcy case was
dismissed by the bankruptcy court and the Company and the other
holders of the loan foreclosed on the property through a special
purpose entity formed for the purpose of holding the property. The
property is currently being marketed for sale. Based on preliminary
bids, the Company believes there is a reasonable likelihood that
its investment, along with the other member's interest of the SPE
will be recovered, although there is no assurance of full recovery.
The borrower has continued to file legal challenge to the sale
process. While the Company believes these legal challenges have no
merit, they have delayed moving forward with the sale of the
property.
PORTFOLIO FINANCING AND HEDGING
Financing
The following table sets forth additional information regarding
the Company’s portfolio financing arrangements as of September 30,
2021 (dollars in thousands):
Collateral
Outstanding Borrowings
Weighted Average Interest
Rate
Weighted Average Remaining
Days to Maturity
Short Term Borrowings:
Agency RMBS
$
1,048
1.05
%
59
Non-Agency CMBS
10,314
1.75
%
12
Residential Whole-Loans(1)
41,013
2.66
%
4
Residential Bridge Loans(1)
5,817
2.60
%
4
Commercial Loans(1)
10,603
3.18
%
4
Other Securities
2,587
3.52
%
19
Subtotal
71,382
2.60
%
7
Long Term Borrowings
Non-Agency CMBS(2)
68,352
2.12
%
193
Non-Agency RMBS
15,632
2.12
%
217
Residential Whole-Loans(1)
236,767
3.00
%
36
Commercial Loans
63,669
2.27
%
360
Other Securities
27,506
2.12
%
217
Subtotal
411,926
2.65
%
113
Repurchase Agreements Borrowings
$
483,308
2.64
%
98
Less Unamortized Debt Issuance Costs
40
N/A
N/A
Repurchase Agreements Borrowings, net
$
483,268
2.64
%
98
(1)
Repurchase agreement borrowings on loans
owned are through trust certificates. The trust certificates are
eliminated in consolidation. In October, the residential whole loan
facility was extended for 30 days. The extension is included in the
days to maturity.
(2)
Includes repurchase agreement borrowings
on securities eliminated upon VIE consolidation.
Certain of the financing arrangements provide the counterparty
with the right to terminate the agreement if the Company does not
maintain certain equity, liquidity and leverage metrics. The
Company was in compliance with the terms of such financial metrics
as of September 30, 2021.
Residential Whole Loan Facility
The Company's residential whole loan facility has an advance
rate of 85% and has an interest rate of LIBOR plus 2.75%, with a
LIBOR floor of 0.25%. The facility matures on November 5, 2021. As
of September 30, 2021 approximately $287.1 million in non QM loans
were financed in the facility with outstanding borrowings of $236.8
million.
Commercial Whole Loan Facility
As of September 30, 2021, the Company had approximately $63.7
million in borrowings, with a weighted average interest rate of
2.27% under its commercial whole loan facility. The borrowing is
secured by loans with an estimated fair market value of $86.9
million as of September 30, 2021.
Non-Agency CMBS and Non-Agency RMBS Facility
As of September 30, 2021, the outstanding balance under the
Company's Non-Agency CMBS and Non-Agency RMBS financing facility
was $111.5 million and has an interest rate of three-month LIBOR
plus 2.00%. The facility matures on May 5, 2022, with two one-year
extension options. The borrowing is secured by investments with an
estimated fair market value of $196.7 million as of September 30,
2021.
Convertible Senior Unsecured Notes
6.75% Convertible Senior Unsecured Notes due 2024 (the "2024
Notes")
In September 2021, the Company issued $86.3 million aggregate
principal amount of 2024 Notes for net proceeds of $83.4 million.
The 2024 Notes mature on September 15, 2024, 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. Interest on the 2024 Notes is
paid semiannually. The 2024 Notes are convertible into, at the
Company's election, cash, shares of the Company's common stock or a
combination of both, subject to the satisfaction of certain
conditions and during specified periods. The conversion rate is
subject to adjustment upon the occurrence of certain specified
events and the holders may require the Company to repurchase all or
any portion of their notes for cash equal to 100% of the principal
amount of the 2024 Notes, plus accrued and unpaid interest, if the
Company undergoes a fundamental change as specified in the
supplemental indenture for the 2024 Notes. The initial conversion
rate was 337.9520 shares of common stock per $1,000 principal
amount of notes and represented a conversion price of $2.96 per
share of common stock.
