Attached files
| file | filename |
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| EX-99.1 - EXHIBIT 99.1 - Western Asset Mortgage Capital Corp | wmcq4fy17ex991.htm |
| 8-K - 8-K - Western Asset Mortgage Capital Corp | wmcq4fy178-k.htm |
Fourth Quarter 2017
Investor Presentation
March 6, 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
Fourth 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 $442 billion(1)
Structured Product AUM of $67.3 billion, of which
$33.9 billion is invested in Agency RMBS and $33.4 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 17 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.
5
Please refer to page 17 for footnote disclosures.
Fourth Quarter Financial Highlights
▪ December 31, 2017 book value per share of $11.15(2), net of fourth quarter common
dividend of $0.31 per share declared on December 21, 2017.
▪ GAAP net income of $21.4 million, or $0.51 per basic and diluted share.
▪ Core earnings plus drop income of $13.0 million(4), or $0.31 per basic and diluted share.
▪ Economic return on book value was 5.3%(3) for the quarter.
▪ 1.79%(6) annualized net interest margin on our investment portfolio.
▪ Issued $115.0 million aggregate principal amount of 6.75% convertible senior unsecured
notes, which included the underwriter’s $15.0 million over-allotment.
▪ 7.2x leverage as of December 31, 2017 (7.5x leverage when adjusted for net TBA
positions).
▪ Acquired $254 million in target assets, including $196 million credit sensitive assets.
▪ Repurchased 125,722 common shares at an average price of $9.80 per share.
6
Please refer to page 17 for footnote disclosures.
Full Year 2017 Financial Highlights
▪ Full year book value per common share increased by $0.88 per share to $11.15, net of annual
dividends.
▪ Maintained a consistent $0.31 per share quarterly common dividend throughout 2017 for total
annual common dividends of $1.24 per share.
▪ GAAP net income of $85.1 million, or $2.03 per basic and diluted share.
▪ Core earnings plus drop income of $50.2 million, or $1.20 per basic and diluted share.
▪ Economic return on book value was 20.6% for the year.
▪ 2.06% annualized net interest margin.
▪ Repositioned our investment portfolio:
• Acquired $1.8 billion in Agency CMBS and $403 million credit sensitive assets.
• Reduced Agency RMBS exposure by $622 million and legacy Non-Agency exposure by
$246 million.
▪ Restructured our hedge positions, reducing our swap related interest expense by 48% year-
over year.
▪ Recorded total expenses of $17.8 million, a year-over-year decrease of $3.5 million or 16.3%.
Recent Performance
7
(3)
(4)
Please refer to page 17 for footnote disclosures.
The repositioning of our portfolio that began in early 2017 enabled us to provide our
shareholders with an attractive dividend that is supported by sustainable core earnings as
well as appreciation in the value of our portfolio.
Economic Return
6.0
4.0
2.0
0.0
Q1 2017 Q2 2017 Q3 2017 Q4 2017
4.8% 4.8% 5.2%
5.3%
Book Value Per Share
12.0
10.0
8.0
6.0
4.0
2.0
0.0
3/31/17 6/30/2017 9/30/2017 12/31/2017
$10.45 $10.64 $10.88 $11.15
Dividend Per Share
$0.35
$0.30
$0.25
$0.20
$0.15
$0.10
$0.05
$0.00
Q1 2017 Q2 2017 Q3 2017 Q4 2017
0.31 0.31 0.31 0.31
Core Earnings Plus Drop Income Per Share
$0.40
$0.35
$0.30
$0.25
$0.20
$0.15
$0.10
$0.05
$0.00
Q1 2017 Q2 2017 Q3 2017 Q4 2017
0.25
0.32 0.32 0.31
8
Fourth Quarter Portfolio Income Attribution(10)
Please refer to page 17 for footnote disclosures.
Portfolio income(5) was $27.8 million for the quarter ended December 31, 2017.
