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 6, 2016 (May 6, 2016)
Western Asset Mortgage Capital Corporation
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OF INCORPORATION)
001-35543 |
|
27-0298092 |
(COMMISSION FILE NUMBER) |
|
(IRS EMPLOYER ID. NUMBER) |
385 East Colorado Boulevard |
|
91101 |
Pasadena, California |
|
(ZIP CODE) |
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) |
|
|
(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:
[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
[ ] 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 6, 2016, Western Asset Mortgage Capital Corporation (the Company) issued a press release announcing its financial results for the fiscal quarter ended March 31, 2016. The text of the press release is furnished as exhibit 99.1 to this Form 8-K.
Item 7.01 Regulation FD Disclosure
On May 6, 2016, the Company will be holding its quarterly conference call in which it will discuss its financial results. The presentation for 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. |
Description |
99.1 |
Press Release, dated May 6, 2016, issued by Western Asset Mortgage Capital Corporation |
99.2 |
Presentation, dated May 6, 2016, 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. Adam C. E. Wright |
| |
|
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Name: |
Adam C. E. Wright | |
|
|
Title: |
Assistant Secretary | |
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Date: May 6, 2016 |
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Exhibit 99.1
WESTERN ASSET MORTGAGE CAPITAL CORPORATION
ANNOUNCES FIRST QUARTER 2016 RESULTS
Conference Call and Webcast Scheduled for Today, Friday, May 6, 2016 at
12:00 a.m. Eastern Time/9:00 a.m. Pacific Time
Pasadena, CA, May 6, 2016 Western Asset Mortgage Capital Corporation (the Company) (NYSE: WMC) today reported its results for the first quarter ended March 31, 2016.
FIRST QUARTER 2016 HIGHLIGHTS
· $0.45 per share common dividend declared
· GAAP net loss of $36.3 million, or $0.88 per basic and diluted share
· Core earnings plus drop income of $9.5 million, or $0.23 per basic and diluted share1,2
· 1.53% annualized net interest spread on our investment portfolio1,5
· Constant prepayment rate on the Companys Agency RMBS portfolio of 7.1% for the quarter
· $10.90 per share net book value as of March 31, 2016, net of first quarter common dividend
· Economic return on book value was (7.0%)1,3 for the quarter
· 5.3x leverage as of March 31, 2016 (6.2x leverage when adjusted for net TBA position)1,4
1 Non GAAP measure.
2 Drop income is income derived from the use of to-be-announced forward contract (TBA) dollar roll transactions which is a component of our gain (loss) on derivative instruments on our consolidated statement of operations, but is not included in core earnings. Drop income was approximately $721 thousand for the three months ended March 31, 2016
3 Economic return is calculated by taking the sum of: (i) the total dividends declared; and (ii) the change in book value during the period and divided by the beginning book value.
4 As of March 31, 2016, the net long position in TBAs was $450.0 million in notional value.
5 Includes interest-only securities accounted for as derivatives, total return swap and the cost of interest rate swaps.
Page 2 of 12
MANAGEMENT COMMENTARY
The first quarter was an extremely challenging and volatile environment for the fixed income markets and, in particular, the U.S. mortgage markets, said Gavin James, Chief Executive Officer of the Company. The markets experienced a downturn in January as concerns surrounding global economic conditions and commodity prices exerted pressure on risk assets, including credit sensitive fixed income securities. While investor sentiment improved in March, resulting in a rebound in the equity and corporate fixed income markets, the credit sensitive mortgage markets didnt fully participate in the risk-on rally. As a result of generally wider spreads on our investments, combined with higher hedging costs, we generated a negative economic return on book value for the quarter of 7.0% and lower sequential core earnings plus drop income of $9.5 million, or $0.23 per share.
Anup Agarwal, Chief Investment Officer of the Company, commented, We believe that the spread widening in credit sensitive securities that negatively impacted our economic return during the first quarter was more technical in nature and not driven by any deterioration in the fundamentals of the U.S. real estate markets. We are long-term investors with an extended investment horizon and do not measure our success solely on the results in any one calendar quarter or year, but instead focus on providing sustainable strong risk-adjusted returns over the long-term.
Given our current expectations for ongoing, yet gradual economic growth in the U.S., including a continued positive outlook for both the residential and commercial real estate markets, we believe that a portfolio weighted towards credit sensitive investments is appropriate. However, we plan to continue to proactively manage our portfolio by monitoring the relative value of opportunities across the broad mortgage universe, in an effort to achieve an optimal risk-adjusted total economic return for our shareholders, Mr. Agarwal concluded.
