UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
May 8, 2014 (May 8, 2014)
Western Asset Mortgage Capital Corporation
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OF INCORPORATION)
001-35543 |
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27-0298092 |
(COMMISSION FILE NUMBER) |
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(IRS EMPLOYER ID. NUMBER) |
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385 East Colorado Boulevard |
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Pasadena, California |
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91101 |
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) |
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(ZIP CODE) |
(626) 844-9400
(REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Item 2.02. Results of Operations and Financial Condition
On May 8, 2014, Western Asset Mortgage Capital Corporation (the Company) issued a press release announcing its financial results for the fiscal quarter ended March 31, 2014. As part of the press release, the Company estimated its book value per share as of May 5, 2014 to be between $14.92 and $15.02. The estimated book value is unaudited, has not been verified by any third party and may have changed due to market conditions, operations of the Company or other factors since May 5, 2014. The text of the press release is furnished as exhibit 99.1 to this Form 8-K.
Item 7.01 Regulation FD Disclosure
Also on May 8, the Company held a conference call in which it discussed its financial results. The presentation from such call is furnished herewith as Exhibit 99.2 to this Form 8-K.
Pursuant to the rules and regulations of the Securities and Exchange Commission, Exhibits 99.1 and 99.2 and the information set forth therein and herein are being furnished and shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the Exchange Act), nor shall they be deemed to be incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing.
Item 9.01. Financial Statements and Exhibits
(d) Exhibits
Exhibit No. |
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Description |
99.1 |
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Press Release, dated May 8, 2014 issued by Western Asset Mortgage Capital Corporation |
99.2 |
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Presentation, dated May 8, 2014 by Western Asset Mortgage Capital Corporation |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
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WESTERN ASSET MORTGAGE CAPITAL CORPORATION | ||
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By: |
/s/ W. Stephen Venable, Jr. | |
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Name: |
W. Stephen Venable, Jr. |
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Title: |
Assistant Secretary |
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Date: May 8, 2014 |
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Exhibit 99.1
FOR IMMEDIATE RELEASE
WESTERN ASSET MORTGAGE CAPITAL CORPORATION
ANNOUNCES FIRST QUARTER 2014 RESULTS
Conference Call and Webcast Scheduled for today at 12:00 p.m. Eastern Time/9:00 a.m. Pacific Time
Pasadena, CA, May 8, 2014 Western Asset Mortgage Capital Corporation (NYSE: WMC) today reported its results for the first quarter ended March 31, 2014. These results reflect the strategic decision by the Company to diversify its portfolio away from a pure Agency REIT and move toward a more hybrid REIT model. Actions taken by the Company in order to implement this strategy had a negative impact on both operating results for the period and book value as of March 31, 2014. The Company, which previously declared a $0.67 per share dividend for the quarter, recorded a GAAP net loss of $8.4 million, or $0.32 per basic and diluted share for the first quarter ended March 31, 2014. Core earnings for the period were $12.4 million, or $0.46 per basic and diluted share(1). Core earnings plus drop income for the first quarter was $15.2 million, or $0.56 per basic and diluted share(1),(2). This amount is inclusive of estimated catch-up premium amortization for the period of $1.4 million or ($0.05) per basic and diluted share(3). The Company also reported a net book value of $14.19 per share as of March 31, 2014(4), but estimated that its book value as of May 5, 2014 was between $14.92 and $15.02 per share(5).
FIRST QUARTER 2014
· Declared a $0.67 per share cash dividend for the quarter
· Includes carryover taxable income from 2013
· Recorded a GAAP net loss of $8.4 million, or $0.32 per basic and diluted share
· Net loss includes $31.1 million of net unrealized gains on MBS, $2.0 million of net realized gains on MBS, and $57.7 million of net loss on derivative instruments and linked transactions
· Generated core earnings plus drop income of $15.2 million, or $0.56 per basic and diluted share(1),(2)
· Core earnings of $0.46 per share, including estimated catch-up premium amortization of ($0.05) per share(3)
· Drop income of $0.10 per share(2)
· $14.19 per share net book value as of March 31, 2014(4)
· Total Stockholders Equity of $384.2 million as of March 31, 2014
· 3.57% weighted average portfolio yield on Agency and Non-Agency MBS, including IO securities accounted for as derivatives and linked transactions under GAAP(1)
· 1.77% weighted average effective cost of financing on Agency and Non-Agency MBS, including swaps and linked transactions(1)
· 1.80% weighted average net interest spread on Agency and Non-Agency MBS, including IO securities accounted for as derivatives and swaps(1)
· $3.3 billion investment portfolio fair value as of March 31, 2014, including linked transactions
· Constant prepayment rate on its Agency RMBS portfolio of 3.8% for the quarter
· 7.4x leverage (including borrowings on linked transactions) as of March 31, 2014
· 8.2x leverage when adjusted for net TBA position (1), (6)
COMMON STOCK OFFERING AND PRIVATE PLACEMENT
On April 9, 2014, the Company closed an offering of 13,000,000 shares of its common stock sold to the public and a concurrent private placement of 650,000 shares of its common stock sold to its external manager Western Asset Management Company. The combined net proceeds from the public offering and the private placement were approximately $200.0 million, after deducting the underwriting discount and estimated offering expenses payable by the Company. The net proceeds of the offering were received and fully invested on April 9, 2014.
