Attached files
| file | filename |
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| EX-99.1 - EXHIBIT 99.1 - Western Asset Mortgage Capital Corp | wmcq3fy17ex991.htm |
| 8-K - 8-K - Western Asset Mortgage Capital Corp | wmcq3fy178-k.htm |
Third Quarter 2017
Investor Presentation
November 8, 2017
We make forward-looking statements in this presentation that are subject to risks and uncertainties. These forward-looking statements
include information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and
objectives. When we use the words "believe," "expect," "anticipate," "estimate," "plan," "continue," "intend," "should," "may" or similar
expressions, we intend to identify forward-looking statements. Statements regarding the following subjects, among others, may be forward-
looking: our business and investment strategy; our projected operating results; our ability to obtain financing arrangements; financing and
advance rates for MBS and our potential target assets; our expected leverage; general volatility of the securities markets in which we invest
and the market price of our common stock; our expected investments; interest rate mismatches between MBS and our potential target
assets and our borrowings used to fund such investments; changes in interest rates and the market value of MBS and our potential target
assets; changes in prepayment rates on Agency MBS and Non-Agency MBS; effects of hedging instruments on MBS and our potential
target assets; rates of default or decreased recovery rates on our potential target assets; the degree to which any hedging strategies may or
may not protect us from interest rate volatility; impact of and changes in governmental regulations, tax law and rates, accounting guidance
and similar matters; our ability to maintain our qualification as a REIT; our ability to maintain our exemption from registration under the
Investment Company Act of 1940, as amended; availability of investment opportunities in mortgage-related, real estate-related and other
securities; availability of qualified personnel; estimates relating to our ability to make distributions to our stockholders in the future; our
understanding of our competition; and market trends in our industry, interest rates, real estate values, the debt securities markets or the
general economy.
The forward-looking statements in this presentation are based on our beliefs, assumptions and expectations of our future performance,
taking into account all information currently available to us. You should not place undue reliance on these forward-looking statements.
These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us.
Some of these factors are described in our filings with the SEC under the headings "Summary," "Risk factors," "Management's discussion
and analysis of financial condition and results of operations" and "Business." If a change occurs, our business, financial condition,
liquidity and results of operations may vary materially from those expressed in our forward-looking statements. Any forward-looking
statement speaks only as of the date on which it is made. New risks and uncertainties arise over time, and it is not possible for us to predict
those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any
forward-looking statements, whether as a result of new information, future events or otherwise.
This presentation is not an offer to sell securities nor a solicitation of an offer to buy securities in any jurisdiction where the offer and sale is
not permitted.
1
Safe Harbor Statement
Third Quarter 2017 WMC Earnings Call Presenters
Lisa Meyer
Chief Financial Officer &
Treasurer
Jennifer W. Murphy
Chief Executive Officer &
President
Anup Agarwal
Chief Investment Officer
2
3
Overview of Western Asset Mortgage Capital Corporation
Western Asset Mortgage Capital Corporation (“WMC”) is a public REIT that benefits from the leading
fixed income management capabilities of Western Asset Management Company
One of the largest U.S. fixed income asset managers with AUM
of $435 billion(1)
Structured Product AUM of $66 billion, of which $34.1
billion is invested in Agency RMBS and $31.9 billion in
Non-Agency RMBS, CMBS, and ABS(1)
Senior investment team members have worked together for
approximately 12 years
Extensive mortgage investing track record
Publicly traded diversified mortgage REIT positioned to capture
attractive current and long-term investment opportunities in the
mortgage market
Completed Initial Public Offering in May 2012
Please refer to page 16 for footnote disclosures.
4
Corporate Overview
▪ WMC is a diversified mortgage finance REIT supported by the deep investment
experience of the morgage and asset backed investment and risk management teams
of Western Asset Management Company ("Western Asset"), a leading global fixed
income manager.
▪ Western Asset's depth and breadth of fixed income expertise, comprehensive platform,
and global institutional relationships provide WMC key advantages:
* Best-in-class portfolio and risk management capabilities;
* Access to investment opportunities and financing relationship and terms reflective
of Western Asset's global platform with over $400 billion AUM;
* Operational excellence and efficiencies; and
* Highest standards of financial reporting, disclosure and transparency.