Page 3 of 12
FIRST QUARTER 2016 RESULTS
The below table reflects a summary of our operating results:
|
|
For the Three Months Ended |
| ||||
GAAP Results |
|
March 31, 2016 |
|
December 31, 2015 |
| ||
|
|
|
|
|
| ||
Net Interest Income |
|
$ |
21,639 |
|
$ |
27,403 |
|
|
|
|
|
|
| ||
Other Income (Loss): |
|
|
|
|
| ||
Realized gain (loss) on sale of investments, net |
|
(6,055) |
|
(988) |
| ||
Other than temporary impairment |
|
(10,797) |
|
(4,907) |
| ||
Unrealized gain (loss), net |
|
10,769 |
|
(44,295) |
| ||
Gain (loss) on derivative instruments, net |
|
(45,170) |
|
7,616 |
| ||
Other, net |
|
(332) |
|
574 |
| ||
Other Income (Loss), net |
|
(51,585) |
|
(42,000) |
| ||
|
|
|
|
|
| ||
Total Operating Expenses |
|
6,358 |
|
5,488 |
| ||
|
|
|
|
|
| ||
Net loss available to Common Stock and participating securities |
|
$ |
(36,304) |
|
$ |
(20,085) |
|
|
|
|
|
|
| ||
Net loss per Common Share Basic/Diluted |
|
$ |
(0.88) |
|
$ |
(0.49) |
|
|
|
|
|
|
| ||
Non-GAAP Results |
|
|
|
|
| ||
Core earnings plus drop income(1) |
|
$ |
9,486 |
|
$ |
16,560 |
|
Core earnings plus drop income per Common Share Basic/Diluted |
|
$ |
0.23 |
|
$ |
0.39 |
|
Weight average yield(2) |
|
4.26% |
|
4.42% |
| ||
Effective cost of funds(3) |
|
2.73% |
|
2.24% |
| ||
Annualized net interest spread(3) |
|
1.53% |
|
2.18% |
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Annualized constant prepayment rate (CPR)(4) |
|
7.10% |
|
8.60% |
|
(1) For a reconciliation of GAAP Income to Core earnings, please refer to the Reconciliation of Core earnings at the end of this press release.
(2) Includes interest-only securities accounted for as derivatives, foreign currency swaps and total return swaps.
(3) Includes interest-only securities accounted for as derivatives, total return swap and the cost of interest rate swaps.
(4) Annualized CPR on Agency RMBS.
Page 4 of 12
PORTFOLIO COMPOSITION
As of March 31, 2016, the Company owned an aggregate investment portfolio equaling $2.8 billion in market value. The following table sets forth additional information regarding the Companys portfolio as of March 31, 2016:
Investment Portfolio
(dollars in thousands)
Agency |
|
Coupon |
|
Principal |
|
Amortized |
|
Fair Value |
|
30-year fixed rate |
|
3.5% |
|
$232,281 |
|
$244,563 |
|
$244,001 |
|
|
|
4.0% |
|
276,345 |
|
299,867 |
|
299,280 |
|
|
|
4.5% |
|
356,729 |
|
382,218 |
|
395,026 |
|
|
|
5.0% |
|
56,544 |
|
63,437 |
|
64,163 |
|
|
|
5.5% |
|
2,674 |
|
3,076 |
|
2,999 |
|
|
|
6.0% |
|
2,564 |
|
2,854 |
|
2,967 |
|
20-year fixed rate |
|
3.5% |
|
141,528 |
|
149,065 |
|
150,204 |
|
|
|
4.0% |
|
409,710 |
|
432,059 |
|
442,369 |
|
|
|
|
|
|
|
|
|
|
|
Agency RMBS IOs and IIOs(1) |
|
3.2% |
|
N/A |
|
69,625 |
|
67,836 |
|
Agency CMBS |
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5.1% |
|
17,478 |
|
17,478 |
|
16,731 |
|
Agency CMBS IOs and IIOs(2) |
|
1.3% |
|
N/A |
|
11,680 |
|
11,500 |
|
Total Agency |
|
3.5% |
|
$1,495,853 |
|
$1,675,922 |
|
$1,697,076 |
|
|
|
|
|
|
|
|
|
|
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Non-Agency |
|
|
|
|
|
|
|
|
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Non-Agency RMBS |
|
3.8% |
|
$482,117 |
|
$349,179 |
|
$354,299 |
|
Non-Agency RMBS IOs and IIOs(3) |
|
5.8% |
|
N/A |
|
66,142 |
|
88,523 |
|
Non-Agency CMBS |
|
5.0% |
|
520,842 |
|
438,020 |
|
405,521 |
|
Total Non-Agency |
|
4.8% |
|
$1,002,959 |
|
$853,341 |
|
$848,343 |
|
|
|
|
|
|
|
|
|
|
|
Other Securities(4) |
|
6.4% |
|
30,897 |
|
50,031 |
|
47,999 |
|
|
|
|
|
|
|
|
|
|
|
Residential Whole-Loans |
|
4.8% |
|
195,425 |
|
197,079 |
|
201,267 |
|
Securitized Commercial Loan(5) |
|
9.0% |
|
25,000 |
|
25,000 |
|
23,675 |
|
Total Portfolio |
|
4.0% |
|
$2,750,134 |
|
$2,801,373 |
|
$2,818,360 |
|
(1) Includes $37,361 of amortized cost and $35,165 of fair value for Agency RMBS IOs and IIOs accounted for as derivatives for GAAP.