On May 2, 2014, underwriters from the April stock offering notified the Company that they had elected to exercise a portion of their overallotment option and purchase an additional 1,000,000 shares of common stock from the Company providing the Company with incremental proceeds of approximately $14.7 million. Such proceeds were received and fully invested yesterday, May 7, 2014.
The offering was overall accretive, on a book value basis, to existing shareholders and increased the market capitalization of the Company by approximately 50%. Given the capital raise and the percentage change in its capitalization, the Company believes that in this particular instance it is important and appropriate to provide additional information
(1) Non GAAP measure.
(2) Drop income is income derived from the use of to-be-announced forward contract (TBA) dollar roll transactions and is a component of our gain (loss) on derivative instruments on our statement of operations, and is not included in core earnings.
(3) Estimated catch-up premium amortization results primarily from the quarterly adjustments in projected constant prepayment rate (CPR) estimates for our MBS portfolio and the retrospective application of such adjustments to certain of our MBS securities, consisting almost entirely of our Agency RMBS whole pools.
(4) March 31, 2014 book value per share reflects the $0.67 per share dividend declared on March 20, 2014.
(5) Estimated book value per share as of May 5, 2014, is unaudited and does not reflect any potential adjustment associated with catch-up premium amortization. The estimated book value has not been reviewed or verified by any third party and may fluctuate based on current market conditions, the Companys operations and other factors. The Companys actual book value, as of the date of this release, may have changed since the estimate provided as of May 5, 2014.
(6) 7.4x leverage calculation does not reflect net To-Be Announced (TBA) mortgage pass-through certificates position. As of March 31, 2014, the net long position in TBAs was $300 million in notional value.
regarding its estimated current book value. As of May 5, 2014, the Company estimated that its book value was between $14.92 and $15.02 per share. This estimated book value is unaudited and has not been reviewed or verified by any third party. The estimated book value does not reflect the use of proceeds associated with the 1,000,000 shares sold as part of the overallotment allocation nor any potential adjustment associated with catch-up premium amortization. Book value will fluctuate with market conditions, the results of the Companys operations and other factors, and the Companys book value as of the date of this release may be different from the estimate provided as of May 5, 2014.
FIRST QUARTER 2014 RESULTS
For the first quarter ended March 31, 2014, the Company recorded a GAAP net loss of $8.4 million, or $0.32 per basic and diluted share. This compares to net income of $20.8 million, or $0.83 per basic and diluted share for the fourth quarter ended December 31, 2013. After adjusting for the additional shares issued as a result of the stock portion of the dividend declared on December 19, 2013 and paid on January 28, 2014, net income would have been $0.76 per basic and diluted share for the fourth quarter ended December 31, 2013. During the first quarter of 2014, the Company generated core earnings plus drop income of $15.2 million, or $0.56 per basic and diluted share. This amount is inclusive of $1.4 million of estimated catch-up premium amortization or ($0.05) per basic and diluted share. This compares to core earnings plus drop income of $18.6 million, or $0.76 per basic and diluted share for the fourth quarter ended December 31, 2013, inclusive of $0.3 million of estimated catch-up premium amortization or ($0.01) per basic and diluted share. After adjusting for the additional shares issued as a result of the stock portion of the dividend declared on December 19, 2013 and paid on January 28, 2014, core earnings plus drop income would have been $0.69 per basic and diluted share for the fourth quarter ended December 31, 2013. Core earnings represents a non-GAAP financial measure and is defined as net income (loss) excluding: (i) net realized gain (loss) on investments and derivative contracts; (ii) net unrealized gain (loss) on investments; (iii) loss resulting from mark-to-market adjustments on derivative contracts; (iv) other loss on MBS; (v) non-cash stock-based compensation expense; and (vi) certain other non-cash charges. Drop income represents a non-GAAP financial measure and is derived from the use of to-be-announced forward contract (TBA) dollar roll transactions and is defined as the difference between the spot price and the forward settlement price for a comparable security on the trade date. Estimated catch-up premium amortization cost is due to quarterly adjustments in projected constant prepayment rate (CPR) estimates for certain securities in our MBS portfolio.
For the quarter ended March 31, 2014, average amortized cost of MBS held, including Agency and Non-Agency Interest-Only Strips accounted for as derivatives and linked transactions, was $3.09 billion, as compared to $3.47 billion for the quarter ended December 31, 2013.
For the quarter ended March 31, 2014, the Companys weighted average yield on its portfolio was 3.57%, including Agency and Non-Agency MBS, interest from Interest-Only securities accounted for as derivatives and linked transactions that occurred during
the quarter. The Companys effective cost of funds on its Agency and Non-Agency MBS financing (including the cost of interest rate swaps and linked transactions) was 1.77%. The annualized net interest spread on its portfolio was 1.80%, including Agency and Non-Agency MBS, interest from Interest-Only securities accounted for as derivatives and linked transactions, and taking into account the cost of the interest rate swaps. This compares with a weighted average yield of 3.61%, an effective cost of funds of 1.46%, and an annualized net interest spread of 2.15% for the quarter ended December 31, 2013.
The actual constant prepayment rate (CPR) for the Companys Agency RMBS portfolio during the first quarter was 3.8% on an annualized basis, as compared to 5.0% for the fourth quarter of 2013.
COMMENTARY
During the first quarter of 2014, our efforts to increase our exposure to Non-Agency RMBS and CMBS and increase income derived from the use of TBA dollar roll transactions resulted in a smaller overall portfolio and a lower effective net interest spread as compared to the December 2013 quarter, thereby impacting our core earnings, said Gavin James, Chief Executive Officer of Western Asset Mortgage Capital Corporation. In addition, our book value per share during the first quarter was impacted by unrealized losses on our interest rate hedges as rates moved towards the low end of our expected range.