For the 3 Months Ended December 31, 2017 (In millions except per share data)
Agency
CMBS
Agency
RMBS
Non-Agency
CMBS
Non-Agency
RMBS
Residential
Whole-
Loans
Residential
Bridge Loans
Other
Securities
Securitized
Commercial
Loan Total
Interest Income $ 15.5 $ 5.4 $ 6.2 1.3 $ 2.2 $ 1.5 $ 2.6 $ 0.3 $ 35.0
Interest expense(7) (8.5) (3.2) (1.3) (0.4) (1.8) (1.0) (0.5) — (16.7)
Net swap interest expense
(8) (1.4) (0.3) (0.1) — — — — — (1.8)
Net Interest Income 5.6 1.9 4.8 0.9 0.4 0.5 2.1 0.3 16.5
Realized gain/(loss) — — (0.3) — — — 0.3 — —
Unrealized gain/ (loss) (5.6) (5.0) (1.9) (0.6) 0.7 0.6 5.2 — (6.6)
Gain (loss) on derivatives
(15) 16.0 3.8 1.0 0.1 — — 0.1 — 21.0
OTTI(9) — (0.4) (2.5) — — — (0.2) — (3.1)
Portfolio Income $ 16.0 $ 0.3 $ 1.1 $ 0.4 $ 1.1 $ 1.1 $ 7.5 $ 0.3 $ 27.8
BV Per Share Increase
(Decrease) $ 0.38 $ 0.01 $ 0.03 $ 0.01 $ 0.02 $ 0.03 $ 0.18 $ 0.01 $ 0.67
Per Share
Beginning book value $ 10.88
Portfolio Income(5) 0.67
Operating expenses and
G&A (0.10)
Dividend (0.31)
Provision for Taxes (0.05)
Convertible senior notes
(equity portion) 0.06
Ending book value $ 11.15
9
Full Year Portfolio Income Attribution(10)
Please refer to page 17 for footnote disclosures.
Portfolio income(5) was $106.4 million for the year ended December 31, 2017.
For the Year Ended December 31, 2017 (In millions except per share data)
Agency
CMBS
Agency
RMBS
Non-Agency
CMBS
Non-Agency
RMBS
Residential
Whole-
Loans
Residential
Bridge Loans
Other
Securities
Securitized
Commercial
Loan Total
Interest Income $ 40.8 $ 26.2 $ 27.5 6.2 $ 8.5 $ 4.5 $ 11.3 $ 1.3 $ 126.3
Interest expense(7) (18.1) (11.3) (6.0) (1.9) (6.0) (2.2) (1.8) (0.2) (47.4)
Net swap interest expense
(8) (7.1) (4.6) (1.0) (1.3) — — (0.1) — (14.1)
Net Interest Income 15.6 10.3 20.5 3.0 2.5 2.3 9.4 1.1 64.7
Realized gain/(loss) — (2.5) 0.7 22.2 — — 0.1 — 20.5
Unrealized gain/ (loss) 6.4 7.2 13.5 (13.0) 0.7 0.6 14.0 0.5 29.9
Gain (loss) on derivatives
(15) 7.5 4.8 1.0 1.4 — — 0.1 — 14.8
OTTI(9) (0.1) (6.3) (15.1) — — — (2.0) — (23.5)
Portfolio Income $ 29.4 $ 13.5 $ 20.6 $ 13.6 $ 3.2 $ 2.9 $ 21.6 $ 1.6 $ 106.4
BV Per Share Increase
(Decrease) $ 0.70 $ 0.32 $ 0.49 $ 0.32 $ 0.08 $ 0.07 $ 0.52 $ 0.04 $ 2.54
Per Share
Beginning book value $ 10.27
Portfolio Income(5) 2.55
Operating expenses and
G&A (0.42)
Dividend (1.24)
Provision for Taxes (0.07)
Convertible senior notes
(equity portion) 0.06
Ending book value $ 11.15
10
Portfolio Composition
Total Investment Portfolio, at fair value
($ in millions)
December 31, 2017
Agency RMBS $ 698
Agency CMBS 2,161
Non-Agency RMBS 99
Non-Agency CMBS 279
Residential Whole-Loans 237
Residential Bridge Loans(14) 107
Other Investments(10) 147
Total $ 3,728
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
19%
58%
3%7%
6%
3%4%
Non-Agency RMBS Residential Whole-loans
CRT and Other Securities
19.5%
67.6%
12.9%
Low Loan Balance Low Loan Balance Modified Pools
MHA/HARP High LTV Other
34.6%
54.0%
6.6%
4.8%
Legacy CMBS New Issue & CRE Mezzanine
Agency CMBS
4.6%6.8%
88.6%
(16)
(10)
Please refer to page 17 for footnote disclosures.