(2) Includes $10,194 of amortized cost and $9,848 of fair value for Agency CMBS IOs and IIOs accounted for as derivatives for GAAP.
(3) Includes $2,562 of amortized cost and $3,982 of fair value for Non-Agency RMBS IOs and IIOs accounted for as derivatives for GAAP.
(4) Other securities includes residual interests in asset-backed securities which have no principal balance and an amortized cost of approximately $22.0 million.
(5) The $25.0 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.
Page 5 of 12
PORTFOLIO FINANCING AND HEDGING
Financing
At March 31, 2016, the Company financed its portfolio with $2.4 billion of borrowings under master repurchase agreements with twenty of its twenty-seven approved counterparties, bearing fixed interest rates with maturities of six months or less. The following table sets forth additional information regarding the Companys portfolio financing as of March 31, 2016 (dollars in thousands):
Repurchase agreements |
|
Balance |
|
Weighted |
|
Weighted |
|
Agency RMBS |
|
$1,591,880 |
|
0.75% |
|
38 |
|
Non-Agency RMBS |
|
295,369 |
|
2.21% |
|
52 |
|
Agency and Non-Agency CMBS |
|
318,146 |
|
2.12% |
|
34 |
|
Whole-Loans and securitized commercial loan |
|
170,788 |
|
2.46% |
|
8 |
|
Other Securities |
|
26,946 |
|
2.68% |
|
11 |
|
Total |
|
$2,403,129 |
|
1.25% |
|
36 |
|
Hedging
The Company has entered into $4.0 billion of pay-fixed interest rate swaps, excluding forward starting swaps of $1.7 billion (approximately 13.7 months forward), which have variable maturities between October 2017 and February 2044, and $3.7 billion notional value of pay-variable interest rate swaps, which have variable maturities between February 2020 and February 2045. In addition, the Company has entered into a $105.0 million notional value of pay-fixed interest rate swaption with a swap term of one year.
The following tables summarize the average pay rate and average maturity for the Companys interest rate swaps as of March 31, 2016:
Fixed Pay Rate Swap Transactions
(dollars in thousands)
Remaining Term to Maturity |
|
Notional Value |
|
Average |
|
Average |
|
Greater than 1 year and less than 3 years |
|
$980,900 |
|
1.1% |
|
2.0 |
|
Greater than 3 years and less than 5 years |
|
2,011,200 |
|
1.9% |
|
4.6 |
|
Greater than 5 years |
|
2,654,600 |
|
2.6% |
|
9.6 |
|
Total |
|
$5,646,700 |
|
2.1% |
|
6.5 |
|
Variable Pay Rate Swap Transactions
(dollars in thousands)
Remaining Term to Maturity |
|
Notional Value |
|
Average |
|
Average |
|
Greater than 3 year and less than 5 years |
|
$1,998,600 |
|
0.6% |
|
4.5 |
|
Greater than 5 years |
|
1,700,300 |
|
0.6% |
|
10.5 |
|
Total |
|
$3,698,900 |
|
0.6% |
|
7.2 |
|
Page 6 of 12
DIVIDEND
On March 24, 2016, the Company declared a regular cash dividend of $0.45 per share for each common share. Since its inception in May 2012, the Company has declared and paid total dividends of $13.13 per share in a combination of cash and stock.
CONFERENCE CALL
The Company will host a conference call with a live webcast today, May 6th , at 12:00 p.m. Eastern Time/9:00 a.m. Pacific Time, to discuss financial results for the first quarter 2016.
Individuals interested in participating in the conference call may do so by dialing (866) 235-9914 from the United States, or (412) 902-4115 from outside the United States and referencing Western Asset Mortgage Capital Corporation. Those interested in listening to the conference call live via the Internet may do so by visiting the Investor Relations section of the Companys website at www.westernassetmcc.com.
The Company is enabling investors to pre-register for the earnings conference call so that they can expedite their entry into the call and avoid the need to wait for a live operator. In order to pre-register for the call, investors can visit http://dpregister.com/10081107 and enter in their contact information. Investors will then be issued a personalized phone number and pin to dial into the live conference call. Individuals can pre-register any time prior to the start of the conference call on May 6, 2016.
