EX-99.2 3 wmcq1fy18ex992.htm EXHIBIT 99.2 wmcq1fy18ex992
First Quarter 2018 Investor Presentation May 8, 2018


 
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 2018 WMC Earnings Call Presenters Jennifer W. Murphy Lisa Meyer Anup Agarwal Chief Executive Officer & Chief Financial Officer & Chief Investment Officer President Treasurer 2


 
Overview of Western Asset Mortgage Capital Corporation Western Asset Mortgage Capital Corporation (“WMC”) is a public REIT that benefits from the leading fixed income management capabilities of Western Asset Management Company One of the largest U.S. fixed income asset managers with AUM of $431 billion(1) • Structured Product AUM of $71.2 billion, of which $35.1 billion is invested in Agency RMBS and $36.1 billion in Non-Agency RMBS, CMBS, and ABS(1) Senior investment team members have worked together for approximately 12 years Extensive mortgage investing track record Publicly traded diversified mortgage REIT positioned to capture attractive current and long-term investment opportunities in the mortgage market Completed Initial Public Offering in May 2012 3 Please refer to page 15 for footnote disclosures.


 
Corporate Overview ▪ WMC is a diversified mortgage finance REIT supported by the deep investment experience of the mortgage and asset-backed investment and risk management teams of Western Asset Management Company ("Western Asset"), a leading global fixed income manager. ▪ Western Asset's depth and breadth of fixed income expertise, comprehensive platform, and global institutional relationships provide WMC key advantages: * Best-in-class portfolio and risk management capabilities; * Access to investment opportunities and financing relationships and terms reflective of Western Asset's global platform with over $400 billion AUM; * Operational excellence and efficiencies; and * Highest standards of financial reporting, disclosure and transparency. ▪ WMC has built a diversified portfolio of residential and commercial assets including MBS and whole loans with the objective of generating strong total returns while preserving book value. ▪ WMC has paid a consistent dividend for 8 quarters, reflecting a philosophy of delivering a sustainable dividend that is supported by the core earnings of our portfolio. 4


 
First Quarter Financial Highlights ▪ March 31, 2018 book value per share of $11.37, net of first quarter common dividend of $0.31 declared on March 22, 2018. ▪ GAAP net income of $21.7 million, or $0.52 per basic and diluted common share. ▪ Core earnings plus drop income of $14.1 million(4), or $0.34 per basic and diluted common share. ▪ Economic return on book value was 4.8%(3) for the quarter. ▪ 1.9%(6) annualized net interest margin on our investment portfolio. ▪ 7.7x leverage excluding securitized debt as of March 31, 2018 (10.5x leverage with securitized debt). ▪ Acquired $486.0 million in target assets(2) * $81.6 million in Agency MBS ($79.6 million in Agency CMBS and $2.0 million in Agency RMBS IOs) * $121.5 million in Non-Agency CMBS and RMBS * $71.3 million in Residential Whole-Loans * $93.7 million in Residential Bridge Loans * $40.4 million in Commercial Loans * $9.7 million in CRT securities * $67.8 million risk retention(2) in a CRE securitization, which resulted in consolidation. ▪ Sold $11.8 million in investments, which included $5.5 million of Agency MBS and $6.3 million in Non-Agency CMBS. ▪ Repurchased 114,400 shares of common stock at an average price of $9.65 per share. 5 Please refer to page 15 for footnote disclosures.


 
Recent Performance The repositioning of our portfolio that began in early 2017 has enabled us to provide our shareholders with an attractive dividend that is supported by sustainable core earnings as well as appreciation in the value of our portfolio. (3) Book Value Change Economic Return 12.0 6.0 10.0 8.0 4.0 6.0 $10.64 $10.88 $11.15 $11.37 5.3% 4.8% 5.2% 4.8% 4.0 2.0 2.0 0.0 0.0 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Dividend Per Share Core Earnings Plus Drop Income Per Share (4) $0.35 $0.40 $0.30 $0.35 $0.30 $0.25 $0.25 $0.20 $0.20 $0.15 $0.31 $0.31 $0.31 $0.31 $0.34 $0.15 $0.32 $0.32 $0.31 $0.10 $0.10 $0.05 $0.05 $0.00 $0.00 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2017 Q3 2017 Q4 2017 Q1 2018 6 Please refer to page 15 for footnote disclosures.