6.75% Convertible Senior Unsecured Notes due 2022 (the "2022
Notes")
At September 30, 2021, the Company had $45.7 million aggregate
principal amount of the 2022 Notes outstanding. The 2022 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 and current conversion rate is
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.
Residential 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 $660.6 million 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
September 30, 2021 (dollars in thousands):
Classes
Principal Balance
Coupon
Carrying Value
Contractual Maturity
Offered Notes:
Class A-1
$
330,944
3.3
%
$
330,944
4/25/2049
Class A-2
17,740
3.5
%
17,740
4/25/2049
Class A-3
28,106
3.8
%
28,106
4/25/2049
Class M-1
25,055
4.8
%
25,055
4/25/2049
401,845
401,845
Less: Unamortized Deferred Financing
Cost
N/A
3,727
Total
$
401,845
$
398,118
The Company retained the subordinate bonds and these bonds had a
fair market value of $35.9 million at September 30, 2021. 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
September 30, 2021 (dollars in thousands):
Classes
Principal Balance
Coupon
Carrying Value
Contractual Maturity
Offered Notes:
Class A-1A
$
148,244
1.7
%
$
148,244
3/25/2055
Class A-1B
17,591
2.1
%
17,591
3/25/2055
Class A-2
13,518
2.9
%
13,518
3/25/2055
Class A-3
17,963
3.3
%
17,963
3/25/2055
Class M-1
11,739
4.3
%
11,739
3/25/2055
Subtotal
209,055
209,055
Less: Unamortized Deferred Financing
Costs
N/A
2,154
Total
$
209,055
$
206,901
The Company retained the subordinate bonds and these bonds had a
fair market value of $26.0 million at September 30, 2021. The
retained Arroyo 2020-1 subordinate bonds are eliminated in
consolidation.
Commercial Mortgage-Backed Notes
CSMC 2014 USA
The following table summarizes CSMC 2014 USA's commercial
mortgage pass-through certificates at September 30, 2021 (dollars
in thousands), which is non-recourse to the Company:
Classes
Principal Balance
Coupon
Fair Value
Contractual Maturity
Class A-1
$
120,391
3.3
%
$
126,264
9/11/2025
Class A-2
531,700
4.0
%
570,167
9/11/2025
Class B
136,400
4.2
%
138,562
9/11/2025
Class C
94,500
4.3
%
92,630
9/11/2025
Class D
153,950
4.4
%
142,388
9/11/2025
Class E
180,150
4.4
%
161,900
9/11/2025
Class F
153,600
4.4
%
118,664
9/11/2025
Class X-1(1)
N/A
0.5
%
12,347
9/11/2025
Class X-2(1)
N/A
—
%
2,572
9/11/2025
$
1,370,691
$
1,365,494
(1)
Class X-1 and X-2 are interest-only
classes with notional balances of $652.1 million and $733.5 million
as of September 30, 2021, respectively.
The above table does not reflect the portion of the Class F bond
held by the Company because the bond is eliminated in
consolidation. The Company's ownership interest in the Class F
bonds represents a controlling financial interest, which resulted
in consolidation of the trust. The bond had a fair market value of
$11.5 million at September 30, 2021. The securitized debt of the
CSMC USA can only be settled with the commercial loan with an
outstanding principal balance of approximately $1.4 billion at
September 30, 2021, that serves as collateral for the securitized
debt and is non-recourse to the Company.
Derivatives Activity
The following table summarizes the Company’s derivative
instruments at September 30, 2021 (dollars in thousands):
Other Derivative Instruments
Notional Amount
Fair Value
Credit default swaps, asset
$
2,030
$
94
Total derivative instruments, assets
94
Interest rate swaps, liability
$
22,000
$
(25
)
Credit default swaps, liability
4,140
(537
)
Total derivative instruments,
liabilities
(562
)
Total derivative instruments, net
$
(468
)
DIVIDEND
For the quarter ended September 30, 2021, we declared a $0.06
dividend per share, generating a dividend yield of approximately
9.2% based on the stock closing price of $2.61 at September 30,
2021.