Shortly after the first quarter ended, we successfully completed our second follow-on stock offering, raising approximately $200.0 million, including approximately $10.0 million in a concurrent private placement from our external manager Western Asset Management Company and exclusive of the partial exercise of the overallotment allocation. The proceeds were invested immediately in a diversified selection of assets across the mortgage spectrum, which is a testament to Western Assets strong and resourceful fixed income investment platform. We also continue to have access to repo counterparties well in excess of our current needs, which significantly mitigates funding risk for WMC going forward. Further, we estimate that at May 5, 2014 our book value had increased to between $14.92 and $15.02, said Mr. James.
Anup Agarwal, Chief Investment Officer of Western Asset Mortgage Capital Corporation, commented, We are optimistic about the impact that diversifying our portfolio away from a pure Agency REIT and into more of a hybrid REIT model will have on our ability to generate attractive core earnings. We have increased our leverage to approximately eight times as we believe that there are currently opportunities to generate leveraged ROE at relatively attractive levels on new capital invested in a variety of Non-Agency assets, including residential and commercial real estate whole loans and asset-backed securities. With the increase in our portfolio size, our lower expense ratio and the diversification of our portfolio, we believe that we are well positioned to generate attractive core earnings, supplemented by drop income from our TBA positions, while reducing the overall volatility of our book value per share.
DIVIDEND
On March 20, 2014, the Company declared a regular cash dividend of $0.67 per share for each common share. Since inception in May of 2012, WMC has declared and paid total dividends of $8.12 per share in a combination of cash and stock.
PORTFOLIO COMPOSITION
As of March 31, 2014, the Company owned an aggregate securities portfolio equaling $3.26 billion in market value, comprised of $1.71 billion of 30-year fixed-rate Agency RMBS (residential mortgage-backed securities for which the principal and interest payments are guaranteed by a U.S. Government agency or sponsored entity), $815.0 million of 20-year fixed-rate Agency RMBS, $434.8 million of Non-Agency RMBS (including $15.7 million of linked transactions and $20.0 million of interest-only and inverse interest-only strips), $25.3 million of Agency and Non-Agency CMBS (commercial mortgage-backed securities), $94.1 million of Agency RMBS interest-only and $74.1 million of Agency RMBS inverse interest-only strips, and $68.5 million of Agency and Non-Agency MBS interest-only and $41.8 million Agency and Non-Agency MBS inverse interest-only strips accounted for as derivatives.
The following table sets forth additional information regarding the Companys portfolio as of March 31, 2014:
Portfolio
($ in millions)
Agency RMBS |
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Coupon |
|
Principal |
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Amortized |
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Estimated Fair |
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30-year fixed rate |
|
3.5 |
% |
$ |
1,012.0 |
|
$ |
1,084.3 |
|
$ |
1,014.4 |
|
|
|
4.0 |
% |
$ |
549.2 |
|
$ |
605.1 |
|
$ |
571.1 |
|
|
|
4.5 |
% |
$ |
23.2 |
|
$ |
24.8 |
|
$ |
24.9 |
|
|
|
5.5 |
% |
$ |
79.6 |
|
$ |
89.7 |
|
$ |
89.7 |
|
|
|
6.0 |
% |
$ |
8.7 |
|
$ |
9.7 |
|
$ |
9.8 |
|
20-year fixed rate |
|
3.0 |
% |
$ |
360.6 |
|
$ |
378.0 |
|
$ |
361.4 |
|
|
|
3.5 |
% |
$ |
97.9 |
|
$ |
104.1 |
|
$ |
100.7 |
|
|
|
4.0 |
% |
$ |
335.0 |
|
$ |
356.7 |
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$ |
352.9 |
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Total Agency RMBS |
|
|
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$ |
2,466.2 |
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$ |
2,652.4 |
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$ |
2,524.9 |
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Non-Agency RMBS (inc. Linked Transactions) |
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5.9 |
% |
$ |
488.1 |
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$ |
404.7 |
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$ |
414.8 |
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Agency & Non-Agency CMBS |
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3.8 |
% |
$ |
27.2 |
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$ |
23.4 |
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$ |
25.3 |
|
Agency RMBS IOs and IIOs |
|
4.5 |
% |
N/A |
|
$ |
166.4 |
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$ |
168.2 |
| |
Non-Agency IOs |
|
5.6 |
% |
N/A |
|
$ |
19.3 |
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$ |
20.0 |
| |
Agency and Non-Agency IOs and IIOs accounted for as derivatives |
|
3.3 |
% |
N/A |
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N/A |
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$ |
110.3 |
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Total Agency and Non-Agency IOs and IIOs |
|
|
|
|
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$ |
185.7 |
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$ |
298.5 |
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Total Portfolio |
|
|
|
|
|
$ |
3,266.2 |
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$ |
3,263.5 |
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PORTFOLIO FINANCING
At March 31, 2014, the Company financed its portfolio with $2.8 billion of borrowings, including $12.7 million of borrowings related to linked transactions, under master repurchase agreements with sixteen (16) of our twenty (20) approved counterparties, bearing fixed interest rates with maturities between April 2014 and September 2014.
