EX-99.1 2 wmcq3fy18ex991.htm EXHIBIT 99.1 Exhibit


Exhibit 99.1


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WESTERN ASSET MORTGAGE CAPITAL CORPORATION
ANNOUNCES THIRD QUARTER 2018 RESULTS
 
Conference Call and Webcast Scheduled for Tomorrow, Thursday, November 8, 2018 at
11:00 a.m. Eastern Time/8:00 a.m. Pacific Time
 
Pasadena, CA, November 7, 2018 – Western Asset Mortgage Capital Corporation (the “Company” or "WMC") (NYSE: WMC) today reported its results for the third quarter ended September 30, 2018.
 
THIRD QUARTER 2018 FINANCIAL HIGHLIGHTS

September 30, 2018 book value per share of $11.13, net of third quarter common dividend of $0.31 per share declared on September 17, 2018.
GAAP net income of $20.9 million, or $0.50 per basic and diluted share.
Core earnings plus drop income of $13.8 million, or $0.33 per basic and diluted share.1,2  
Economic return on book value was 3.1%1,3 for the quarter.
2.06% annualized net interest margin on our investment portfolio. 1,4,5 
6.7x leverage excluding securitized debt as of September 30, 2018 (8.8x leverage with securitized debt).

OTHER THIRD QUARTER 2018 HIGHLIGHTS

$67.8 million of common equity raised during the quarter, net of offering cost
Acquired $579.8 million of credit sensitive assets, consisting of,
*
$375.3 million in Residential Whole Loans
*
$81.4 million in Residential Bridge Loans
*
$94.3 million in Commercial Loans
*
$28.8 million in Non Agency CMBS






                                                                                                                                                                                                                                                                                             
1  Non – GAAP measure.
2  Drop income is income derived from the use of ‘to-be-announced’ forward contract (“TBA”) dollar roll transactions which is a component of our gain (loss) on derivative instruments on our consolidated statements of operations, but is not included in core earnings. Drop income was $1.1 million or $0.03 per share for the three months ended September 30, 2018.
3  Economic return is calculated by taking the sum of: (i) the total dividends declared; and (ii) the change in book value during the period and dividing by the beginning book value.
4   Includes interest-only securities accounted for as derivatives and the cost of interest rate swaps.
5 Excludes the consolidation of VIE trusts required under GAAP.


1


MANAGEMENT COMMENTARY

“I am pleased to report that we delivered another solid performance in the third quarter, generating core earnings plus drop income of $0.33 per share, as we continue to realize the benefits of our diversified portfolio and differentiated investment strategy,” said Jennifer Murphy, Chief Executive Officer of the Company. "Our primary focus continues to be on generating consistent and sustainable core earnings that will support an attractive dividend, while improving the stability of the company’s book value.  Our economic return on book value was 3.1%, an improvement from last quarter and in a market environment that has seen an increase in interest rate volatility. Our dividend has remained consistent at $0.31 per share for ten consecutive quarters and our book value has been generally stable or rising over that period. 
The equity offering we completed in September allowed us to further invest in our target assets, which we believe will enhance the overall earnings potential of the portfolio. The offering also supports our long term goal of growing the company to achieve better scale, which we believe benefits shareholders in a number of ways, including spreading fixed costs over a larger equity base and increasing liquidity" Ms Murphy added.
Anup Agarwal, Chief Investment Officer of the Company, commented, “Our strong core earnings for the quarter are a reflection of our ongoing shift into credit sensitive investments and shifting away from Agency RMBS, which tends to be more interest rate sensitive. We invested the proceeds from our September equity offering relatively quickly, acquiring more of our target assets. During the quarter we acquired nearly $580 million of credit sensitive investments. These purchases occurred across a number of sub-sectors of the mortgage market, but particularly in Residential Whole and Bridge Loans and Commercial Loans, where we continue to see attractive opportunities. This is consistent with our long-term goal of holding a diversified portfolio of investments that offer what we believe to be the best risk-adjusted returns over our investment horizon.
Our current expectations are for ongoing economic growth in the U.S. with the potential for modestly higher inflation. Residential and commercial real estate markets across the country remain healthy, based on continued strong employment and high levels of consumer confidence. Against this backdrop, we believe that our strategy of investing in across of sub-sectors of the mortgage market, particularly in credit-sensitive investments, continues to be appropriate, and in our opinion, positions us well to continue to generate attractive risk-adjusted total economic returns for our shareholders,” Mr. Agarwal concluded.