▪ WMC has built a diversified portfolio of residential and commercial assets including
MBS and whole loans with the objective of generating strong total returns with stable
book value.
▪ WMC has paid a consistent dividend for 6 quarters, reflecting a philosophy of delivering
a sustainable dividend that is not dilutive to book value.
▪ Net income of $22.8 million, or $0.54 per basic and diluted common share.
▪ Core earnings of $13.5 million(4), or $0.32 per basic and diluted common share.
* There was no drop income for the three months ended September 30, 2017.
▪ 5.2%(3) economic return for the quarter.
▪ Quarterly cash dividend of $0.31 per share.
▪ $10.88(2) net book value per share as of September 30, 2017
* Book value increased $0.24 or 2.3% during the third quarter of 2017, comprised of:
• $0.37 from our Agency Securities.
◦ Spread tightening in the sector.
• $0.25 from our Credit Sensitive Investments.
◦ U.S. housing market fundamentals remain strong and spreads for most mortgages tightened
during the quarter.
• $(0.31) declared dividend and $(0.07) operating, general administrative expenses and income tax
benefit.
▪ Investment portfolio as of September 30, 2017 compared to June 30, 2017.
* Acquired $1.1 billion of Agency Securities, comprised of $817 million of Agency CMBS and $294 million Agency
RMBS.
* Net sales and payoffs of $86 million.
▪ Net interest margin of 2.21%(6)
▪ 7.3x leverage as of September 30, 2017
* Leverage increased as a result of $1.1 billion of investment acquisitions in the third quarter in anticipation of the
closing of the convertible note offering in early October 2017.
▪ Agency RMBS CPR of 11.2% for third quarter (7)
5
Please refer to page 16 for footnote disclosures.
Third Quarter Financial Highlights
Dividend Per Share
$0.50
$0.45
$0.40
$0.35
$0.30
$0.25
$0.20
$0.15
$0.10
$0.05
$0.00
Q4 2016 Q1 2017 Q2 2017 Q3 2017
0.31 0.31 0.31 0.31
Overall MBS spreads tightened in the third quarter of 2017, resulting in an increase in book
value and economic return.
Recent Performance
Book Value Change
6.0
4.0
2.0
0.0
-2.0
-4.0
-6.0
-8.0
-10.0
-12.0
Q4 2016 Q1 2017 Q2 2017 Q3 2017
(10.5)%
1.8% 1.8% 2.3%
6
Core Earnings Plus Drop Income Per Share
$0.50
$0.45
$0.40
$0.35
$0.30
$0.25
$0.20
$0.15
$0.10
$0.05
$0.00
Q4 2016 Q1 2017 Q2 2017 Q3 2017
0.52
0.25
0.32 0.32
(3)
(4)
Please refer to page 16 for footnote disclosures.
Economic Return
8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
-6.0
-8.0
Q4 2016 Q1 2017 Q2 2017 Q3 2017
(7.8)%
4.8% 4.8% 5.2%
7
Portfolio Income Attribution(11)
Please refer to page 16 for footnote disclosures.
Portfolio Income(5) was $25.9 million for the quarter ended September 30, 2017.