CONFERENCE CALL
The Company will host a conference call with a live webcast
tomorrow, November 5, 2021 at 12:00 p.m. Eastern Time/9:00 a.m.
Pacific Time, to discuss financial results for the third quarter
2021.
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, individuals can visit
https://dpregister.com/sreg/10161202/eeb5f79ed6 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 November 12, 2021
by dialing (877) 344-7529 from the United States, or (412) 317-0088
from outside the United States, and entering conference ID
10161202. 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
This press release contains statements that 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.
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.
Other factors are described in Risk Factors section of the
Company’s annual report on Form 10-K for the period ended December
31, 2020 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 distributable earnings, distributable 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)
September 30, 2021
June 30, 2021
Assets:
Cash and cash equivalents
$
63,916
$
45,775
Restricted cash
260
22,975
Agency mortgage-backed securities, at fair
value ($1,342 and $1,501 pledged as collateral, at fair value,
respectively)
1,342
1,501
Non-Agency mortgage-backed securities, at
fair value ($153,460 and $161,072 pledged as collateral, at fair
value, respectively)
162,661
173,765
Other securities, at fair value ($52,093
and $51,433 pledged as collateral, at fair value, respectively)
52,093
51,433
Residential Whole Loans, at fair value
($949,417 and $801,503 pledged as collateral, at fair value,
respectively)
949,417
801,503
Residential Bridge Loans ($5,960 and
$7,471 at fair value and $5,960 and $8,205 pledged as collateral,
respectively)
5,960
8,450
Securitized commercial loans, at fair
value
1,377,005
1,595,077
Commercial Loans, at fair value ($234,492
and $234,492 pledged as collateral, at fair value,
respectively)
128,766
267,203
Investment related receivable
27,586
30,972
Interest receivable
10,726
11,546
Due from counterparties
2,842
3,448
Derivative assets, at fair value
94
120
Other assets
46,676
4,623
Total Assets (1)
$
2,829,344
$
3,018,391
Liabilities and Stockholders’ Equity:
Liabilities:
Repurchase agreements, net
$
483,268
$
364,835
Convertible senior unsecured notes,
net
126,632
165,413
Securitized debt, net ($1,365,494 and
$1,540,652 at fair value and $185,666 and $214,120 held by
affiliates, respectively)
1,970,513
2,221,860
Interest payable (includes $712 and $749
on securitized debt held by affiliates, respectively)
7,763
10,648
Due to counterparties
—
421
Derivative liability, at fair value
562
573
Accounts payable and accrued expenses
2,965
1,863
Payable to affiliate
3,133
1,572
Dividend payable
3,651
3,649
Other liabilities
8,804
31,662
Total Liabilities (2)
2,607,291
2,802,496
Commitments and contingencies
Stockholders’ Equity:
Common stock: $0.01 par value, 500,000,000
shares authorized, 60,859,913 and 60,812,701 outstanding,
respectively
609
609
Preferred stock, $0.01 par value,
100,000,000 shares authorized and no shares outstanding
—
—
Treasury stock, at cost, 100,000 and
100,000 shares held, respectively
(578
)
(578
)
Additional paid-in capital
917,963
915,782
Retained earnings (accumulated
deficit)
(707,808
)
(699,920
)
Total Stockholders’ Equity
210,186
215,893
Non-controlling interest
11,867
2
Total Equity
222,053
215,895
Total Liabilities and Equity
$
2,829,344
$
3,018,391
Western Asset Mortgage Capital