2


OPERATING RESULTS
 
The below table reflects a summary of our operating results:
 
 
 
For the Three Months Ended
GAAP Results
 
September 30, 2018
 
June 30, 2018
 
March 31, 2018
 
 
 
 
 
 
 
Net Interest Income
 
$
15,944

 
$
19,020

 
$
19,030

Other Income (Loss):
 
 

 
 

 
 
Realized gain (loss) on sale of investments, net
 
(24,229
)
 
(5,608
)
 
575

Other than temporary impairment
 
(2,533
)
 
(2,974
)
 
(2,916
)
Unrealized gain (loss), net
 
13,128

 
(31,693
)
 
(68,961
)
Gain (loss) on derivative instruments, net
 
24,625

 
28,490

 
79,582

Other, net
 
(2
)
 
(145
)
 
47

Other Income (loss)
 
10,989

 
(11,930
)
 
8,327

Total Expenses
 
5,845

 
5,601

 
5,315

Income (loss) before income taxes
 
21,088

 
1,489

 
22,042

Income tax provision (benefit)
 
206

 
36

 
313

Net income (loss)
 
$
20,882

 
$
1,453

 
$
21,729

 
 
 
 
 
 
 
Net income (loss) per Common Share – Basic/Diluted
 
$
0.50

 
$
0.03

 
$
0.52

Non-GAAP Results
 
 

 
 

 
 

Core earnings plus drop income(1)
 
$
13,837

 
$
15,155

 
$
14,149

Core earnings plus drop income per Common Share – Basic/Diluted
 
$
0.33

 
$
0.36

 
$
0.34

Weighted average yield(2)(4)
 
4.53
%
 
4.36
%
 
4.14
%
Effective cost of funds(3)(4)
 
2.78
%
 
2.58
%
 
2.44
%
Annualized net interest margin(2)(3)(4)
 
2.06
%
 
2.05
%
 
1.94
%
Annualized CPR on Agency RMBS
 
10.4
%
 
10.4
%
 
11.0
%
 
(1)          For a reconciliation of GAAP Income to Core earnings, please refer to the Reconciliation of Core Earnings at the end of this press release.
(2)          Includes interest-only securities accounted for as derivatives and foreign currency swaps.
(3)          Includes the net amount paid, including accrued amounts for interest rate swaps and premium amortization for MAC interest rate swaps during the periods.
(4) Excludes the consolidation of VIE trusts required under GAAP.




3


Portfolio Composition
 
As of September 30, 2018, the Company owned an aggregate investment portfolio with a fair market value totaling $5.2 billion. The following tables sets forth additional information regarding the Company’s investment portfolio as of September 30, 2018:
 
Portfolio Characteristics

Agency Portfolio

The following table summarizes certain characteristics of our Agency portfolio by investment category as of September 30, 2018 (dollars in thousands): 
 
Principal Balance
 
Amortized Cost
 
Fair Value
 
Net Weighted Average Coupon
Agency RMBS
$
389,756

 
$
402,889

 
$
385,008

 
3.6
%
Agency RMBS Interest-Only Strips
N/A

 
12,377

 
12,203

 
2.3
%
Agency RMBS Interest-Only Strips, accounted for as derivatives
N/A

 
N/A

 
8,006

 
2.8
%
Total Agency RMBS
389,756

 
415,266

 
405,217

 
3.2
%
 
 
 
 
 
 
 
 
Agency CMBS
2,124,942

 
2,129,912

 
2,066,075

 
3.2
%
Agency CMBS Interest-Only Strips, accounted for as derivatives
N/A

 
N/A

 
4,241

 
0.4
%
Total Agency CMBS
2,124,942

 
2,129,912

 
2,070,316

 
3.0
%
Total
$
2,514,698

 
$
2,545,178

 
$
2,475,533

 
3.0
%
 
Credit Sensitive Portfolio

The following table summarizes certain characteristics of our credit sensitive portfolio by investment category as of September 30, 2018 (dollars in thousands): 