The Company has also entered into approximately $3.4 billion notional amount of pay-fixed interest rate swaps, excluding forward starting swaps of $653.8 million (approximately 22.8 months forward) that have variable maturities between October 2014 and February 2044, and $527.0 million notional amount of pay-variable interest rate swaps that have variable maturities between October 2018 and August 2043. In addition, the Company has entered into approximately $2.2 billion notional amount of pay-fixed interest rate swaptions with swap terms that range between 7 and 10 years and have exercise expiration dates that range from May 2014 to October 2014. As of March 31, 2014, the Company has also entered into approximately $100.0 million notional amount of pay-variable interest rate swaptions with a swap term of 10 years and an exercise expiration date of May 2014, which expired unexercised subsequent to the end of the quarter.
The following tables set forth additional information regarding the Companys portfolio financing as of March 31, 2014:
Financing as of March 31, 2014
($ in millions)
Repurchase agreements |
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Balance |
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Weighted |
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Weighted |
| |
Agency RMBS |
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$ |
2,529.5 |
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0.39 |
% |
28 |
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Non-Agency RMBS |
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$ |
279.1 |
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1.69 |
% |
31 |
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Agency and Non-Agency CMBS |
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$ |
14.3 |
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1.43 |
% |
71 |
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Non-Agency Linked Transactions |
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$ |
12.7 |
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1.56 |
% |
17 |
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Total |
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$ |
2,835.6 |
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0.53 |
% |
29 |
|
The following tables summarize the average pay rate and average maturity for the Companys interest rate swaps as of March 31, 2014:
Fixed Pay Rate Swap Transactions
($ in millions)
Remaining Term to |
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Notional |
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Average |
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Average |
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1 year or less |
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$ |
215.9 |
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0.4 |
% |
0.6 |
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> 1 year to 3 years |
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$ |
729.1 |
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0.5 |
% |
1.9 |
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> 3 years to 5 years |
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$ |
1,104.8 |
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1.5 |
% |
4.5 |
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> 5 years |
|
$ |
2,023.1 |
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2.7 |
% |
10.9 |
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Total Fixed Pay Rate |
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$ |
4,072.9 |
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1.9 |
% |
7.0 |
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Variable Pay Rate Swap Transactions
($ in millions)
Remaining Term to |
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Notional |
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Average |
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Average |
| |
> 3 years to 5 years |
|
$ |
281.0 |
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0.2 |
% |
4.9 |
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> 5 years |
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$ |
246.0 |
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0.2 |
% |
12.5 |
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Total |
|
$ |
527.0 |
|
0.2 |
% |
8.4 |
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CONFERENCE CALL
The Company will host a conference call with a live webcast today at 12:00 p.m. Eastern Time/9:00 a.m. Pacific Time, to discuss financial results for the first quarter ended March 31, 2014.
Individuals interested in participating in the conference call may do so by dialing 888.317.6016 from the United States, or 412.317.6016 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 Companys website at www.westernassetmcc.com.
A telephone replay will be available through May 23, 2014 by dialing 877.344.7529 from the United States, or 412.317.0088 from outside the United States, and entering conference ID 10045783. A webcast replay will be available for 90 days.
ABOUT WESTERN ASSET MORTGAGE CAPITAL CORPORATION
Western Asset Mortgage Capital Corporation is a REIT that invests primarily in Agency RMBS, which are residential mortgage-backed securities for which the principal and interest payments are guaranteed by a U.S. Government agency (such as GNMA) or a
U.S. Government-sponsored entity (such as FNMA or FHLMC). The Company also invests in residential mortgage-backed securities that are not guaranteed by a U.S. Government agency or sponsored entity and commercial mortgage-backed securities. In the future, it may opportunistically invest in other asset-backed securities. The Company is externally managed and advised by Western Asset Management Company, an investment advisor registered with the SEC and a wholly-owned subsidiary of Legg Mason, Inc.
FORWARD-LOOKING STATEMENTS
This press release contains statements that constitute forward-looking statements. Operating results are subject to numerous conditions, many of which are beyond the control of the Company, including, without limitation, changes in interest rates; changes in the yield curve; changes in prepayment rates; the availability and terms of financing; general economic conditions; market conditions; conditions in the market for mortgage related investments; legislative and regulatory changes that could adversely affect the business of the Company; and other factors, including those set forth in the Risk Factors section of the Companys annual report on Form 10-K for the period ended December 31, 2013 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 core earnings, core earnings per share, drop income and drop income per share and certain financial metrics derived from non-GAAP information, such as weighted average yield, including IO securities; weighted average effective cost of financing, including swaps; weighted average net interest spread, including IO securities and swaps, which constitute non-GAAP financial measures within the meaning of Regulation G promulgated by the SEC. We believe that these measures presented in this release, when considered together with GAAP financial measures, provide information that is useful to investors in understanding our borrowing costs and net interest income, as viewed by us. An analysis of any non-GAAP financial measure should be made in conjunction with results presented in accordance with GAAP.