For the Three Months Ended September 30, 2017
(in thousands except per share data)
Agency
CMBS
Agency
RMBS
Non-
Agency
CMBS
Non-
Agency
RMBS
Residential
Whole-
Loans
Residential
Bridge
Loans (14)
Other
Securities
(12)
Securitized
Commercial
Loan Total
Interest Income $ 11,247 $ 6,157 6,381 $ 944 $ 2,002 $ 1,330 $ 2,943 $ 319 $ 31,323
Interest expense (4,938) (2,824) (1,472) (349) (1,412) (576) (487) (55) (12,113)
Net swap interest expense(8) (1,204) (341) (97) (18) — — (12) — (1,672)
Net Interest Income 5,105 2,992 4,812 577 590 754 2,444 264 17,538
Realized gain/(loss) on investments — 48 1,363 — — — 366 — 1,777
Unrealized gain/ (loss) on investments (916) 5,946 46 1,778 (570) — (189) 76 6,171
Gain (loss) on derivative instruments,
net(15) 5,642 1,599 454 83 — — 56 — 7,834
OTTI(9) — (5,001) (2,345) — — — (121) — (7,467)
Portfolio Income (loss) $ 9,831 $ 5,584 $ 4,330 $ 2,438 $ 20 $ 754 $ 2,556 $ 340 $ 25,853
BV Per Share Increase (Decrease) $ 0.23 $ 0.14 $ 0.10 $ 0.06 $ — $ 0.02 $ 0.06 $ 0.01 $ 0.62
per share
Beginning book value $ 10.64
Portfolio Income(5) 0.62
Operating expenses and G&A (0.10)
Dividends (0.31)
Income tax benefit (provision) 0.03
Ending book value $ 10.88
8
Portfolio Composition
Total Investment Portfolio ($ in millions)
September 30, 2017
Agency RMBS $ 1,122
Agency CMBS 2,109
Non-Agency RMBS 64
Non-Agency CMBS 279
Residential Whole-Loans 191
Residential Bridge Loans(14) 55
Other Investments(10) 148
Total $ 3,968
Agency & Non-Agency CMBSAgency RMBS Non-Agency RMBS, Whole-loans &CRT Securities
Select Sector Categories
Agency RMBS Agency CMBS
Non-Agency RMBS Non-Agency CMBS
Residential Whole-Loans Residential Bridge Loans
Other Investments
28%
53%
2%7%
5%
1%4%
Non-Agency RMBS
Residential Whole-loans
CRT and Other Securities
14.0%
53.8%
32.2%
Lower Loan Balance
MHA/HARP High LTV
Other
83.8%
9.9%
6.4%
Legacy CMBS
New Issue & CRE Mezzanine
Agency CMBS
6.0%1.8%
92.2%
(16)
(10)
Please refer to page 16 for footnote disclosures.
(19)
Portfolio Composition and Net Interest Margin
Net Interest Margin by Asset Class
For the Quarter Ended September 30, 2017
($ in thousands)
Carrying
Value
% of
Carrying
Value
Wtd
Average
Yield(18)
Funding
Cost(17) NIM(6)
Agency CMBS $ 2,109 53.2% 3.0% 1.4% 1.7%
Agency RMBS 1,122 28.3% 2.8% 1.4% 1.5%
Non-Agency CMBS 279 7.0% 8.6% 3.0% 6.6%
Non-Agency RMBS 64 1.6% 6.4% 2.8% 4.0%
Residential Whole-Loans 191 4.8% 4.1% 3.5% 1.2%
Residential Bridge Loans 55 1.4% 8.5% 4.3% 4.8%
Other Securities 123 3.1% 8.4% 3.5% 6.8%
Securitized Commercial Loan 25 0.6% 9.1% 6.8% 4.3%
Total return swap 13.1%
Interest rate swaps 0.2%
Total $ 3,968 100% 4.0% 2.0% 2.2%
Please refer to page 16 for footnote disclosures.
9
Investment Portfolio History
($ in millions)
Asset Class Carrying Value 12/31/2016 3/31/2017 6/30/2017 9/30/2017
Agency RMBS $ 1,470 $ 1,074 $ 859 $ 1,122
Agency CMBS 372 1,120 1,294 2,109
Non-Agency RMBS 308 64 64 64
Non-Agency CMBS 359 342 298 279
Whole-Loans:
Residential Whole-Loans 192 216 204 191
Residential Bridge Loans(14) — 33 65 55
Other Investments (10) 92 139 158 148
Total $ 2,793 $ 2,988 $ 2,942 $ 3,968
Yield on Investment Portfolio 4.8% 4.4% 4.1% 4.0%
Cost of Funds 2.1% 2.8% 2.2% 2.0%
NIM 2.7% 2.0% 2.3% 2.2%
Leverage 5.0x 5.5x 6.3x 7.3x
Portfolio Financing
September 30, 2017
($ in thousands)
Repurchase Agreements
Outstanding
Amounts
Weighted Average
Interest Rate Interest
Rate
Weighted Average
Remaining Days to
Maturity
Agency RMBS $ 792,520 1.39% 61
Agency CMBS 2,019,010 1.39% 32
Non-Agency RMBS 48,443 2.85% 41
Non-Agency CMBS 192,015 2.96% 36
Whole-Loans and Securitized Commercial
Loan 214,634 3.66% 19
Other Securities (12) 69,634 3.36% 22
Total/Wtd Avg $ 3,336,256 1.69% 38
10
▪ Master repurchase agreements with 27 counterparties.