 
Principal Balance
 
Amortized Cost
 
Fair Value
 
 Weighted Average Coupon(1)
Non-Agency RMBS
$
113,606

 
$
79,589

 
$
83,350

 
4.4
%
Non-Agency RMBS IOs and IIOs
N/A

 
15,677

 
15,513

 
0.5
%
Non-Agency CMBS
322,255

 
268,265

 
266,847

 
5.9
%
Residential Whole Loans
674,763

 
682,856

 
684,463

 
4.9
%
Residential Bridge Loans
249,179

 
250,161

 
249,226

 
9.1
%
Securitized Commercial Loans(1)  
1,178,839

 
1,179,866

 
1,191,048

 
5.4
%
Commercial Loans

144,787

 
144,110

 
143,951

 
7.3
%
Other Securities
71,420

 
82,349

 
92,528

 
9.0
%
 
$
2,754,849

 
$
2,702,873

 
$
2,726,926

 
4.5
%
                                                                               
(1) In March 2018, the Company acquired a $67.8 million Non-Agency CMBS security which resulted in the consolidation of a variable interest entity and the recording of a $1.4 billion securitized commercial loan and $1.3 billion of securitized debt. As of September 30, 2018, the fair value of the securitized loan was $1.2 billion and the securitized debt was $1.2 billion.  

4


PORTFOLIO FINANCING AND HEDGING
 
Financing Activity

Repurchase Agreements
 
At September 30, 2018, the Company had $3.5 billion of borrowings under master repurchase agreements with 16 of its 28 approved counterparties with maturities of six months or less. The following table sets forth additional information regarding the Company’s portfolio financing under the master repurchase agreements as of September 30, 2018 (dollars in thousands):
 
Repurchase Agreements
 
Balance
 
Weighted Average Interest Rate (end of period)
 
Weighted Average Remaining Maturity (days)
Agency RMBS
 
$
393,486

 
2.39
%
 
60
Agency CMBS
 
1,833,352

 
2.36
%
 
62
Non-Agency RMBS
 
71,117

 
3.70
%
 
31
Non-Agency CMBS
 
212,282

 
3.79
%
 
48
Residential Whole-Loans
 
585,178

 
3.65
%
 
35
Residential Bridge Loans
 
216,917

 
4.37
%
 
26
Securitized Commercial Loans
 
7,599

 
3.99
%
 
12
Commercial Loans
 
87,567

 
4.33
%
 
27
Other Securities
 
61,821

 
3.86
%
 
29
Total
 
$
3,469,319

 
2.90
%
 
52


Convertible Senior Unsecured Notes

At September 30, 2018, the Company had $115.0 million aggregate principal amount of 6.75% convertible senior unsecured notes. The notes mature on October 1, 2022, unless earlier converted, redeemed or repurchased by the holders pursuant to their terms, and are not redeemable by the Company except during the final three months prior to maturity. The initial conversion rate was 83.1947 shares of common stock per $1,000 principal amount of notes and represented a conversion price of $12.02 per share of common stock. The Company believes that this financing is an attractive source of longer term capital, which was more cost efficient than issuing straight equity.

Hedging Activity
 
At September 30, 2018, the Company had $3.2 billion notional value of pay-fixed interest rate swaps, excluding a forward starting swap of $599.3 million (approximately 2.6 months forward), which have variable maturities between June 14, 2019 and April 27, 2037.
 
The following tables summarize the average fixed pay rate, average floating receive rate and average maturity for the Company’s fixed pay interest rate swaps as of September 30, 2018 (dollars in thousands):

5


  
Remaining Interest Rate Swap Term
 
Notional Value
 
Average
Fixed Pay
Rate
 
Average Floating Receive Rate
 
Average
Maturity
(Years)
 
Forward Starting
1 year or less
 
$
400,000

 
1.5
%
 
2.3
%
 
0.8
 
%
Greater than 1 year and less than 3 years
 
200,000

 
1.8
%
 
2.3
%
 
1.7
 
%
Greater than 3 years and less than 5 years
 
1,164,700

 
2.4
%
 
2.3
%
 
4.1
 
%
Greater than 5 years
 
2,064,700

 
2.7
%
 
2.3
%
 
10.2
 
29.0
%
Total
 
$
3,829,400

 
2.4
%
 
2.3
%
 
6.9
 
15.6
%

The following table summarizes the average variable pay rate, average fixed receive rate and average maturity for the Company’s variable pay interest rate swaps as of September 30, 2018 (dollars in thousands):

Remaining Interest Rate Swap Term
 
Notional Amount

 
Average 
Variable Pay Rate
 
Average Fixed Receive Rate
 
Average Maturity (Years)
 
Forward Starting
Greater than 5 years
 
$
482,400

 
2.3
%
 
2.4
%
 
8.6
 
%
Total
 
$
482,400

 
2.3
%
 
2.4
%
 
8.6
 
%


DIVIDEND
 
On September 17, 2018, the Company declared a regular cash dividend of $0.31 per share for each common share. Since its inception in May 2012, the Company has declared and paid total dividends of $16.23 per share in a combination of cash and stock.
 