###
Investor Relations Contact: |
Media Contact: |
Larry Clark |
Tricia Ross |
Financial Profiles, Inc. |
Financial Profiles, Inc. |
(310) 622-8223 |
(310) 622-8226 |
lclark@finprofiles.com |
tross@finprofiles.com |
-Financial Tables to Follow-
Western Asset Mortgage Capital Corporation
Balance Sheets (Unaudited)
(in thousandsexcept share and per share data)
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March 31, 2014 |
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December 31, 2013 |
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Assets: |
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Cash and cash equivalents |
|
$ |
5,492 |
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$ |
48,525 |
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Mortgage-backed securities, at fair value ($3,100,433 and $2,818,947 pledged as collateral, at fair value, respectively) |
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3,247,794 |
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2,853,587 |
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Linked transactions, net, at fair value |
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2,973 |
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18,559 |
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Investment related receivable ($2,416 and $0 pledged as collateral, at fair value, respectively) |
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2,556 |
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341 |
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Accrued interest receivable |
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14,529 |
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12,266 |
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Due from counterparties |
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57,821 |
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55,434 |
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Derivative assets, at fair value |
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66,736 |
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105,826 |
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Other assets |
|
383 |
|
339 |
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Total Assets |
|
$ |
3,398,284 |
|
$ |
3,094,877 |
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Liabilities and Stockholders Equity: |
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|
|
|
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Liabilities: |
|
|
|
|
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Borrowings under repurchase agreements |
|
$ |
2,822,961 |
|
$ |
2,579,067 |
|
Accrued interest payable |
|
10,298 |
|
12,534 |
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Investment related payables |
|
104,526 |
|
|
| ||
Due to counterparties |
|
34,013 |
|
65,861 |
| ||
Derivative liability, at fair value |
|
20,753 |
|
4,673 |
| ||
Accounts payable and accrued expenses |
|
1,270 |
|
1,353 |
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Underwriting and offering costs payable |
|
153 |
|
8 |
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Payable to related party |
|
2,006 |
|
1,842 |
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Dividend payable |
|
18,136 |
|
19,445 |
| ||
Total Liabilities |
|
3,014,116 |
|
2,684,783 |
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|
|
|
|
|
| ||
Commitments and contingencies |
|
|
|
|
| ||
|
|
|
|
|
| ||
Stockholders Equity: |
|
|
|
|
| ||
Common stock, $0.01 par value, 500,000,000 shares authorized, 27,068,467 and 26,853,287 shares issued and outstanding, respectively |
|
270 |
|
268 |
| ||
Preferred stock, $0.01 par value, 100,000,000 shares authorized and no shares outstanding |
|
|
|
|
| ||
Additional paid-in capital |
|
544,796 |
|
544,143 |
| ||
Retained earnings (accumulated deficit) |
|
(160,898 |
) |
(134,317 |
) | ||
Total Stockholders Equity |
|
384,168 |
|
410,094 |
| ||
Total Liabilities and Stockholders Equity |
|
$ |
3,398,284 |
|
$ |
3,094,877 |
|
Western Asset Mortgage Capital Corporation
Statement of Operations (Unaudited)
(in thousandsexcept share and per share data)
|
|
For the three |
|
For the three |
| ||
|
|
|
|
|
| ||
Net Interest Income: |
|
|
|
|
| ||
Interest income |
|
$ |
23,430 |
|
$ |
33,750 |
|
Interest expense |
|
3,390 |
|
5,181 |
| ||
Net Interest Income |
|
20,040 |
|
28,569 |
| ||
|
|
|
|
|
| ||
Other Income (Loss): |
|
|
|
|
| ||
Interest income on cash balances and other income (loss), net |
|
(12 |
) |
33 |
| ||
Realized gain (loss) on sale of Mortgage-backed securities and other securities, net |
|
3,716 |
|
(11,660 |
) | ||
Other loss on Mortgage-backed securities |
|
(1,709 |
) |
(2,268 |
) | ||
Unrealized gain (loss) on Mortgage-backed securities and other securities, net |
|
31,091 |
|
(54,759 |
) | ||
Gain on linked transactions, net |
|
2,219 |
|
596 |
| ||
Gain (loss) on derivative instruments, net |
|
(59,906 |
) |
14,840 |
| ||
Other Income (Loss), net |
|
(24,601 |
) |
(53,218 |
) | ||
|
|
|
|
|
| ||
Operating Expenses: |
|
|
|
|
| ||
General and administrative (includes $588 and $286 non-cash stock based compensation, respectively) |