 
Portfolio Income Attribution(11) Portfolio Income(5) was $27.4 million for the quarter ended March 31, 2018. For the Three Months Ended March 31, 2018 (in thousands except per share data) Non- Non- Residential Residential Securitized Agency Agency Agency Agency Whole- Bridge Other Commercial CMBS RMBS CMBS RMBS Loans Loans (14) Investments (12) Loans(19) Total Interest Income $ 16,179 $ 6,024 6,709 $ 1,553 $ 3,040 $ 2,351 $ 2,667 $ 422 $ 38,945 Interest expense (9,652) (3,230) (1,667) (500) (2,427) (1,549) (609) (4) (19,638) Net swap interest expense(8) (784) (197) (46) (25) — — (4) — (1,056) Net Interest Income 5,743 2,597 4,996 1,028 613 802 2,054 418 18,251 Realized gain/(loss) on investments — 18 (337) 894 — — — — 575 Unrealized gain/ (loss) on investments (54,392) (16,009) 1,973 (479) (789) (883) 1,397 319 (68,862) Gain (loss) on derivative instruments, net(15) 59,671 14,972 3,510 1,934 — — 254 — 80,341 OTTI(9) (33) (142) (2,684) (90) — — — — (2,949) Portfolio Income (loss) $ 10,989 $ 1,436 $ 7,458 $ 3,287 $ (176) $ (81) $ 3,705 $ 737 $ 27,356 BV Per Share Increase (Decrease) $ 0.26 $ 0.04 $ 0.18 $ 0.08 $ — $ — $ 0.09 $ 0.02 $ 0.67 per share Beginning book value $ 11.15 Portfolio Income(5) 0.67 Operating expenses and G&A (0.13) Dividends (0.31) Income tax benefit (provision) (0.01) Ending book value $ 11.37 7 Please refer to page 15 for footnote disclosures.


 
Portfolio Composition Total Investment Portfolio ($ in millions) Agency RMBS March 31, 2018 3.0% Agency RMBS $ 659 Agency CMBS 41.0% 6.0% Agency CMBS 2,184 Non-Agency RMBS Non-Agency RMBS 150 6.0% Non-Agency CMBS Non-Agency CMBS 332 3.0% Residential Whole-Loans 296 Residential Whole- Loans Residential Bridge Loans(14) 160 Securitized Commercial Loans(2) 1,383 Residential Bridge Loans Other Investments(10) 172 Total $ 5,336 26.0% Securitized 12.0% Commercial Loans 3.0% Other Investments Select Sector Categories Agency RMBS Non-Agency RMBS, Whole-loans & Agency & Non-Agency CMBS CRT Securities 54.0% 86.8% 42.0% 22.6% 14.2% 5.8% 34.5% 6.7% 4.8% 21.2% 4.4% 3.0% Non-Agency RMBS Residential Whole Loans Agency CMBS Legacy CMBS Low-Loan Balance Modified (18) Lower Loan Balance(17) Residential Bridge Loans CRT Securities MHA/HARP High LTV Other(16) New-Issuance CMBS CRE Mezz (10) Please refer to page 15 for footnote disclosures. 8