CONFERENCE CALL
 
The Company will host a conference call with a live webcast tomorrow, November 8th, at 11:00 a.m. Eastern Time/8:00 a.m. Pacific Time, to discuss financial results for the third quarter 2018.
 
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 Company’s 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/10125095 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 November 8, 2018.
 
A telephone replay will be available through November 22 , 2018 by dialing (877) 344-7529 from the United States, or (412) 317-0088 from outside the United States, and entering conference ID 10125095. 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 CMBS, Agency RMBS, Non-Agency RMBS, Non-Agency CMBS, ABS,

6



GSE Risk Transfer Securities, Residential Whole and Bridge Loans and Commercial Loans. The Company’s investment strategy may change, subject to the Company’s stated investment guidelines, and is based on its manager Western Asset Management Company LLC's 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, LLC, an investment advisor registered with the Securities and Exchange Commission and a wholly-owned subsidiary of Legg Mason, Inc. Please visit the Company’s website at www.westernassetmcc.com.

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 Company’s annual report on Form 10-K for the period ended December 31, 2017 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.
 

7



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-


8



Western Asset Mortgage Capital Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands—except share and per share data)
(Unaudited)
 
 
September 30, 2018
 
December 31, 2017
Assets:
 
 

 
 

Cash and cash equivalents
 
$
12,817

 
$
48,024

Restricted cash
 
100,138

 

Agency mortgage-backed securities, at fair value ($2,325,859 and $2,833,595 pledged as collateral, at fair value, respectively)
 
2,475,533

 
2,858,600

Non-Agency mortgage-backed securities, at fair value ($351,032 and $266,189 pledged as collateral, at fair value, respectively)
 
365,710

 
378,158

Other securities, at fair value ($92,391 and $89,823 pledged as collateral, at fair value, respectively)
 
92,528

 
122,065

Residential Whole-Loans, at fair value ($684,463 and $237,423 pledged as collateral, at fair value, respectively)
 
684,463

 
237,423

Residential Bridge Loans ($234,747 and $64,526 at fair value and $249,471 and $106,673 pledged as collateral, respectively)
 
249,471

 
106,673

Securitized commercial loan, at fair value
 
1,191,048

 
24,876

Commercial Loans, at fair value ($123,677 and $0 pledged as collateral, at fair value, respectively)
 
143,951

 

Investment related receivable ($34,559 and $0 pledged as collateral, respectively)
 
113,341

 
7,665

Interest receivable
 
21,869

 
13,603

Due from counterparties
 
81,513

 
86,930

Derivative assets, at fair value
 
2,700

 
728

Other assets
 
2,903

 
2,161

Total Assets (1)
 
$
5,537,985

 
$
3,886,906

 
 
 
 
 
Liabilities and Stockholders’ Equity:
 
 

 
 

Liabilities:
 
 

 
 

Repurchase agreements, net
 
$
3,469,319

 
$
3,251,686

Convertible senior unsecured notes, net

 
109,731

 
108,743

Securitized debt, at fair value (includes $313,143 and $10,945 held by affiliates, respectively)
 
1,119,089

 
10,945

Interest payable (includes $891 and $70 on securitized debt held by affiliates, respectively)
 
10,027

 
8,322

Investment related payables
 
169,499

 
17,217

Due to counterparties
 
1,068

 
1,490

Derivative liability, at fair value
 
2,159

 
4,346

Accounts payable and accrued expenses
 
3,513

 
3,118

Payable to affiliate
 
2,489

 
2,041

Dividend payable
 
14,916

 
12,960

  Other liabilities
 
100,530

 

Total Liabilities (2)
 
$
5,002,340

 
$
3,420,868

 
 
 
 
 
Commitments and contingencies
 
 

 
 

 
 
 
 
 
Stockholders’ Equity:
 
 

 
 

Common stock: $0.01 par value, 500,000,000 shares authorized, 48,116,379 and 41,794,079 outstanding, respectively
 
481

 
419

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

 