|
2,075 |
|
1,737 |
| ||
Management fee related party |
|
1,805 |
|
2,113 |
| ||
Total Operating Expenses |
|
3,880 |
|
3,850 |
| ||
|
|
|
|
|
| ||
Net loss available to Common Stock and participating securities |
|
$ |
(8,441 |
) |
$ |
(28,499 |
) |
|
|
|
|
|
| ||
Net loss per Common Share Basic |
|
$ |
(0.32 |
) |
$ |
(1.18 |
) |
Net loss per Common Share Diluted |
|
$ |
(0.32 |
) |
$ |
(1.18 |
) |
Dividends Declared per Share of Common Stock |
|
$ |
0.67 |
|
$ |
|
|
Western Asset Mortgage Capital Corporation
Reconciliation of GAAP Net Income to Non-GAAP Core Earnings
(Unaudited)
(in thousandsexcept share and per share data)
The table below summarizes the reconciliation from Net Loss to Core Earnings for the three months ended March 31, 2014 and 2013:
(in thousands) |
|
For the three months |
|
For the three |
| ||
|
|
|
|
|
| ||
Net Loss GAAP |
|
$ |
(8,441 |
) |
$ |
(28,499 |
) |
Adjustments: |
|
|
|
|
| ||
|
|
|
|
|
| ||
MBS and other securities: |
|
|
|
|
| ||
|
|
|
|
|
| ||
Unrealized (gain) loss on MBS |
|
(31,091 |
) |
54,759 |
| ||
Other loss on mortgage-backed securities |
|
1,709 |
|
2,268 |
| ||
Realized (gain) loss on sale of MBS |
|
(3,716 |
) |
11,660 |
| ||
|
|
|
|
|
| ||
Derivative Instruments: |
|
|
|
|
| ||
|
|
|
|
|
| ||
Realized gain on termination of interest rate swaps |
|
(2 |
) |
(18,258 |
) | ||
Realized gain on settlement of TBAs |
|
(2,370 |
) |
(601 |
) | ||
Realized gain on sale/unlinking of securities underlying linked transactions |
|
(1,290 |
) |
|
| ||
Realized loss on Agency Interest-Only Strips accounted for as derivatives |
|
869 |
|
99 |
| ||
Mark-to-market adjustments on interest rate swaps |
|
45,496 |
|
(1,858 |
) | ||
Mark-to-market adjustments on interest rate swaptions |
|
9,324 |
|
1,506 |
| ||
Mark-to-market adjustments on options |
|
|
|
324 |
| ||
Mark-to-market adjustments on futures contracts |
|
(118 |
) |
|
| ||
Mark-to-market adjustments on TBAs |
|
468 |
|
(1,224 |
) | ||
Mark-to-market adjustments on linked transactions |
|
(226 |
) |
(250 |
) | ||
Mark-to-market adjustments on derivative instruments |
|
1,220 |
|
2,348 |
| ||
|
|
|
|
|
| ||
Non-cash stock-based compensation expense |
|
588 |
|
286 |
| ||
Total adjustments |
|
20,861 |
|
51,059 |
| ||
Core Earnings Non-GAAP Financial Measure |
|
$ |
12,420 |
|
$ |
22,560 |
|
|
|
|
|
|
| ||
Basic Core Earnings per Share of Common Stock and Participating Securities - Non-GAAP Financial Measure |
|
$ |
0.46 |
|
$ |
0.93 |
|
Diluted Core Earnings per Share of Common Stock and Participating Securities - Non-GAAP Financial Measure |
|
$ |
0.46 |
|
$ |
0.93 |
|
|
|
|
|
|
| ||
Basic weighted average common shares and participating securities |
|
26,907,391 |
|
24,206,170 |
| ||
Diluted weighted average common shares and participating securities |
|
26,907,391 |
|
24,338,990 |
|
Reconciliation of Interest Income
(Unaudited, in thousands)
The following table reconciles total interest income to interest income including interest income on Agency and Non-Agency Interest-Only Strips classified as derivatives and interest income on linked transactions (non-GAAP financial measure) for the three months ended March 31, 2014 and 2013:
(in thousands) |
|
For the three months |
|
For the three months |
| ||
Coupon Interest |
|
$ |
34,578 |
|
$ |
51,001 |
|
Premium accretion, discount amortization and amortization of basis, net |
|
(11,148 |
) |
(17,251 |
) | ||
Interest Income |
|
$ |
23,430 |
|
$ |
33,750 |
|
|
|
|
|
|
| ||
Contractual Interest income, net of amortization basis on Agency and Non-Agency Interest-Only and Interest Strips, classified as derivatives(1): |
|
|
|
|
| ||
Coupon Interest |
|
$ |
8,426 |
|
$ |
5,943 |
|
Amortization of basis (Non-GAAP Financial Measure) |
|
(5,592 |
) |
(4,184 |
) | ||
Contractual Interest income, net of discount amortization on Linked Transactions (2): |
|
|
|
|
| ||
Coupon Interest |
|
3,100 |
|
106 |
| ||
Discount amortization |
|
(2,172 |
) |
329 |
| ||
Subtotal |
|
3,762 |
|
2,194 |
| ||
Total interest income, including interest income on Agency and Non-Agency Interest-Only Strips, classified as derivatives - Non-GAAP Financial Measure |
|
$ |
27,192 |
|
$ |
35,944 |
|
(1) Reported in gain (loss) on derivative instruments in the Statement of Operations.
(2) Reported in gain (loss) on linked transactions in the Statement of Operations.
The following table reconciles the Effective Cost of Funds (non-GAAP financial measure) with interest expense for the three months ended March 31, 2014 and 2013:
|
|
For the three months ended March 31, |
|
For the three months ended March 31, |
| ||||||
(dollars in thousands) |
|
Reconciliation |
|
Cost of |
|
Reconciliation |
|
Cost of |
| ||
|
|
|
|
|
|
|
|
|
| ||
Interest expense |
|
$ |
3,390 |
|
0.53 |
% |
$ |
5,181 |
|
0.46 |
% |
Interest expense on linked transactions |
|
225 |
|
1.73 |
% |
90 |
|
1.85 |
% | ||
Net interest paid - interest rate swaps |
|
7 852 |
|
1.21 |
% |
4,582 |
|
0.41 |
% | ||
Effective Borrowing Costs |
|
$ |
11,467 |
|
1.77 |
% |
$ |
9,853 |
|
0.87 |
% |
Weighted average repurchase borrowings (1) |
|
2,628,790 |
|
|
|
4,606,037 |
|
|
|
(1) Includes average repurchase borrowings under linked transactions.