 
Financing Summary ▪ Master repurchase agreements with 28 counterparties. ▪ Outstanding borrowings with 17 counterparties. ▪ Capacity in excess of our current needs. Portfolio Financing March 31, 2018 ($ in thousands) Weighted Average Weighted Average Outstanding Interest Rate Interest Remaining Days to Repurchase Agreements Amounts Rate Maturity Agency RMBS $ 630,980 1.92% 65 Agency CMBS 2,073,029 1.81% 56 Non-Agency RMBS 104,580 3.19% 28 Non-Agency CMBS 252,121 3.42% 57 Residential Whole-Loans 234,675 4.13% 30 Residential Bridge Loans 151,555 4.40% 59 Securitized Commercial Loan 7,631 3.72% 26 Commercial Loans 12,321 4.61% 73 Other Securities (12) 90,028 3.42% 34 Total/Wtd Avg $ 3,556,920 2.31% 55 9 Please refer to page 15 for footnote disclosures.


 
(13) Hedging Summary Fixed Pay Interest Rate Swaps ($ in millions – as of March 31, 2018) Avg. Fixed Pay Avg. Floating Average Maturity Maturity Notional Amount Rate Receive Rate (Years) Forward Starting 1 Year to 3 Years 600.0 1.6% 2.0% 1.6 —% 3 Years to 5 Years 850.0 2.0% 1.8% 4.1 —% >5 Years 1,757.3 2.5% 1.8% 10.2 88.3% Total Fixed Pay Rate $ 3,207.3 2.2% 1.8% 7.0 48.4% Our interest rate swaps are comprised of: ▪ $1.6 billion notional value of pay-fixed interest rate swaps, and ▪ Forward starting swap of $1.6 billion (approximately 1.0 month forward), which has a maturity of April 27, 2028. 10 Please refer to page 15 for footnote disclosures.


 
Duration as of March 31, 2018 Agency Holdings Key Rate Duration Contribution Total 6-months 2-Year 5-Year 10-Year 20-Year 30-Year Agency RMBS 0.94 0.02 0.08 0.2 0.34 0.23 0.07 Agency CMBS 4.01 0.01 0.05 0.85 3.02 0.08 — Swaps and Futures (5.29) — (1.08) (0.47) (3.56) (0.18) — Total (0.34) 0.03 (0.95) 0.58 (0.2) 0.13 0.07 ▪ Net Duration of the Agency RMBS and Agency CMBS portfolio: (0.34) years. 11 Please refer to page 15 for footnote disclosures.


 
2018 Macroeconomic Outlook Base case is for steady economic growth, where spread sectors are likely to outperform. ▪ U.S. growth and inflation may rise with fiscal stimulus. ▪ Central banks are very cautiously signaling their path to normalization. ▪ Spread sectors should outperform but margins are thin for some sectors. ▪ Consumer and housing fundamentals remain at historically attractive levels. ▪ We expect elevated volatility in the near-term due to U.S. policy uncertainties and global political developments. ▪ Global economies are expected to continue to experience improving growth from subdued levels. 12


 
Portfolio View Credit sensitive mortgage sectors have performed relatively well and are expected to continue to offer attractive returns. We expect to increase credit sensitive mortgages. We remain constructive on Agency commercial spreads and look to further reduce Agency RMBS exposure. ▪ Residential Whole-loans continue to perform in-line with our expectations. * We expect to continue to increase our holdings of bridge residential and commercial loans as opportunities arise. ▪ Commercial mezzanine loan opportunities continue to offer attractive risk-reward opportunities. ▪ Agency CMBS offers more attractive relative value than Agency RMBS. ▪ Securitized prime jumbo mortgages offer attractive value as convexity is priced in. 13


 
Target Investment Opportunities ▪ Strategic partnerships with seasoned originators. ▪ Short-term non owner occupied single or multi-unit residences. ▪ Attractive unlevered net yield of 7-8%. Residential Bridge Loans ▪ Average loan sizes approximately $250,000. ▪ Target loan to value of 85% based on "as is" appraised value. • Single asset single borrower commercial loans. ▪ Invest in deals where our manager has an opportunity to negotiate deal Commercial Real Estate structure and covenants. ▪ Attractive yields of Libor plus 600-900 bps. Mezzanine ▪ Target floating rate assets and short term deals. ▪ Multifamily residential loans guaranteed by Fannie Mae and Freddie Mac. ▪ Outstanding balance of more than $400 billion with annual issuance in excess Agency CMBS of $40 billion. ▪ Prepayment protection in the form of defeasance, yield maintenance or points. ▪ Interest only securities receive the prepayment penalties. ▪ Principal bearing bonds have soft bullets and tight windows for principal payment. 14