A telephone replay will be available through May 20, 2016 by dialing (877) 344-7529 from the United States, or (412) 317-0088 from outside the United States, and entering conference ID 10084740. A webcast replay will be available for 90 days.
ABOUT WESTERN ASSET MORTGAGE CAPITAL CORPORATION
Western Asset Mortgage Capital Corporation is a real estate investment trust that invests in, acquires and manages a diverse portfolio assets consisting of Agency RMBS, Non-Agency RMBS, CMBS, ABS, Residential and Commercial Whole-Loans and other financial assets. The Companys investment strategy may change, subject to the Companys stated investment guidelines, and is based on its manager Western Asset Management Companys perspective of which mix of portfolio assets it believes provide the Company with the best risk-reward opportunities at any given time. The Company is externally managed and advised by Western Asset Management Company, an investment advisor registered with the Securities and Exchange Commission and a wholly-owned subsidiary of Legg Mason, Inc. Please visit the Companys website at www.westernassetmcc.com
Page 7 of 12
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, 2015 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-
Page 8 of 12
Western Asset Mortgage Capital Corporation and Subsidiaries
Consolidated Balance Sheets (Unaudited)
(in thousandsexcept share and per share data)
|
|
March 31, 2016 |
|
December 31, |
Assets: |
|
|
|
|
Cash and cash equivalents |
$ |
22,440 |
$ |
24,711 |
Mortgage-backed securities and other securities, at fair value ($2,587,846 and $2,777,717 pledged as collateral, at fair value, respectively) |
|
2,593,418 |
|
2,851,127 |
Residential Whole-Loans, at fair value ($201,267 and $218,538 pledged as collateral, at fair value, respectively) |
|
201,267 |
|
218,538 |
Securitized commercial loan, at fair value |
|
23,675 |
|
25,000 |
Receivable under reverse repurchase agreements |
|
9,307 |
|
- |
Investment related receivable |
|
21,509 |
|
572 |
Accrued interest receivable |
|
24,494 |
|
22,621 |
Due from counterparties |
|
280,471 |
|
249,563 |
Derivative assets, at fair value |
|
100,161 |
|
21,915 |
Other assets |
|
173 |
|
382 |
Total Assets (1) |
$ |
3,276,915 |
$ |
3,414,429 |
|
|
|
|
|
Liabilities and Stockholders Equity: |
|
|
|
|
Liabilities: |
|
|
|
|
Borrowings under repurchase agreements, net |
$ |
2,403,129 |
$ |
2,585,667 |
Securitized debt, at fair value |
|
10,417 |
|
11,000 |
Accrued interest payable |
|
20,340 |
|
20,431 |
Investment related payables |
|
18,044 |
|
66,146 |
Due to counterparties |
|
21,608 |
|
9,950 |
Derivative liability, at fair value |
|
322,387 |
|
180,177 |
Accounts payable and accrued expenses |
|
1,971 |
|
2,078 |
Payable to related party |
|
3,103 |
|
3,019 |
Dividend payable |
|
18,864 |
|
24,313 |
Total Liabilities (2) |
|
2,819,863 |
|
2,902,781 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
Stockholders Equity: |
|
|
|
|
Common stock, $0.01 par value, 500,000,000 shares authorized, 41,919,801 shares issued and outstanding, respectively |
|
419 |
|
419 |
Preferred stock, $0.01 par value, 100,000,000 shares authorized and no shares outstanding |
|
- |
|
- |
Additional paid-in capital |
|
763,869 |
|
763,283 |
Retained earnings (accumulated deficit) |
|
(307,236) |
|
(252,054) |
Total Stockholders Equity |
|
457,052 |
|
511,648 |
Total Liabilities and Stockholders Equity |
$ |
3,276,915 |
$ |
3,414,429 |
See notes to unaudited consolidated financial statements.
Page 9 of 12
Western Asset Mortgage Capital Corporation and Subsidiaries
Consolidated Balance Sheets (Continued) (Unaudited)
(in thousandsexcept share and per share data)
|
|
March 31, 2016 |
|
December 31, 2015 |
(1) Assets of consolidated VIEs included in the total assets above: |
|
|
|
|
Residential Whole-Loans, at fair value ($201,267 and $218,538 pledged as collateral, at fair value, respectively) |
$ |
201,267 |
$ |
218,538 |
Securitized commercial loan, at fair value |
|
23,675 |
|
25,000 |
Investment related receivable |
|
3,200 |
|
- |
Accrued interest receivable |
|
1,737 |
|
1,836 |
Total assets of consolidated VIEs |
$ |
229,879 |
$ |
245,374 |
|
|
|
|
|
(2) Liabilities of consolidated VIEs included in the total liabilities above: |
|
|
|
|
Securitized debt, at fair value |
$ |
10,417 |
$ |
11,000 |
Accrued interest payable |
|
85 |
|
85 |
Accounts payable and accrued expenses |
|
2 |
|
2 |
Total liabilities of consolidated VIEs |
$ |
10,504 |
$ |
11,087 |
See notes to unaudited consolidated financial statements.