Exhibit 99.2
|
First Quarter 2014 Investor Presentation May 8, 2014 |
|
Safe Harbor Statement 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 Agency RMBS 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 Agency RMBS and our potential target assets and our borrowings used to fund such investments; changes in interest rates and the market value of Agency RMBS and our potential target assets; changes in prepayment rates on Agency RMBS and Non-Agency RMBS; effects of hedging instruments on Agency RMBS and our potential target assets; rates of default or decreased recovery rates on Agency RMBS and 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 |
|
Key Highlights First Quarter 2014 Regular dividend of $0.67 per share Recorded a GAAP net loss of $8.4 million, or $0.32 per share Generated core earnings plus drop income of $15.2 million, or $0.56 per basic and diluted share. Includes estimated catch-up premium of ($0.05) per share Experienced a negative economic return on book value of 2.7% Subsequent to quarter end, raised over $214 million in an offering of 14 million shares of common stock sold to the public and a concurrent private placement of 650,000 shares sold to our external manager, Western Asset Management Company Since IPO Generated GAAP net income of $21.0 million Generated core earnings of $134.6 million Generated an total economic return on book value of approximately 11.6%, comprised of: $8.12 per share in dividends $5.81 per share decrease in book value 2 Core earnings is a non-GAAP measure defined as net income excluding: (i) net realized gain (loss) on investments and derivative contracts; (ii) net unrealized gain (loss) on investments; (iii) loss resulting from mark-to-market adjustments on derivative contracts; (iv) other loss on RMBS; (v) non-cash stock-based compensation expense; and (vi) one-time events pursuant to changes in GAAP and certain other non-cash charges. Drop income is income derived from the use of to-be-announced forward contract (TBA) dollar roll transactions and is a component of our gain (loss) on derivative instruments on our statement of operations, and is not included in core earnings. Estimated catch-up premium amortization cost results from the quarterly adjustments in projected constant prepayment rate (CPR) estimates for our MBS portfolio and the retrospective application of such adjustments to certain of our MBS securities, consisting almost entirely of our Agency RMBS whole pools. 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. Dividend return includes all dividends declared during the period from May 15, 2012, the date of WMCs commencement of initial operations, through March 31, 2014. (1) (2) (1) (4) (3) (2) |
|
First Quarter Financial Results 3 Non-GAAP measures, which include Agency RMBS, Non-Agency RMBS (including linked transactions), and interest income on Agency IOs classified as derivatives. Adjusted for the $0.67 dividend declared on March 20, 2014. First quarter weighted average Constant Prepayment Rate for the companys Agency RMBS portfolio on an annualized basis. (1) (3) (1) (1) (1) (2) (1) |
|
2014: An Improved Market for Mortgage Assets 4 Agency spreads have gradually tightened while Non-Agency bonds have gradually appreciated in value Source: IDC Source: Bloomberg 2014 YTD: +1.4% 2014 YTD: +2.3% 2014 YTD: +1.9% FNMA Current Coupon Rate Spread to 7 yr Swap Rate |
|
2014: Interest Rate Volatility has Declined 1 yr. x 10 yr. Swap Volatility 5 Source: Bloomberg 10-Year Treasury Yield |
|
Agency Peers Agency & Hybrid Peers Economic Return Since IPO May 10, 2012 to March 31, 2014 (not annualized) 6 Since its IPO and through the first quarter of 2014, WMC generated an economic return on book value in excess of the Agency Peers average by approximately 1,140 basis points Dividend return is calculated by taking total dividends declared, divided by the beginning book value, or in the case of WMC, its IPO price of $20.00. Dividend return includes all dividends declared during the period from May 15, 2012, the date of WMCs commencement of initial operations, through March 31, 2014. Peer group dividend return includes all dividends declared during the period and adjusting for 50% of the dividends declared during the period ending June 30, 2012. Economic return 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, or in the case of WMC, its IPO price of $20.00. Calculations for the period are not annualized. Hybrid Peers consists of AGNC, ANH, ARR, CMO, CYS, HTS & NLY Agency & Hybrid Peers consists of AGNC, AMTG, ANH, ARR, CMO, CYS, DX, EFC, HTS, IVR, MFA, MITT, MTGE, NLY & TWO (1) (2) (3) (4) WMC |
|
7 Portfolio Composition as of March 31, 2014 Lower loan balance pools generally consist of loans below $150,000. Other consists of newly issued pools, high spread at origination SATO and low third party origination pools. Portfolio ($ in millions) Agency RMBS Coupon Principal Balance Amortized Cost Estimated Fair Value 30 - year fixed rate 3.5% $ 1, 0 12 . 0 $ 1, 0 84.3 $ 1, 01 4. 4 4.0% $ 5 49.2 $ 6 05.1 $ 57 1.1 4.5% $23.2 $24.8 $24.9 5.5% $ 79.6 $ 89.7 $ 89.7 6.0% $ 8.7 $ 9.7 $ 9.8 20 - year fixed rate 3.0% $ 36 0.6 $ 3 78.0 $ 361. 4 3.5% $ 9 7.9 $ 10 4.1 $ 10 0.7 4.0% $ 335.0 $ 356. 7 $ 3 52.9 Total Agency RMBS $2, 466.2 $ 2, 652. 4 $ 2, 524.9 Non - Agency RMBS (inc. L inked T ransactions) 5 . 9 % $ 488.1 $ 4 04. 7 $ 4 14.8 Agency & Non - Agency CMBS 3.8 % $ 27.2 $ 23.4 $ 25.3 Agency RMBS IOs and IIOs 4. 5 % N/A $1 66.4 $1 6 8.2 Non - Agency IOs 5. 6 % N/A $ 19.3 $ 20.0 Agency and Non - Agency IOs and IIOs accounted for as derivatives 3.3 % N/A N/A $ 1 10.3 Total Agency and Non - Agency IOs and IIOs $ 18 5.7 $ 29 8.5 Total Portfolio $ 3,266. 2 $ 3,263.5 Agency Pool Breakdown Non-Agency Pool Breakdown |