 
Footnotes (1) As of March 31, 2018 (2) 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 million securitized commercial loan and $1.3 billion of securitized debt. (3) Economic return, for any period, is calculated by taking the sum of (i) the total dividends declared and (ii) the change in net book value during the period and dividing by the beginning book value. (4) Core earnings is a non-GAAP measures which includes the cost of interest rate swaps, interest income on IOs and IIOs classified as derivatives, net interest income on foreign currency swaps and total return swaps. Drop income is income derived from the use of ‘to-be-announced’ forward contract (“TBA”) dollar roll transactions which is a component of our gain (loss) on derivative instruments on our consolidated statement of operations, but is not included in core earnings. Drop income was approximately $978 thousand for the three months ended March 31, 2018. (5) Non-GAAP measure which includes net interest margin (as defined in footnote 6), realized and unrealized gains or losses in the portfolio and other than temporary impairment. (6) Non-GAAP measures which include interest income, interest expense, the cost of interest rate swaps and interest income on IOs and IIOs classified as derivatives, foreign currency swaps and total return swap, and are weighted averages for the quarter ended March 31, 2018. (7) Convertible senior notes interest expense has been allocated based on deployment of proceeds during the quarter ended March 31, 2018. (8) Net interest rate swaps interest expense have been allocated based on average duration contribution. (9) Includes other than temporary impairment on IO's and IIO's accounted for as derivatives. (10) Other investments include ABS, GSE Credit Risk Transfer securities and securitized commercial loans. (11) Portfolio income attribution uses total income defined as the sum of net interest income, realized gain, unrealized gain and other than temporary impairment. (12) Other investments includes ABS, GSE Credit Risk Transfer securities and commercial loans. (13) While we use hedging strategies as part of our overall portfolio management, these strategies are not designed to eliminate all risks in the portfolio. There can be no assurance as to the level or effectiveness of these strategies. (14) The bridge loans acquired prior to October 25, 2017 are carried at amortized costs, since we did not elect the fair value option for these loans. For the bridge loans acquired subsequent to October, 25, 2017, we elected the fair value option to be consistent with the accounting of other investments. Accordingly, the carrying amount of the bridge loans as of March 31, 2018 includes $129.5 million of residential bridge loans carried at fair value and $30.2 million of residential bridge loans carried at amortized costs. (15) Gain (loss) on derivative instruments, net (excluding cost of hedging) has been allocated based average duration contribution. (16) Other includes investor loans and low-FICO loans. (17) Lower loan balance pools generally consist of loans below $150,000. (18) Represents loans that have been modified to have 40-year maturities, with balance below $175,000. (19) The portfolio income attribution for securitized commercial loan is presented on an unconsolidated basis. 15


 
Supplemental Information


 
Book Value Roll Forward Book value increased by 2.0% during the first quarter. This is the fifth consecutive quarter of book value appreciation. Amounts in 000's Per Share Book Value at December 31, 2017 $ 466,038 $ 11.15 Repurchase of common stock (1,107) N/A Common dividend (12,921) (0.31) 452,010 10.84 Portfolio Income Net interest margin (6) 18,251 0.44 Net realized gain on investments and derivatives 79,674 1.92 Unrealized gain on investments and derivatives (67,619) (1.62) Other than temporary impairment (9) (2,949) (0.07) Net portfolio income 27,357 0.67 Operating expenses (3,149) (0.08) General and administrative expenses, excluding equity based compensation (2,091) (0.05) Provision for taxes (313) (0.01) Book Value March 31, 2018 $ 473,814 $ 11.37 16 Please refer to page 15 for footnote disclosures.