Page 10 of 12
Western Asset Mortgage Capital Corporation and Subsidiaries
Consolidated Statements of Operations (Unaudited)
(in thousandsexcept share and per share data)
|
|
For the three months |
|
For the three | ||
|
|
|
|
| ||
Net Interest Income: |
|
|
|
| ||
Interest income |
|
$ |
29,618 |
|
$ |
40,806 |
Interest expense |
|
7,979 |
|
6,402 | ||
Net Interest Income |
|
21,639 |
|
34,404 | ||
|
|
|
|
| ||
Other Income (Loss): |
|
|
|
| ||
Realized gain (loss) on sale of investments, net |
|
(6,055) |
|
7,468 | ||
Other than temporary impairment |
|
(10,797) |
|
(4,651) | ||
Unrealized gain (loss), net |
|
10,769 |
|
28,410 | ||
Gain (loss) on derivative instruments, net |
|
(45,170) |
|
(48,302) | ||
Other, net |
|
(332) |
|
2,384 | ||
Other Income (Loss), net |
|
(51,585) |
|
(14,691) | ||
|
|
|
|
| ||
Operating Expenses: |
|
|
|
| ||
General and administrative (includes $572 and $679 non-cash stock based compensation, respectively) |
|
3,605 |
|
2,874 | ||
Management fee related party |
|
2,753 |
|
2,693 | ||
Total Operating Expenses |
|
6,358 |
|
5,567 | ||
|
|
|
|
| ||
Net income (loss) available to Common Stock and participating securities |
|
$ |
(36,304) |
|
$ |
14,146 |
|
|
|
|
| ||
Net income (loss) per Common Share Basic |
|
$ |
(0.88) |
|
$ |
0.34 |
Net income (loss) per Common Share Diluted |
|
$ |
(0.88) |
|
$ |
0.34 |
Dividends Declared per Share of Common Stock |
|
$ |
0.45 |
|
$ |
0.67 |
Page 11 of 12
Reconciliation of GAAP Net Income to Non-GAAP Core Earnings
(Unaudited)
(in thousandsexcept share and per share data)
The table below reconciles Net Income (Loss) to Core Earnings for the three months ended March 31, 2016 and March 31, 2015:
(dollars in thousands) |
|
For the here months |
|
For the here months |
| ||
|
|
|
|
|
| ||
Net Income (loss) GAAP |
|
$ |
(36,304) |
|
$ |
14,146 |
|
Adjustments: |
|
|
|
|
| ||
|
|
|
|
|
| ||
Investments: |
|
|
|
|
| ||
|
|
|
|
|
| ||
Unrealized gain on investments and securitized debt |
|
(10,769) |
|
(28,410) |
| ||
Other than temporary impairment |
|
10,797 |
|
4,651 |
| ||
Realized (gain) loss on sale of investments |
|
6,055 |
|
(7,468) |
| ||
|
|
|
|
|
| ||
Derivative Instruments: |
|
|
|
|
| ||
|
|
|
|
|
| ||
Realized loss on termination of interest rate swaps |
|
3,605 |
|
1,049 |
| ||
Realized gain on settlement of TBAs |
|
(7,739) |
|
(7,448) |
| ||
Realized (gain) loss on currency forwards |
|
28 |
|
(646) |
| ||
Realized gain on option derivatives |
|
(4,756) |
|
- |
| ||
Realized gain on termination of futures |
|
(14,316) |
|
- |
| ||
Realized (gain) loss on sale of swaptions |
|
712 |
|
(713) |
| ||
Realized (gain) loss on Agency Interest-Only Strips accounted for as derivatives |
|
(300) |
|
2 |
| ||
Realized gain on foreign currency swaps |
|
(3,942) |
|
- |
| ||
Realized gain on total return swap |
|
(8) |
|
- |
| ||
Realized gain on foreign currency transactions |
|
(521) |
|
(1,705) |
| ||
Unrealized (gain) loss on foreign currency transactions |
|
1,096 |
|
(691) |
| ||
Mark-to-market adjustments on interest rate swaps |
|
54,248 |
|
53,205 |
| ||
Mark-to-market adjustments on interest rate swaptions |
|
(1,309) |
|
873 |
| ||
Mark-to-market adjustments on futures contracts |
|
1,159 |
|
74 |
| ||
Mark-to-market adjustments on TBAs |
|
1,143 |
|
2,651 |
| ||
Mark-to-market adjustments on IOs |
|
3,679 |
|
2,395 |
| ||
Mark-to-market adjustments on foreign currency swaps |
|
4,569 |
|
(4,356) |
| ||
Mark-to-market adjustments on total return swaps |
|
866 |
|
- |
| ||
Mark-to-market adjustments on foreign currency forwards |
|
200 |
|
1,195 |
| ||
|
|
|
|
|
| ||
Non-cash stock-based compensation expense |
|
572 |
|
679 |
| ||
Total adjustments |
|
45,069 |
|
15,337 |
| ||
Core Earnings Non-GAAP Financial Measure |