▪ Outstanding borrowings with 17 counterparties.
▪ Capacity in excess of our current needs.
Please refer to page 16 for footnote disclosures.
Financing Summary
11
Fixed Pay Interest Rate Swaps
($ in millions – as of September 30, 2017)
Maturity Notional Amount
Avg. Fixed Pay
Rate
Avg. Floating
Receive Rate
Average Maturity
(Years) Forward Starting
Less than 1 Year $ 105.9 0.8% 1.3% 0.1 —%
1 Year to 3 Years 600.0 1.6% 1.3% 2.1 —%
3 Years to 5 Years 690.0 2% 1.3% 4.6 —%
>5 Years 1,682.3 2.5% 0.1% 10.7 95.3%
Total Fixed Pay Rate $ 3,078.2 2.2% 0.6% 7.3 52.1%
Hedging Summary
Please refer to page 16 for footnote disclosures.
At September 30, 2017 we added hedges as we increased our exposure to Agency
RMBS and Agency CMBS.
(13)
Our interest rate swaps are comprised of:
▪ $1.5 billion notional value of pay-fixed interest rate swaps, and
▪ Forward starting swap of $1.6 billion (approximately 7.0 months forward), which has a
maturity of April 27, 2028.
▪ Net Duration of the Agency RMBS and Agency CMBS portfolio: 0.32 years.
▪ Agency RMBS Weighted Average Loan Age (“WALA”) of 40.8 months
12
Duration as of September 30, 2017
Agency Holdings Key Rate Duration Contribution
Total 6-months 2-Year 5-Year 10-Year 20-Year 30-Year
Agency RMBS 1.05 0.04 0.13 0.25 0.37 0.2 0.05
Agency CMBS 4.72 0.01 0.05 0.7 3.8 0.16 —
Swaps and Futures (5.45) 0.2 (0.36) (0.72) (4.17) (0.39) —
Total 0.32 0.25 (0.18) 0.23 — (0.03) 0.05
Please refer to page 16 for footnote disclosures.
13
▪ U.S. growth and inflation may be moderating.
▪ Central banks are signaling a path to normalization.
▪ Spread sectors should continue to offer attractive returns.
▪ Consumer and housing fundamentals remain at historically attractive levels.
▪ We expect elevated interest rate volatility in the near-term due to U.S. policy
uncertainties and global political developments.
▪ Global economies will continue to experience improving growth, but weak by
historical standards.
2017 Macroeconomic Outlook
Base case is for steady but unspectacular growth, where spread
sectors are likely to outperform.
▪ Residential Whole-loans continue to perform in-line with our expectations.
* We will continue to increase our holdings of bridge residential and commercial
loans as opportunities arise.
▪ Re-performing loans provide attractive risk adjusted returns from a well-functioning
securitization market and we expect to invest in this sector.
▪ Commercial mezzanine loan opportunities continue to offer attractive risk-reward
opportunities.
▪ Lower-rated CMBS spreads remain wide and have lagged the recovery in credit.
▪ Agency CMBS offers more attractive relative value than Agency RMBS.
Portfolio View
Credit sensitive mortgage sectors have performed relatively well and are
expected to continue to offer attractive returns. We remain constructive on
Agency RMBS and Agency CMBS spreads.
14
Target Investment Opportunities
Residential Bridge Loans
▪ Strategic partnerships with seasoned originators.
▪ Short-term non owner occupied single or multi-unit residences.