(19)
Portfolio Financing
($ in millions)
December 31, 2017
Repurchase Agreements
Outstanding
Amounts Interest Rate
Remaining Days to
Maturity
Agency RMBS $ 665.9 1.62% 61
Agency CMBS 2,035.2 1.53% 53
Non-Agency RMBS 46.5 2.76% 41
Non-Agency CMBS 154.3 2.98% 40
Whole-Loans and Securitized Commercial
Loan 189.3 3.66% 8
Residential Bridge Loans 100.2 4.05% 59
Other Securities (12) 60.3 2.94% 23
Total $ 3,251.7 1.86% 51
11
n Master repurchase agreements with 28 counterparties
n Outstanding borrowings with 16 counterparties
n Capacity in excess of our current needs
Please refer to page 17 for footnote disclosures.
Financing Summary
12
Fixed Pay Interest Rate Swaps
($ in millions – as of December 31, 2017)
Maturity Notional Amount
Avg. Fixed Pay
Rate
Avg. Floating
Receive Rate
Average Maturity
(Years)
Greater than 1 year and less than 3 years 600.0 1.6% 0.9% 1.8
Greater than 3 years and less than 5 years 960.0 2.0% 0.9% 4.3
Greater than 5 years 1,692.2 2.5% 0.9% 10.5
Total $ 3,252.2 2.2% 0.9% 7.1
Hedging Summary
Please refer to page 17 for footnote disclosures.
Our net fixed pay interest rate swap(13) position is $3.3 billion.
(13)
Our interest rate swaps are comprised of:
n $1.7 billion notional value of pay-fixed interest rate swaps, and
n $1.5 billion forward starting swap (approximately 4.0 months forward),
which has a maturity of April 27, 2028.
n Net Duration of Agency RMBS Pools and Agency CMBS portfolio: Negative 0.27 years
13
Duration as of December 31, 2017
Agency Holdings Key Rate Duration Contribution
Total 6-Months 2-Year 5-Year 10-Year 20-Year 30-Year
Agency RMBS 1.11 0.04 0.13 0.25 0.38 0.25 0.06
Agency CMBS 4.31 0.01 0.04 0.79 3.36 0.11 —
Swaps and Futures (5.69) 0.13 (0.91) (0.83) (3.79) (0.29) —
Total (0.27) 0.18 (0.74) 0.21 (0.05) 0.07 0.06
Please refer to page 17 for footnote disclosures.
14
▪ U.S growth and inflation may rise with fiscal stimulus.
▪ Central banks are becoming less accommodative.
▪ Spread sectors should outperform but margins are thin for some sectors.
▪ Consumer and housing fundamentals remain at historically attractive levels.
▪ We expect elevated volatility in the near-term due to U.S. policy uncertainties and
global political developments.
▪ Global economies are expected continue to experience improving growth from
subdued levels.
2017 Macroeconomic Outlook
Base case is for steady economic 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 continue to invest in this sector.
▪ Commercial mezzanine loan opportunities continue to offer attractive risk-reward
opportunities.
▪ Agency CMBS offers more attractive relative value than Agency RMBS.
▪ Securitized prime jumbo mortgages offer attractive value as convexity is priced in.
Portfolio View
Credit sensitive mortgage sectors have performed relatively well and are
expected to continue to offer attractive returns. We remain constructive on
Agency CMBS spreads.
15
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.
▪ Target loan to value of 85% based on as is appraised value.
Agency CMBS
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
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
▪ 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. 16
17
(1) As of December 31, 2017
(2) Reflects the $0.31 dividend declared on December 21, 2017 and paid on January 26, 2018.
(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. Drop income was approximately $0.2 million for the three
months ended December 31, 2017.
(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 December 31, 2017.
(7) Convertible senior notes interest expense has been allocated based on deployment of proceeds during the quarter ended December 31, 2017.