|
$ |
8,765 |
|
$ |
29,483 |
|
|
|
|
|
|
| ||
Basic Core Earnings per Share of Common Stock and Participating Securities - Non-GAAP Financial Measure |
|
$ |
0.21 |
|
$ |
0.71 |
|
Diluted Core Earnings per Share of Common Stock and Participating Securities - Non-GAAP Financial Measure |
|
$ |
0.21 |
|
$ |
0.71 |
|
|
|
|
|
|
| ||
|
|
|
|
|
| ||
Basic weighted average common shares and participating securities |
|
41,950,076 |
|
41,803,480 |
| ||
Diluted weighted average common shares and participating securities |
|
41,950,076 |
|
41,803,480 |
|
Page 12 of 12
Reconciliation of Interest Income and Effective Cost of Funds
(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 (Non-GAAP financial measure) for the three months ended March 31, 2016 and March 31, 2015:
(dollars in thousands) |
|
For the three |
|
For the three months |
| ||
Coupon interest income |
|
$ |
38,399 |
|
$ |
57,680 |
|
Premium accretion, discount amortization and amortization of basis, net |
|
(8,781) |
|
(16,874) |
| ||
Interest income |
|
$ |
29,618 |
|
$ |
40,806 |
|
|
|
|
|
|
| ||
Contractual interest income, net of amortization of basis on Agency and Non-Agency Interest-Only Strips, classified as derivatives(1): |
|
|
|
|
| ||
Coupon interest income |
|
$ |
4,146 |
|
$ |
5,654 |
|
Amortization of basis (Non-GAAP Financial Measure) |
|
(3,383) |
|
(4,478) |
| ||
Contractual interest income, net on Foreign currency swaps(1) |
|
113 |
|
216 |
| ||
Contractual interest income, net on Total return swaps(1) |
|
221 |
|
- |
| ||
Subtotal |
|
1,097 |
|
1,392 |
| ||
Total interest income, including interest income on Agency and Non-Agency Interest-Only Strips, classified as derivatives and other derivative instruments - Non-GAAP Financial Measure |
|
$ |
30,715 |
|
$ |
42,198 |
|
(1) Reported in gain (loss) on derivative instruments in the Consolidated Statement of Operations.
The following tables reconcile the Effective Cost of Funds (Non-GAAP financial measure) with interest expense for the three months ended March 31, 2016 and March 31, 2015:
|
|
For the three months ended March |
|
For the three months ended March |
| ||||||
(dollars in thousands) |
|
Reconciliation |
|
Cost of |
|
Reconciliation |
|
Cost of |
| ||
|
|
|
|
|
|
|
|
|
| ||
Interest expense |
|
$ |
7,979 |
|
1.33 |
% |
$ |
6,402 |
|
0.65 |
% |
Net interest paid - interest rate swaps |
|
8,428 |
|
1.40 |
% |
1,413 |
|
0.16 |
% | ||
Effective Borrowing Costs |
|
$ |
16,407 |
|
2.73 |
% |
$ |
7,815 |
|
0.81 |
% |
Weighted average repurchase borrowings |
|
$ |
2,414,531 |
|
|
|
$ |
3,927,321 |
|
|
|
Exhibit 99.2
First Quarter 2016 Investor Presentation May 6, 2016
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 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
First Quarter Financial Highlights GAAP Net Loss of $36.3 million, or $0.88 per share Core earnings plus drop income of $9.5 million, or $0.23 per share, consists of: Core earnings of $0.21 per share Drop income of $0.02 per share $10.90 net book value per share as of March 31, 2016 Quarterly cash dividend of $0.45 per share Economic return on book value was (7.0%) Total economic return on book value since IPO of 20.2% Net Interest Income of $14.3 million Net interest spread of 1.53% 4.26% adjusted gross yield 2.73% fully hedged cost of funds CPR on Agency RMBS of 7.1% for the quarter 2 Non-GAAP measures which includes the cost of interest rate swaps and interest income on IOs and IIOs classified as derivatives. Reflects the $0.45 dividend declared on March 24, 2016 and paid on April 26, 2016. 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. Includes all dividends declared during the period from May 15, 2012, the date of WMCs commencement of initial operations, through March 31, 2016, which amounts to $13.13 per share in total. Non-GAAP measures which include 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 March 31, 2016. First quarter weighted average Constant Prepayment Rate for the Companys Agency RMBS portfolio on an annualized basis. (5) (3) (5) (1) (5) (2) (5) (4) (6)