▪ Attractive unlevered net yield of 7-8%.
▪ Average loan sizes approximately $250,000.
▪ Maximum loan to value of 85% based on as is appraised value.
Agency CMBS
▪ Multifamily residential loans guaranteed by Fannie Mae and Freddie Mac
▪ Outstanding balance of more than $400 billion with annual issuance in excess
of $40 billion.
▪ Prepayment protection in the form of defeasance, yield maintenance or points.
▪ Interest only securities receive the prepayment penalties.
▪ Principal bearing bonds have soft bullet and tight window for principal
payment.
Reperforming Loans
▪ Mortgages that were previously delinquent, but are now “re-performing”
because payments on the mortgages have become current with or without the
use of a loan modification
▪ See significant loan sales coming from Fannie Mae and Freddie Mac, as well
as legacy holders
▪ Target loans with improved updated loan-to-value ratios, significant
repayment history, and strong updated credit scores
Commercial Real Estate
Mezzanine
▪ Single asset single borrower commercial loans
▪ Invest in deals where our manager drives deal structure and covenants
▪ Attractive yields of Libor plus 600-800 bps
▪ Target floating rate assets and short term deals
15
(1) As of September 30, 2017
(2) Reflects the $0.31 dividend declared on September 21, 2017 and paid on October 26, 2017.
(3) Economic return, for any period, is calculated by taking the sum of (i) the total dividends declared and (ii) the change in net book value during the period and dividing by the beginning
book value.
(4) Core earnings is a non-GAAP measures which includes the cost of interest rate swaps, interest income on IOs and IIOs classified as derivatives, net interest income on foreign
currency swaps and total return swaps. 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.
(5) Non-GAAP measure which includes net interest margin (as defined in footnote 6), realized and unrealized gains or losses in the portfolio and other than temporary impairment.
(6) Non-GAAP measures which include interest income, interest expense, the cost of interest rate swaps and interest income on IOs and IIOs classified as derivatives, foreign currency
swaps and total return swap, and are weighted averages for the quarter ended September 30, 2017.
(7) Third quarter weighted average Constant Prepayment Rate for the company’s Agency RMBS portfolio on an annualized basis.
(8) Net interest rate swaps interest expense have been allocated based on average duration contribution.
(9) Includes other than temporary impairment on IO's and IIO's accounted for as derivatives.
(10) Other investments include ABS, GSE Credit Risk Transfer securities and a securitized commercial loan.
(11) Portfolio income attribution uses total income defined as the sum of net interest income, realized gain, unrealized gain and other than temporary impairment.
(12) Other securities includes ABS and GSE Credit Risk Transfer securities.
(13) While we use hedging strategies as part of our overall portfolio management, these strategies are not designed to eliminate all risks in the portfolio. There can be no assurance as to
the level or effectiveness of these strategies.
(14) The residential bridge loans are reflected at amortized costs. The estimated fair value of the residential bridge loans at September 30, 2017 is approximately $56 million.
(15) Loss on derivative instruments, net (excluding cost of hedging) has been allocated based average duration contribution.
(16) Other includes low WALA and investor loans.
(17) Non-GAAP measures which include interest expense, the cost of interest rate swaps, foreign currency swaps, and are weighted averages for the quarter ended September 30, 2017.
(18) Non-GAAP measures consisting of interest income on the investment portfolio, including IOs and IOs classified as derivatives and are weighted average for the quarter ended
September 30, 2017.
(19) Lower loan balance pools generally consist of loans below $150,000.
16
Footnotes
Supplemental Information
18
Book Value Roll Forward
Please refer to page 16 for footnote disclosures.
Book value increased by 2.3% during the third quarter of 2017.