(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 bridge loans are carried at amortized costs as of the quarters ended March 31, 2017, June 30, 2017 and Septembers 30, 2017 since we did not elect the fair value option for
these loans. For the bridge loans acquired subsequent to October, 25, 2017, we elected the fair value option to be consistent with the accounting of other investments. Accordingly,
the carrying amount of the bridge loans as of December 31, 2017 includes $64.5 million of residential bridge loans carried at fair value and $42.1 million of residential bridge loans
carried at amortized costs.
(15) Gain (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 December 31, 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
December 31, 2017.
(19) Lower loan balance pools generally consist of loans below $150,000.
Footnotes
Appendix
19
Book Value Roll Forward
Please refer to page 17 for footnote disclosures.
Book value increased by 2.5% and 8.6% during the fourth quarter and twelve month-
ended 2017, respectively.
Q4 2017 FY 2017
Amounts
($ in millions) Per Share
Amounts
($ in millions) Per Share
Beginning Book Value $ 456.0 $ 10.88 $ 430.5 $ 10.27
Convertible senior notes (equity portion) 2.7 0.06 2.7 0.06
Repurchase of common stock (1.2) N/A (1.2) N/A
Common Dividend (13.0) (0.31) (51.9) (1.24)
444.5 10.63 380.1 9.09
Portfolio Income
Net Interest Margin 16.7 0.40 64.8 1.55
Net realized gain (loss) on investments and
derivatives 28.6 0.69 (116.4) (2.79)
Net unrealized gain (loss) on investments and
derivatives (14.5) (0.35) 181.5 4.34
Other than temporary impairment (3.0) (0.07) (23.5) (0.56)
Net Portfolio Income 27.8 0.67 106.4 2.54
Operating expense (2.5) (0.06) (10.5) (0.25)
General and administrative (excludes stock-
based compensation) (1.6) (0.04) (6.5) (0.15)
Income tax benefit (provision) (2.2) (0.05) (3.5) (0.08)
Book Value at December 31, 2017 $ 466.0 $ 11.15 $ 466.0 $ 11.15
20
Agency Portfolio
($ in millions)
Principal Balance Amortized Costs Fair Value Net WeightedAverage Coupon
Agency CMBS $ 2,145.1 $ 2,147.3 $ 2,154.8 2.9%
Agency CMBS IOs and IIOs N/A — 5.8 0.5%
Agency RMBS 20-Year, 30-Year and 40-Year 641.0 669.9 672.2 3.9%
Agency RMBS IOs and IIOs N/A 14.8 25.9 2.9%
Total $ 2,786.2 $ 2,832.0 $ 2,858.6 3.0%
Portfolio Composition as of December 31, 2017
Agency CMBS 75.3%
Agency RMBS 40-Year
mortgage 13.2%
Agency RMBS 30-Year
mortgage 8.5%
Agency RMBS 20-Year
mortgage 1.9%
Agency RMBS IO & IIO
0.9%
Agency CMBS IO & IIO
0.2%
21
Credit Sensitive Portfolio
($ in millions)
Principal Balance Amortized Costs Fair Value Net WeightedAverage Coupon
Non-Agency RMBS $ 119.7 $ 85.5 $ 90.8 3.8%
Non-Agency RMBS IOs and IIOs N/A 8.7 8.7 0.9%
Non-Agency CMBS 379.2 292.0 278.6 4.8%
Residential Whole Loans 232.3 233.1 237.4 4.5%
Residential Bridge Loans 105.9 106.2 107.4 8.6%
Securitized Commercial Loan 24.8 24.8 24.9 9.0%
Other Securities 86.3 110.1 122.1 7.8%
$ 948.2 $ 860.4 $ 869.9 4.4%
Portfolio Composition as of December 31, 2017 (Continued)
Non-Agency RMBS: 10.4%
Non-Agency RMBS IOs and
IIOs: 1.0%
Non-Agency CMBS: 32.0%
Residential Whole Loans:
27.3%
Residential Bridge Loans:
12.3%
Securitized Commercial
Loan: 2.9%
Other Securities: 14.0%
22
Economic Return(1) Total Stock Return(2)
QTD YTD
3 Years
Ended
5/5/12 to
12/31/2017 QTD YTD
3 Years
Ended
5/5/12 to
12/31/2017
5.3% 20.6% 8.8% 32.3% (2.0)% 11.1% 2.4% 26.3%
WMC Returns as of December 31, 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