Q1 2016: Continued Volatility for Mortgage Assets 3 Agency spreads were volatile and widened over the course of the first quarter and Credit Sensitive mortgage securities spreads also widened. Source: IDC, Citigroup & Bloomberg Indices: For Prime, Alt A and Subprime Citigroup Legacy Non-Agency Cash Price Index. For CMBS Bloomberg CMBS BBB Index (New Issue). Source: Bloomberg Index: CMM-SW7 Q1:-0.8% Q1: -1.7% Q1: -2.7% Q1: -5.6% 65 70 75 80 85 90 95 100 105 6/30/15 7/31/15 8/31/15 9/30/15 10/31/15 11/30/15 12/31/15 1/31/16 2/29/16 3/31/16 Non - Agency RMBS and CMBS Index Prices Prime AltA Subprime CMBX.BBB.8 70 80 90 100 110 120 130 140 6/30/2015 7/31/2015 8/31/2015 9/30/2015 10/31/2015 11/30/2015 12/31/2015 1/31/2016 2/29/2016 3/31/2016
Interest Rate Volatility Remains High in 2016 1 yr. x 10 yr. Swap Volatility 4 Source: Bloomberg 10-Year Treasury Yield Source: Bloomberg 1.6 1.8 2 2.2 2.4 2.6 70 75 80 85 90 95
CMBS, Whole-Loans and Other Investments1 Portfolio Breakdown as of March 31, 2016 ¹ Other investments includes ABS, GSE Credit Risk Transfer securities and securitized commercial loan. 2 Lower loan balance pools generally consist of loans below $150,000. 3 Other includes low WALA and Investor loans. 4 Commercial Real Estate Mortgage Mezzanine Loans. Agency RMBS Non-Agency RMBS (By U.S. Dollar Price) 3 4 5 Total Investment Portfolio ($ in millions) Agency RMBS $1,669 Agency CMBS $28 Non-Agency RMBS $443 Non-Agency CMBS $406 Residential Whole-Loans $201 Other Investments1 $72 Total $2,818 1 ² 1 42.2% 37.3% 20.5% <65 65-85 85+ 33.2% 17.5% 6.7% 4.0% 28.5% 10.1% Legacy CMBS New Issue CMBS CRE Mezzanine Agency CMBS Res. Whole-Loans Other 75.3% 10.7% 14.0% Lower Loan Balance MHA/HARP High LTV Other 59.2% 1.0% 15.7% 14.4% 7.1% 2.6% Agency RMBS Agency CMBS Non-Agency RMBS Non-Agency CMBS Whole-Loans Other Investments
6 Portfolio Composition as of March 31, 2016 Portfolio ($ in millions) Agency Coupon Principal Balance Amortized Cost Estimated Fair Value 30-year fixed rate 3.5% $232.3 $244.6 $244.0 4.0% 276.4 299.9 299.3 4.5% 356.7 382.2 395.0 5.0% 56.5 63.4 64.2 5.5% 2.7 3.1 3.0 6.0% 2.6 2.8 3.0 20-year fixed rate 3.5% 141.5 149.1 150.2 4.0% 409.7 432.0 442.4 Agency RMBS IOs and IIOs¹ 3.2% N/A 69.6 67.8 Agency CMBS 5.1% 17.5 17.5 16.7 Agency CMBS IOs and IIOs2 1.3% N/A 11.7 11.5 Total Agency 3.5% $1,495.9 $1,675.9 $1,697.1 Non-Agency RMBS 3.8% $482.1 $349.2 $354.3 Non-Agency RMBS IOs and IIOs3 5.8% N/A 66.1 88.5 Non-Agency CMBS 5.0% 520.8 438.0 405.5 Total Non-Agency 4.8% $1,002.9 $853.3 $848.3 Other Securities4 6.4% 30.9 50.0 48.0 Residential Whole-Loans5 4.8% 195.4 197.1 201.3 Securitized Commercial Loan6 9.0% 25.0 25.0 23.7 Total Portfolio 4.0% $2,750.1 $2,801.3 $2,818.4 Includes $37.4 million of amortized cost and $35.2 million of fair value for Agency RMBS IOs and IIOs accounted for as derivatives for GAAP. Includes $10.2 million of amortized cost and $9.8 million of fair value for Agency CMBS IOs and IIOs accounted for as derivatives for GAAP. Includes $2.6 million of amortized cost and $4.0 million of fair value for Non-Agency RMBS IOs and IIOs accounted for as derivatives for GAAP. Other securities includes residual interests in asset-backed securities which have no principal balance and an amortized cost of approximately $22.0 million. Residential Whole-Loans are held by a trust whose entire beneficial interest is held by WMC. The $25.0 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.