 
Portfolio Composition as of March 31, 2018 Agency Portfolio ($ in millions) Principal Balance Amortized Costs Fair Value Net Weighted Average Coupon Agency CMBS $ 2,221.6 $ 2,225.5 $ 2,178.7 2.9% Agency CMBS IOs and IIOs N/A — 5.1 0.5% Agency RMBS 20-Year, 30-Year and 40-Year 619.3 647.8 634.1 3.9% Agency RMBS IOs and IIOs N/A 14.6 25.0 2.7% Total $ 2,841.0 $ 2,887.9 $ 2,842.9 3.0% Agency RMBS 40-Year mortgage 1.8% Agency RMBS 30-Year mortgage 8.0% Agency CMBS 76.6% Agency RMBS 20-Year mortgage 12.5% Agency RMBS IO & IIO 0.9% Agency CMBS IO & IIO 0.2% 17


 
Portfolio Composition as of March 31, 2018 (Continued) Credit Sensitive Portfolio ($ in millions) Principal Balance Amortized Costs Fair Value Net Weighted Average Coupon Non-Agency RMBS $ 166.0 $ 145.0 $ 149.8 1.0% Non-Agency CMBS 428.7 343.2 331.7 5.1% Residential Whole Loans 291.2 293.2 296.7 4.7% Residential Bridge Loans 158.8 159.2 159.4 9.1% Securitized Commercial Loans 1,374.7 1,377.8 1,383.0 5.0% Commercial Loans 40.6 40.4 40.5 7.5% Other Securities 103.9 118.3 131.6 7.9% $ 2,563.9 $ 2,477.1 $ 2,492.7 4.1% Commercial Loan: 1.6% Other Securities: 5.3% Non-Agency RMBS: 6.0% Securitized Commercial Loans: 55.5% Non-Agency CMBS: 13.3% Residential Whole Loans: 11.9% Residential Bridge Loans: 6.4% 18


 
Portfolio Composition as of March 31, 2018 (Continued) Adjusted Credit Sensitive Portfolio * ($ in millions) Principal Balance Amortized Costs Fair Value Net Weighted Average Coupon Non-Agency RMBS $ 166.0 $ 145.0 $ 149.8 1.0% Non-Agency CMBS 496.5 411.0 331.8 5.9% Residential Whole Loans 291.2 293.2 296.7 4.7% Residential Bridge Loans 158.8 159.2 159.4 9.1% Securitized Commercial Loan 24.7 24.7 24.8 9.0% Commercial Loans 40.6 40.4 40.5 7.5% Other Securities 103.9 118.3 131.6 7.9% $ 1,281.7 $ 1,191.8 $ 1,134.6 3.8% Commercial Loans: 3.6% Securitized Commercial Loan: 2.2% Other Securities: 11.6% Residential Bridge Loans: 14.0% Non-Agency RMBS: 13.2% Residential Whole Loans: 26.2% Non-Agency CMBS: 29.2% * 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 million securitized commercial loan and $1.3 billion of securitized debt. The above table reflects the credit sensitive portfolio excluding the securitized commercial loan of the consolidated variable interest entity. 18


 
WMC Returns as of March 31, 2018 Economic Return(1) Total Stock Return(2) 3 Years 5/5/12 to 3 Years 5/5/12 to QTD Ended 3/31/2018 QTD Ended 3/31/2018 4.8% 10.8% 34.9% 0.5% (4.2)% 26.5% (1) Economic return is calculated by taking the sum of: (i) the total dividends declared; and (ii) the change in book value during the period and dividing by the beginning book value. (2) Total Stock return is calculated by taking the sum of: (i) the total dividends declared; and (ii) the change in stock price during the period and dividing by the beginning stock price. 20


 
Contact Information 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