Treasury stock, at cost, 0 and 125,722 shares held, respectively
 

 
(1,232
)
Additional paid-in capital
 
833,840

 
768,763

Retained earnings (accumulated deficit)
 
(298,676
)
 
(301,912
)
Total Stockholders’ Equity
 
535,645

 
466,038

Total Liabilities and Stockholders’ Equity
 
$
5,537,985

 
$
3,886,906


9



Western Asset Mortgage Capital Corporation and Subsidiaries
Consolidated Balance Sheets (Continued)
(in thousands—except share and per share data)
(Unaudited)
 
 
 
September 30, 2018
 
December 31, 2017
(1) Assets of consolidated VIEs included in the total assets above:
 
 

 
 

Restricted Cash
 
100,138

 

Residential Whole-Loans, at fair value ($684,463 and $237,423 pledged as collateral, at fair value, respectively)
 
684,463

 
237,423

Residential Bridge Loans ($234,747 and $64,526 at fair value and $249,471 and $106,673 pledged as collateral, respectively)
 
249,471

 
106,673

Securitized commercial loan, at fair value
 
1,191,048

 
24,876

Commercial Loans, at fair value ($123,677 and $0 pledged as collateral, at fair value, respectively)
 
123,677

 

Investment related receivable
 
33,430

 
7,665

Interest receivable
 
12,418

 
3,358

Other assets
 
203

 

Total assets of consolidated VIEs
 
$
2,394,848

 
$
379,995

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

 
 

Securitized debt, at fair value (includes $313,143 and $10,945 held by affiliates, respectively)
 
$
1,119,089

 
$
10,945

Interest payable (includes $891 and $70 on securitized debt held by affiliates, respectively)
 
2,487

 
70

Accounts payable and accrued expenses
 
737

 
189

Other liabilities
 
100,531

 

Total liabilities of consolidated VIEs
 
$
1,222,844

 
$
11,204

 



10



Western Asset Mortgage Capital Corporation and Subsidiaries
Consolidated Statements of Operations
(in thousands—except share and per share data)
 (Unaudited)
 
 
Three months ended
 
 
September 30, 2018
 
June 30, 2018
 
March 31, 2018
Net Interest Income
 
 
 
 
 
 
Interest income
 
$
54,461

 
$
57,154

 
$
39,727

Interest expense (includes $4,465, $4,719, and $488 on securitized debt held by affiliates, respectively)
 
38,517

 
38,134

 
20,697

Net Interest Income
 
15,944

 
19,020

 
19,030

 
 
 
 
 
 
 
Other Income (Loss)
 
 
 
 
 
 
Realized gain (loss) on sale of investments, net
 
(24,229
)
 
(5,608
)
 
575

Other than temporary impairment
 
(2,533
)
 
(2,974
)
 
(2,916
)
Unrealized gain (loss), net
 
13,128

 
(31,693
)
 
(68,961
)
Gain (loss) on derivative instruments, net
 
24,625

 
28,490

 
79,582

Other, net
 
(2
)
 
(145
)
 
47

Other Income (Loss)
 
10,989

 
(11,930
)
 
8,327

 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
Management fee to affiliate
 
2,284

 
2,259

 
2,180

Other operating expenses
 
1,609

 
1,555

 
969

General and administrative expenses:
 
 
 
 
 
 

  Compensation expense
 
552

 
572

 
510

  Professional fees
 
1,065

 
818

 
1,295

  Other general and administrative expenses
 
335

 
397

 
361

Total general and administrative expenses
 
1,952

 
1,787

 
2,166

Total Expenses
 
5,845

 
5,601

 
5,315

 
 
 
 
 
 
 
Income before income taxes
 
21,088

 
1,489

 
22,042

Income tax provision (benefit)
 
206

 
36

 
313

Net income
 
$
20,882

 
$
1,453

 
$
21,729

 
 
 
 
 
 
 
Net income per Common Share – Basic
 
$
0.50

 
$
0.03

 
$
0.52

Net income per Common Share – Diluted
 
$
0.50

 
$
0.03

 
$
0.52

Dividends Declared per Share of Common Stock
 
$
0.31

 
$
0.31

 
$
0.31



11



Reconciliation of GAAP Net Income to Non-GAAP Core Earnings
(in thousands—except share and per share data)
(Unaudited)
 
The table below reconciles Net Income to Core Earnings for the three months ended September 30, 2018, June 30, 2018 and March 31, 2018:
 