Amounts in 000's Per Share
Book Value at June 30, 2017 $ 445,994 $ 10.64
Common dividend (12,995) (0.31)
432,999 10.33
Portfolio Income
Net interest margin (6) 17,538 0.42
Net realized gain on investments and derivatives 10,890 0.26
Unrealized gain on investments and derivatives 4,892 0.12
Other than temporary impairment (9) (7,467) (0.18)
Net portfolio income 25,853 0.62
Operating expenses (2,555) (0.06)
General and administrative expenses, excluding equity based compensation (1,467) (0.04)
Provision for taxes 1,155 0.03
Book Value at September 30, 2017 $ 455,985 $ 10.88
Coupon Principal Balance Amortized Cost(4) Estimated Fair Value
Agency
40-year fixed rate 3.5% $ 374.8 $ 385.9 $ 387.1
30-year fixed rate 3.0% 23.8 23.9 23.9
4.0% 245.2 260.2 260.7
4.5% 192.6 206.8 211.0
5.0% 43.1 48.1 48.1
5.5% 1.9 2.2 2.1
6.0% 2.2 2.4 2.5
20-year fixed rate 3.5% 31.3 32.8 32.8
4.0% 118.7 125.0 126.5
Agency RMBS IOs and IIOs(1) 3.0% N/A 15.4 16.0
Agency RMBS IOs and IIOs accounted for as
derivatives (1)(2)
2.9%
N/A N/A 11.2
Agency CMBS 2.9% 2,087.9 2,090.1 2,103.2
Agency CMBS IOs and IIOs(1) 3.2% N/A — —
Agency CMBS IOs and IIOs accounted for as
derivatives (1)(2)
0.5%
N/A N/A 6.0
Subtotal Agency 3.1% 3,121.5 3,192.8 3,231.1
Non-Agency
Non-Agency RMBS 3.1% 81.5 58.4 64.4
Non-Agency CMBS 4.8% 376.2 290.0 278.5
Subtotal Non-Agency 4.5% 457.7 348.4 342.9
Other Securities(3) 7.3% 92.3 115.8 122.7
Subtotal MBS and Other Securities 3.3% 3,671.5 3,657.0 3,696.7
Whole-Loans
Residential Whole-Loans 4.5% 187.5 187.8 191.4
Residential Bridge Loans 10.0% 54.7 54.9 54.9
Securitized Commercial Loan(5) 9.0% 24.9 24.9 25.0
Subtotal Whole-Loans 6.1% 267.1 267.6 271.3
Total Portfolio 3.5% 3,938.6 3,924.6 3,968.0
(1) IOs and IIOs have no principal balances and bear interest based on a notional balance. The notional balance is used solely to determine interest distributions on interest-only class of securities. At September 30,
2017, the notional balance for Agency RMBS IOs and IIOs, Agency RMBS IOs and IIOs accounted for as derivatives, Agency CMBS IOs and IIOs and Agency CMBS IOs and IIOs accounted for as
derivatives was $166.2 million, $131.8 million, $5.3 million and $193.8 million, respectively.
(2) Interest on these securities is reported as a component of "Gain (loss) on derivative instruments, net" in our Consolidated Statements of Operations.
(3) Other securities include residual interests in asset-backed securities which have no principal balance and an amortized cost of approximately $23.4 million.
(4) All investments are carried at their fair value with the exception of the residential bridge loans, which are carried at their amortized cost.
(5) The $24.9 million securitized commercial loan is from a consolidated variable interest entity in which the Company owns a $14.0 million first loss position in a CMBS Securitized Trust.
19
Portfolio Composition as of September 30, 2017 (in millions)
20
Economic Return(1) Total Stock Return(2)
QTD YTD
3 Years
Ended
5/5/12 to
9/30/2017 QTD YTD
3 Years
Ended
5/5/12 to
9/30/2017
5.2% 15.0% 7.3% 29.4% 4.7% 13.2% 8.1% 27.3%
WMC Returns as of September 30, 2017
(1) 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.
(2) Total Stock return is calculated by taking the sum of: (i) the total dividends declared; and (ii) the change in stock price during the
period and dividing by the beginning stock price.
Western Asset Mortgage Capital Corporation
c/o Financial Profiles, Inc.
11601 Wilshire Blvd., Suite 1920
Los Angeles, CA 90025
www.westernassetmcc.com
Investor Relations Contact:
Larry Clark
Tel: (310) 622-8223
lclark@finprofiles.com
Contact Information