Corporation and Subsidiaries Consolidated Balance Sheets
(Continued) (in thousands—except share and per share data)
(Unaudited)
September 30, 2021
June 30, 2021
(1) Assets of consolidated VIEs included
in the total assets above:
Cash and cash equivalents
$
9,245
$
90
Restricted Cash
260
22,975
Residential Whole Loans, at fair value
($949,417 and $801,503 pledged as collateral, at fair value,
respectively)
949,417
801,503
Residential Bridge Loans ($5,960 and
$7,226 at fair value and $5,960 and $8,205 pledged as collateral,
respectively)
5,960
8,205
Securitized commercial loans, at fair
value
1,377,005
1,595,077
Commercial Loans, at fair value ($14,362
and $68,661 pledged as collateral, at fair value, respectively)
14,362
68,661
Investment related receivable
24,224
28,695
Interest receivable
9,433
9,621
Other assets
80
80
Total assets of consolidated VIEs
$
2,389,986
$
2,534,907
(2) Liabilities of consolidated VIEs
included in the total liabilities above:
Securitized debt, net ($1,365,494 and
$1,540,652 at fair value and $185,666 and $214,120 held by
affiliates, respectively)
$
1,970,513
$
2,221,860
Interest payable (includes $712 and $749
on securitized debt held by affiliates, respectively)
6,519
6,958
Accounts payable and accrued expenses
49
42
Other liabilities
260
22,975
Total liabilities of consolidated VIEs
$
1,977,341
$
2,251,835
Western Asset Mortgage Capital
Corporation and Subsidiaries Consolidated Statements of Operations
(in thousands—except share and per share data) (Unaudited)
Three months ended
September 30, 2021
June 30, 2021
March 31, 2021
Net Interest Income
Interest income
$
40,141
$
41,195
$
46,017
Interest expense
32,978
34,605
36,769
Net Interest Income
7,163
6,590
9,248
Other Income (Loss)
Realized gain (loss), net
(1,526
)
(116
)
(5,725
)
Unrealized gain (loss), net
(6,003
)
(42,318
)
9,050
Gain (loss) on derivative instruments,
net
515
175
26
Other, net
277
200
(28
)
Other Income (Loss)
(6,737
)
(42,059
)
3,323
Expenses
Management fee to affiliate
1,502
1,490
1,477
Other operating expenses
1,306
428
392
General and administrative expenses:
Compensation expense
626
651
708
Professional fees
947
1,038
879
Other general and administrative
expenses
747
984
1,062
Total general and administrative
expenses
2,320
2,673
2,649
Total Expenses
5,128
4,591
4,518
Income (loss) before income
taxes
(4,702
)
(40,060
)
8,053
Income tax provision (benefit)
(218
)
101
98
Net income (loss)
(4,484
)
(40,161
)
7,955
Net (loss) income attributable to
non-controlling interest
(271
)
2
2
Net income (loss) attributable to
common stockholders and participating securities
$
(4,213
)
$
(40,163
)
$
7,953
Net income (loss) per Common Share –
Basic
$
(0.07
)
$
(0.66
)
$
0.13
Net income (loss) per Common Share –
Diluted
$
(0.07
)
$
(0.66
)
$
0.13
Reconciliation of GAAP Net Income (Loss) to
Non-GAAP Distributable Earnings (in thousands—except share and per
share data) (Unaudited)
Distributable Earnings (formerly referred to as Core Earnings)
is a non-GAAP financial measure that is used by us as a key metric
to evaluate the effective yield of the portfolio. Distributable
Earnings allows us to reflect the net investment income of our
portfolio as adjusted to reflect the net interest rate swap
interest expense. Distributable Earnings allows us to isolate the
interest expense associated with our interest rate swaps in order
to monitor and project our borrowing costs and interest rate
spread. It is one metric of several used in determining the
appropriate distributions to our shareholders.