 
Three months ended
(dollars in thousands)
 
September 30, 2018
 
June 30, 2018
 
March 31, 2018
Net Income
 
$
20,882

 
$
1,453

 
$
21,729

Income tax provision (benefit)
 
206

 
36

 
313

Income before income taxes
 
21,088

 
1,489

 
22,042

 
 
 
 
 
 
 
Adjustments:
 
 

 
 

 
 

Investments:
 
 

 
 

 
 

Unrealized (gain) loss on investments, securitized debt and other liabilities
 
(13,128
)
 
31,693

 
68,961

Other than temporary impairment
 
2,533

 
2,974

 
2,916

Realized (gain) loss on sale of investments
 
24,229

 
5,608

 
(575
)
One-time transaction costs
 
310

 
163

 
41

 
 
 
 
 
 
 
Derivative Instruments:
 
 

 
 

 
 

Net realized (gain) loss on derivatives
 
(29,569
)
 
(22,973
)
 
(79,118
)
Unrealized (gain) loss on derivatives
 
7,036

 
(4,268
)
 
(1,308
)
 
 
 
 
 
 
 
Amortization of discount on convertible senior unsecured notes
 
137

 
138

 
137

Non-cash stock-based compensation
 
70

 
50

 
75

Total adjustments
 
(8,382
)
 
13,385

 
(8,871
)
Core Earnings
 
$
12,706

 
$
14,874

 
$
13,171

Basic and Diluted Core Earnings per Common Share and Participating Securities
 
$
0.30

 
$
0.35

 
$
0.32

Basic and Diluted Core Earnings plus Drop Income per Common Share and Participating Securities
 
$
0.33

 
$
0.36

 
0.34

Basic weighted average common shares and participating securities
 
42,168,806

 
41,707,291

 
41,844,798

Diluted weighted average common shares and participating securities
 
42,168,806

 
41,707,291

 
41,844,798



12



Reconciliation of Interest Income and Effective Cost of Funds
(dollars in thousands)
(Unaudited)
 
The following table reconciles total interest income to adjusted interest income which includes interest income on Agency and Non-Agency Interest-Only Strips classified as derivatives (Non-GAAP financial measure) for the three months ended September 30, 2018, June 30, 2018 and March 31, 2018:
 
 
 
Three months ended
(dollars in thousands)
 
September 30, 2018
 
June 30, 2018
 
March 31, 2018
Coupon interest income
 
$
59,045

 
$
60,043

 
$
40,557

Premium amortization, discount accretion and amortization of basis, net
 
(4,584
)
 
(2,889
)
 
(830
)
Interest income
 
54,461

 
57,154

 
39,727

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

 
 

 
 
Coupon interest income
 
1,209

 
1,011

 
1,422

Amortization of basis
 
(996
)
 
(783
)
 
(1,191
)
Subtotal
 
213

 
228

 
231

Total adjusted interest income
 
$
54,674

 
$
57,382

 
$
39,958

 
(1)                Reported in "Gain (loss) on derivative instruments, net" in the Consolidated Statements of Operations.
 
The following table reconciles the Effective Cost of Funds (Non-GAAP financial measure) with interest expense for three months ended September 30, 2018, June 30, 2018 and March 31, 2018:
 
 
 
Three months ended
 
 
September 30, 2018
 
June 30, 2018
 
March 31, 2018
 (dollars in thousands)
 
Reconciliation
 
Cost of Funds/Effective Borrowing Costs
 
Reconciliation
 
Cost of Funds/Effective Borrowing Costs
 
Reconciliation
 
Cost of Funds/Effective Borrowing Costs
Interest expense
 
$
38,517

 
3.50
 %
 
$
38,134

 
3.20
 %
 
$
20,697

 
2.38
%
Adjustments:
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense on Securitized debt from consolidated VIEs
 
(13,975
)
 
(4.85
)%
 
(14,340
)
 
4.62
 %
 
(1,060
)
 
5.23
%
Net interest (received) paid - interest rate swaps
 
(1,962
)
 
(0.18
)%
 
(1,044
)
 
(0.09
)%
 
1,056

 
0.12
%
Effective Borrowing Costs
 
$
22,580

 
2.78
 %
 
$
22,750

 
2.58
 %
 
$
20,693

 
2.41
%
Weighted average borrowings
 
$
3,224,915

 
 

 
$
4,780,990

 
 

 
$
3,526,311

 
 



13