5.3x leverage calculation does not reflect net To-Be Announced (TBA) mortgage pass-through certificates position. As of March 31, 2016, the net long position in TBAs was $450 million in notional value. Adjusted leverage is a Non-GAAP measure. Non-GAAP measures which include Agency and Non-Agency MBS, other securities and Whole-Loans (including the cost of interest rate swaps), and interest income on IOs and IIOs classified as derivatives, foreign currency swaps and total return swap, and are weighted averages for the quarter ended March 31, 2016. Includes net interest component related to interest rate swaps. First quarter weighted average Constant Prepayment Rate for the companys Agency RMBS portfolio on an annualized basis. Estimated impact of liability hedges on the duration of net assets. Leverage Ratio: 5.3x Leverage Ratio adjusted for TBA position of 6.2x Net Duration of the Agency RMBS portfolio: 0.6 months Agency RMBS Weighted Average Loan Age (WALA) of 29.0 months Portfolio Gross Yield: 4.26% Hedge Adjusted Cost of Financing: 2.73% Net Interest Spread: 1.53% Agency RMBS CPR of 7.1% for Q1 Duration Contribution by Maturity Date Key Portfolio Metrics as of March 31, 2016 (2) (2) (1) 7 (4) (3) (4) 1.85 0.19 0.50 0.59 0.55 0.13 -0.07 0.92 0.04 0.22 0.16 0.19 0.22 0.07 0.42 0.04 0.05 0.15 0.17 0.00 0.00 -1.80 0.32 -0.30 -0.68 -0.84 -0.32 0.02 1.39 0.59 0.47 0.22 0.07 0.03 0.02
Financing Summary Portfolio Financing ($ in millions as of March 31, 2016) Repurchase Agreements Repo Outstanding Interest Rate Remaining Days to Maturity Agency RMBS $1,591.9 0.75% 38 Non-Agency RMBS $295.4 2.21% 52 Agency and Non-Agency CMBS $318.1 2.12% 34 Whole-Loans and Securitized Commercial Loan $170.8 2.46% 8 Other Securities1 $26.9 2.68% 11 Total/Wtd Avg $2,403.1 1.25% 36 8 Master repurchase agreements with 27 counterparties Outstanding borrowing with 20 counterparties Internal credit review Capacity in excess of our current needs ¹ Other securities includes ABS and GSE Credit Risk Transfer securities.
Hedging Summary 9 Includes $1.7 billion of forward starting swaps, starting in 13.7 months. While we use hedging strategies as part of our overall portfolio management, these strategies are not designed to eliminate all risks in the portfolio. There can be no assurance as to the level or effectiveness of these strategies. Fixed Pay Interest Rate Swaps ($ in millions as of March 31, 2016) Maturity Notional Amount Avg. Fixed Pay Rate Avg. Floating Receive Rate Average Maturity (Years) 1 Year to 3 Years $980.9 1.1% 0.6% 2.0 3 Years to 5 Years $2,011.2 1.9% 0.6% 4.6 >5 Years $2,654.6 2.6% 0.6% 9.6 Total Fixed Pay Rate (1) $5,646.7 2.1% 0.6% 6.5 Other Instruments with Hedging Attributes (2) $105 million of notional value of pay-fixed interest rate swaptions $168 million of IOs and inverse IOs $ 34 million notional long position of US Treasury futures Variable Pay Interest Rate Swaps ($ in millions as of March 31, 2016) Maturity Notional Amount Avg. Fixed Receive Rate Avg. Floating Pay Rate Average Maturity (Years) 3 Years to 5 Years $1,998.6 1.4% 0.6% 4.5 >5 Years $1,700.3 2.0% 0.6% 10.5 Total Floating Pay Rate $3,698.9 1.7% 0.6% 7.2
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 set of investment opportunities across the entire mortgage sector Portfolio activity during the first quarter: Reduced average portfolio leverage Rotated into higher yielding credit sensitive investments Readjusted hedge positions, seeking to improve core earnings Expect portfolio to continue to benefit from credit spread tightening 10 Our long-term objective is to generate strong core earnings to support an attractive dividend, while also maintaining a stable book value
Contact Information 11 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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