The table below reconciles Net Income to Distributable Earnings
for the three months ended September 30, 2021, June 30, 2021 and
March 31, 2021:
Three months ended
(dollars in thousands)
September 30, 2021
June 30, 2021
March 31, 2021
Net income (loss) attributable to common
stockholders and participating securities
$
(4,213
)
$
(40,163
)
$
7,953
Income tax provision (benefit)
(218
)
101
98
Net income (loss) before income taxes
(4,431
)
(40,062
)
8,051
Adjustments:
Investments:
Unrealized (gain) loss on investments,
securitized debt and other liabilities
6,003
42,318
(9,050
)
Realized (gain) loss on sale of
investments
(51
)
116
5,965
One-time transaction costs
681
104
(4
)
Derivative Instruments:
Net realized (gain) loss on
derivatives
(485
)
(35
)
—
Net unrealized (gain) loss on
derivatives
105
(25
)
17
Other:
Realized (gain) loss on extinguishment of
convertible senior unsecured notes
1,577
—
(240
)
Amortization of discount on convertible
senior unsecured notes
228
239
245
Other non-cash adjustments
—
—
977
Non-cash stock-based compensation
165
106
182
Total adjustments
8,223
42,823
(1,908
)
Distributable Earnings
$
3,792
$
2,761
$
6,143
Basic and Diluted Distributable Earnings
per Common Share and Participating Securities
$
0.06
$
0.05
$
0.10
Basic weighted average common shares and
participating securities
61,201,589
61,099,889
61,114,060
Diluted weighted average common shares and
participating securities
61,201,589
61,099,889
61,114,060
Alternatively, our Distributable 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)
September 30, 2021
June 30, 2021
March 31, 2021
Net interest income
$
7,163
$
6,590
$
9,248
Interest income from IOs and IIOs
accounted for as derivatives
23
23
27
Net interest income from interest rate
swaps
96
76
—
Adjusted net interest income
7,282
6,689
9,275
Total expenses
(5,128)
(4,591)
(4,518)
Non-cash stock-based compensation
165
106
182
One-time transaction costs
681
104
(4)
Amortization of discount on convertible
unsecured senior notes
228
239
245
Interest income on cash balances and other
income (loss), net
293
216
(12)
Income attributable to non-controlling
interest
271
(2)
(2)
Distributable Earnings
$
3,792
$
2,761
$
6,143
Reconciliation of GAAP Book
Value to Non-GAAP Economic Book Value (dollars in thousands)
(Unaudited)
September 30, 2021
$ Amount
Per Share
GAAP Book Value at June 30,
2021
$
215,893
$
3.55
Equity portion of our convertible senior
unsecured notes
1,992
0.03
Common dividend
(3,651
)
(0.06
)
214,234
3.52
Portfolio Income (Loss)
Net Interest Margin
7,558
0.12
Realized gain (loss), net
(1,024
)
(0.02
)
Unrealized gain (loss), net
(6,109
)
(0.09
)
Net portfolio income (loss)
425
0.01
Operating expenses
(2,536
)
(0.04
)
General and administrative expenses,
excluding equity based compensation
(2,155
)
(0.04
)
Provision for taxes
218
—
GAAP Book Value at September 30,
2021
$
210,186
$
3.45
Adjustments to deconsolidate VIEs and
reflect the Company's interest in the securities owned
Deconsolidation of VIEs assets
(2,065,610
)
(33.95
)
Deconsolidation VIEs liabilities
1,977,055
32.49
Interest in securities of VIEs owned, at
fair value
73,390
1.21
Economic Book Value at September 30,
2021
$
195,021
$
3.20
"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
(CSMC USA, 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 (CSMC USA, 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 Effective Cost of Funds
(dollars in thousands) (Unaudited)
The following table reconciles the Effective Cost of Funds
(Non-GAAP financial measure) with interest expense for three months
ended September 30, 2021, June 30, 2021 and March 31, 2021:
Three months ended
September 30, 2021
June 30, 2021
March 31, 2021
(dollars in thousands)
Reconciliation
Cost of Funds/Effective
Borrowing Costs
Reconciliation
Cost of Funds/Effective
Borrowing Costs
Reconciliation
Cost of Funds/Effective
Borrowing Costs
Interest expense
$
32,978
5.17
%
$
34,605
5.15
%
$
36,769
5.22
%
Adjustments:
Interest expense on Securitized debt from
consolidated VIEs(1)
(21,745
)
(6.34
)
%
(22,277
)
(6.17
)
%
(23,035
)
(6.25
)
%
Net interest (received) paid - interest
rate swaps
(96
)
(0.02
)
%
(76
)
(0.01
)
%
—
—
%
Effective Cost of Funds
$
11,137
3.77
%
$
12,252
3.94
%
$
13,734
4.10
%
Weighted average borrowings
$
1,170,965
$
1,248,322
$
1,358,620
(1)
Excludes third-party sponsored securitized
debt interest expense.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20211104006340/en/
Investor Relations Contact: Larry Clark Financial Profiles, Inc.
(310) 622-8223 lclark@finprofiles.com
Media Contact: Tricia Ross (310) 622-8226
tross@finprofiles.com
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