|
7.4x leverage calculation does not reflect net To-Be Announced (TBA) mortgage pass-through certificates position. As of March 31, 2014, the net long position in TBAs was $300 million in notional value. Adjusted leverage is a Non-GAAP measure. Non-GAAP measures which include Agency and Non-Agency MBS (including the cost of interest rate swaps , swaptions, and linked transactions), and interest income on IOs and IIOs classified as derivatives, and for the quarter ended March 31, 2014. Includes net interest component related to interest rate swaps and swaptions and reflects interest expense adjusted to include realized loss (the interest expense component) for all interest rate swaps and swaptions. Estimated impact of liability hedges on the duration of net assets. Leverage Ratio: 7.4x Leverage Ratio adjusted for TBA position of 8.2x Net Duration of Agency RMBS Portfolio: Negative 0.5 years Agency RMBS Weighted Average Loan Age (WALA) of 19 months Percentage of swaps that are forward starting: 18% Portfolio Gross Yield: 3.57% Hedge Adjusted Cost of Financing: 1.77% Net Interest Spread: 1.80% Agency RMBS CPR of 3.8% for Q1 versus Agency REIT Peer Group average of 9.4% Duration Contribution by Maturity Date Key Portfolio Metrics as of March 31, 2014 (3) (2) (2) 8 (1) (4) Total 6-Months 2-Year 5-Year 10-Year 20-Year 30-Year Agency RMBS 5.85 0.11 0.70 1.42 2.23 1.25 0.10 Non-Agency RMBS 0.79 0.03 0.10 0.22 0.27 0.20 0.04 CMBS 0.00 0.01 0.01 0.01 0.00 0.00 0.00 Swaps and Swaptions -6.39 0.05 -0.58 -1.34 -3.19 -1.23 -0.11 Total (ex Non-Agency RMBS) -0.54 0.17 0.13 0.09 -0.96 0.02 -0.01 |
|
Financing Summary Portfolio Financing ($ in millions as of March 31, 2014) Repurchase Agreements Repo Outstanding Interest Rate Remaining Days to Maturity Agency RMBS $2,529.5 0.39% 28 Non-Agency RMBS $279.1 1.69% 31 Agency and Non-Agency CMBS $14.3 1.43% 71 Non-Agency Linked Transactions $12.7 1.56% 17 Total/Wtd Avg $2,835.6 0.53% 29 9 Master repurchase agreements with 20 counterparties Internal credit review Capacity in excess of our needs |
|
Hedging Summary 10 Includes $654 million of forward starting swaps, starting in x.x months. While we use hedging strategies as part of our overall portfolio management, these strategies are not designed to eliminate all risks in the portfolio. There can be no assurance as to the level or effectiveness of these strategies. Fixed Pay Interest Rate Swaps ($ in millions as of March 31, 2014) Maturity Notional Amount Avg. Fixed Pay Rate Avg. Floating Receive Rate Average Maturity (Years) 1 Year or Less $215.9 0.4% 0.2% 0.6 1 Year to 3 Years $729.1 0.5% 0.2% 1.9 3 Years to 5 Years $1,104.8 1.5% 0.2% 4.5 >5 Years $2,023.1 2.7% 0.2% 10.9 Total Fixed Ray Rate (1) $4,072.9 1.9% 0.2% 7.0 Other Instruments with Hedging Attributes (2) $2.1 billion of net notional value of pay-fixed interest rate swaptions $299 million of IOs and inverse IOs $415 million of Non-Agency RMBS Variable Pay Interest Rate Swaps ($ in millions as of March 31, 2014) Maturity Notional Amount Avg. Fixed Receive Rate Avg. Floating Pay Rate Average Maturity (Years) 3 Years to 5 Years $281.0 1.7% 0.2% 4.9 >5 Years $246.0 3.2% 0.2% 12.5 Total Fixed Ray Rate $527.0 2.4% 0.2% 8.4 |
|
Portfolio Strategy and Dynamics Continue to manage both the assets and liabilities of the portfolio to capture relative value opportunities Continue to leverage Western Assets comprehensive platform to access a broad investment opportunities across the entire mortgage sector Portfolio dynamics during the first quarter: Increased exposure to higher coupon 30-year and 20-year fixed rate pools Maintained exposure to select Non-Agency securities that we believe are correlated to housing recovery and home price appreciation Increased exposure to TBA securities Modestly increased overall portfolio leverage Modestly reduced negative net duration of Agency RMBS portfolio Look to continue to diversify our portfolio and increase our exposure to: Non-Agency RMBS and CMBS GSE Credit Risk Transfer securities Other Asset-Backed securities Exploring potential exposure to Residential and Commercial Real Estate Whole Loans 11 |
|
Investment Highlights Western Asset is one of the largest fixed income managers with extensive experience in managing mortgage assets since 1974 Differentiated investment approach to managing prepayment, interest rate risk, and credit risk Our flexibility to invest across the mortgage sector positions us well to seek our objective of superior risk-adjusted returns Industry leading finance and administrative infrastructure Key strategic relationships provides superior market access 12 |
|
Contact Information 13 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 |
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