Western Asset Mortgage Capital Corporation Announces First Quarter 2018 Results

1

Non – GAAP measure.

2

Drop income is income derived from the use of 'to-be-announced' forward contract ("TBA") dollar roll transactions which is a component of our gain (loss) on derivative instruments on our consolidated statements of operations, but is not included in core earnings. Drop income was $1.0 million or $0.02 per share for the three months ended March 31, 2018.

3

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

4

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

5

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

For the Three Months Ended

GAAP Results

March 31, 2018

December 31, 2017

Net Interest Income

$

19,030

$

18,012

Other Income (Loss):

Realized gain (loss) on sale of investments, net

575

(2)

Other than temporary impairment

(2,916)

(2,972)

Unrealized gain (loss), net

(68,961)

(6,730)

Gain (loss) on derivative instruments, net

79,582

19,327

Other, net

47

190

Other Income (loss)

8,327

9,813

Total Expenses

5,315

4,206

Income (loss) before income taxes

22,042

23,619

Income tax provision (benefit)

313

2,215

Net income (loss)

$

21,729

$

21,404

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

$

0.52

$

0.51

Non-GAAP Results

Core earnings plus drop income⁽¹⁾

$

14,149

$

12,998

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

0.34

0.31

Weighted average yield⁽²⁾

4.16

%

3.82

%

Effective cost of funds(3)

2.50

%

2.22

%

Annualized net interest margin⁽²⁾⁽³⁾

1.90

%

1.79

%

Annualized CPR on Agency RMBS

11.0

%

10.0

%

(1)

For a reconciliation of GAAP Income to Core earnings, please refer to the Reconciliation of Core Earnings at the end of this press release.

(2)

Includes interest-only securities accounted for as derivatives, foreign currency swaps and total return swaps.

(3)

Includes the net amount paid, including accrued amounts for interest rate swaps and premium amortization for MAC interest rate swaps during the periods.

Principal Balance

Amortized Cost

Fair Value

Net Weighted
Average Coupon

Agency RMBS:

20-Year mortgage

$

48,590

$

50,924

$

50,596

4.0

%

30-Year mortgage

215,368

231,015

227,570

4.4

%

40-Year mortgage

355,378

365,896

355,972

3.5

%

Agency RMBS Interest-Only Strips

N/A

14,578

15,019

2.5

%

Agency RMBS Interest-Only Strips, accounted for as derivatives

N/A

N/A

9,938

2.9

%

Total Agency RMBS

619,336

662,413

659,095

3.5

%

Agency CMBS

2,221,642

2,225,468

2,178,693

2.9

%

Agency CMBS Interest-Only Strips

N/A

—

2

3.2

%

Agency CMBS Interest-Only Strips, accounted for as derivatives

N/A

N/A

5,113

0.5

%

Total Agency CMBS

2,221,642

2,225,468

2,183,808

2.8

%

Total

$

2,840,978

$

2,887,881

$

2,842,903

3.0

%

Principal Balance

Amortized Cost

Fair Value

 Weighted
Average Coupon⁽¹⁾

Non-Agency RMBS

$

166,023

$

127,959

$

132,796

4.0

%

Non-Agency RMBS IOs and IIOs

N/A

17,006

16,987

0.5

%

Non-Agency CMBS

428,702

343,168

331,712

5.1

%

Residential Whole Loans

291,161

293,186

296,719

4.7

%

Residential Bridge Loans

158,778

159,240

159,355

9.1

%

Securitized Commercial Loans⁽¹⁾

1,374,746

1,377,765

1,383,044

5.0

%

Commercial Loans

40,638

40,414

40,455

7.8

%

Other Securities

103,906

118,275

131,603

7.9

%

$

2,563,954

$

2,477,013

$

2,492,671

4.1

%

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

Repurchase Agreements

Balance

Weighted Average
Interest Rate (end of
period)

Weighted Average
Remaining Maturity
(days)

Agency RMBS

$

630,980

1.92

%

65

Agency CMBS

2,073,029

1.81

%

56

Non-Agency RMBS

104,580

3.19

%

28

Non-Agency CMBS

252,121

3.42

%

57

Residential Whole-Loans

234,675

4.13

%

30

Residential Bridge Loans

151,555

4.40

%

59

Securitized commercial loans

7,631

3.72

%

26

Commercial Real Estate Loans

12,321

4.61

%

73

Other Securities

90,028

3.42

%

34

Total

$

3,556,920

2.31

%

55

(dollars in thousands)

Remaining Term to Maturity

Notional
Value

Average
Fixed Pay
Rate

Average
Floating
Receive
Rate

Average
Maturity
(Years)

Forward
Starting

Greater than 1 year and less than 3 years

$

600,000

1.6

%

2.0

%

1.6

—

%

Greater than 3 years and less than 5 years

850,000

2.0

%

1.8

%

4.1

—

%

Greater than 5 years

1,757,300

2.5

%

1.8

%

10.2

88.3

%

$

3,207,300

2.2

%

1.8

%

7.0

48.4

%

Western Asset Mortgage Capital Corporation and Subsidiaries

Consolidated Balance Sheets

(in thousands—except share and per share data)

(Unaudited)

March 31, 2018

December 31, 2017

Assets:

Cash and cash equivalents

$

24,828

$

48,024

Restricted cash

37,034

$

—

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

2,842,903

2,858,600

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

481,495

378,158

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

131,603

122,065

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

296,719

237,423

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

159,646

106,673

Securitized commercial loan, at fair value

1,383,044

24,876

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

40,455

—

Investment related receivable

24,536

7,665

Accrued interest receivable

16,615

13,603

Due from counterparties

96,470

86,930

Derivative assets, at fair value

2,353

728

Other assets

2,102

2,161

Total Assets ⁽¹⁾

$

5,539,803

$

3,886,906

Liabilities and Stockholders' Equity:

Liabilities:

Borrowings under repurchase agreements, net

$

3,556,920

$

3,251,686

Convertible senior unsecured notes, net

109,072

108,743

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

1,301,050

10,945

Accrued interest payable

9,857

8,322

Investment related payables

25,382

17,217

Due to counterparties

300

1,490

Derivative liability, at fair value

3,689

4,346

Accounts payable and accrued expenses

4,775

3,118

Payable to affiliate

4,259

2,041

Dividend payable

12,921

12,960

  Other liabilities

37,764

—

Total Liabilities ⁽²⁾

$

5,065,989

$

3,420,868

Commitments and contingencies

Stockholders' Equity:

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

419

419

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

—

—

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

(2,339)

(1,232)

Additional paid-in capital

768,862

768,763

Retained earnings (accumulated deficit)

(293,128)

(301,912)

Total Stockholders' Equity

473,814

466,038

Total Liabilities and Stockholders' Equity

$

5,539,803

$

3,886,906

Western Asset Mortgage Capital Corporation and Subsidiaries

Consolidated Balance Sheets (Continued)

(in thousands—except share and per share data)

(Unaudited)

March 31, 2018

December 31, 2017

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

Cash and cash equivalents

$

227

$

—

Restricted Cash

37,034

—

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

296,719

237,423

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

159,646

106,673

Securitized commercial loan, at fair value

1,383,044

24,876

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

20,534

—

Investment related receivable

18,825

7,665

Accrued interest receivable

5,589

3,358

Total assets of consolidated VIEs

$

1,921,675

$

379,995

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

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

$

1,301,050

$

10,945

Accrued interest payable

887

70

Accounts payable and accrued expenses

455

189

Other liabilities

37,764

—

Total liabilities of consolidated VIEs

$

1,340,156

$

11,204

Western Asset Mortgage Capital Corporation and Subsidiaries

Consolidated Statements of Operations

(in thousands—except share and per share data)

(Unaudited)

Three months ended

March 31, 2018

December 31, 2017

Net Interest Income

Interest income

$

39,727

$

34,878

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

20,697

16,866

Net Interest Income

19,030

18,012

Other Income (Loss)

Realized gain (loss) on sale of investments, net

575

(2)

Other than temporary impairment

(2,916)

(2,972)

Unrealized gain (loss), net

(68,961)

(6,730)

Gain (loss) on derivative instruments, net

79,582

19,327

Other, net

47

190

Other Income (Loss)

8,327

9,813

Expenses

Management fee to affiliate

2,180

1,941

Other operating expenses

969

564

General and administrative expenses:

  Compensation expense

510

628

  Professional fees

1,295

741

  Other general and administrative expenses

361

332

Total general and administrative expenses

2,166

1,701

Total Expenses

5,315

4,206

Income before income taxes

22,042

23,619

Income tax provision (benefit)

313

2,215

Net income

$

21,729

$

21,404

Net income per Common Share – Basic

$

0.52

$

0.51

Net income per Common Share – Diluted

$

0.52

$

0.51

Dividends Declared per Share of Common Stock

$

0.31

$

0.31

Three months ended

(dollars in thousands)

March 31, 2018

December 31, 2017

Net Income

$

21,729

$

21,404

Income tax provision (benefit)

313

2,215

Income before income taxes

22,042

23,619

Adjustments:

Investments:

Unrealized (gain) loss on investments and securitized debt

68,961

6,730

Other than temporary impairment

2,916

2,972

Realized (gain) loss on sale of investments, net

(575)

2

Acquisition costs

41

39

Derivative Instruments:

Net realized (gain) loss on derivatives

(79,118)

(28,658)

Unrealized (gain) loss on derivatives

(1,308)

7,790

Amortization of discount on convertible senior note

137

137

Non-cash stock-based compensation

75

186

Total adjustments

(8,871)

(10,802)

Core Earnings

$

13,171

$

12,817

Basic Core Earnings per Common Share and Participating Securities

$

0.32

$

0.31

Diluted Core Earnings per Common Share and Participating Securities

$

0.32

$

0.31

Basic weighted average common shares and participating securities

41,844,798

41,938,559

Diluted weighted average common shares and participating securities

41,844,798

41,938,559

Three months ended

(dollars in thousands)

March 31, 2018

December 31, 2017

Coupon interest income

$

40,557

$

36,544

Premium amortization, discount accretion and amortization of basis, net

(830)

(1,666)

Interest income

39,727

34,878

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

Coupon interest income

1,422

1,209

Amortization of basis

(1,191)

(940)

Subtotal

231

269

Total adjusted interest income

$

39,958

$

35,147

(1)

Reported in "Gain (loss) on derivative instruments, net" in the Consolidated Statements of Operations.

March 31, 2018

December 31, 2017

 (dollars in thousands)

Reconciliation

Cost of
Funds/Effective
Borrowing Costs

Reconciliation

Cost of
Funds/Effective
Borrowing Costs

Interest expense

$

20,697

2.38

%

$

16,866

2.01

%

Net interest paid - interest rate swaps

1,056

0.12

%

1,798

0.21

%

Effective Borrowing Costs

$

21,753

2.50

%

$

18,664

2.22

%

Weighted average repurchase borrowings

$

3,526,311

$

3,334,251