EX-99.1 2 wmcq4fy18ex991.htm EXHIBIT 99.1 Exhibit


Exhibit 99.1
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WESTERN ASSET MORTGAGE CAPITAL CORPORATION
ANNOUNCES FOURTH QUARTER AND FULL YEAR 2018 RESULTS
 
Conference Call and Webcast Scheduled for Tomorrow, Wednesday, March 6, 2019 at
11:00 a.m. Eastern Time/8:00 a.m. Pacific Time
 
Pasadena, CA, March 5, 2019 – Western Asset Mortgage Capital Corporation (the “Company” or "WMC") (NYSE: WMC) today reported its results for the fourth quarter and the year ended December 31, 2018.
 
FOURTH QUARTER 2018 HIGHLIGHTS

▪
December 31, 2018 book value per share of $10.45, net of fourth quarter common dividend of $0.31 per share declared on December 19, 2018.
▪
GAAP net loss of $17.7 million, or $0.37 per basic and diluted share.
▪
Core earnings plus drop income of $16.2 million, or $0.34 per basic and diluted share.1,2  
▪
Economic return on book value was a negative 3.3%1,3 for the quarter.
▪
2.25% annualized net interest margin on our investment portfolio. 1,4,5 
▪
5.8x leverage excluding securitized debt as of December 31, 2018 (7.7x with securitized debt).

OTHER FOURTH QUARTER 2018 HIGHLIGHTS

▪
Acquired $521.9 million in credit sensitive investments, consisting of:
*
$387.5 million in Residential Whole Loans,
*
$71.3 million in Commercial Whole Loans, and
*
$63.1 million in Residential Bridge Loans.

 FULL YEAR 2018 HIGHLIGHTS

▪
Maintained a consistent $0.31 per share quarterly common dividend throughout 2018 for total annual common dividends of $1.24 per share.
▪
GAAP net income of $26.4 million, or $0.61 per basic and diluted share.
▪
Core earnings plus drop income of $59.4 million, or $1.36 per basic and diluted share.1,2  
▪
Economic return on book value was 4.8%1,3 for the year.
▪
2.08% annualized net interest margin. 1,4,5 
▪
$67.7 million of common equity raised, net of offering cost.


                                                                                                                                                                                                                                                                                            
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 $273 thousand and $2.7 million for the three months and the year ended December 31, 2018, respectively.
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


“2018 was another positive year for WMC, despite a backdrop of year-end equity market volatility that spilled into the fixed income markets and pressured all spread sectors,” said Jennifer Murphy, Chief Executive Officer of the Company. “Notwithstanding the challenging conditions, we generated core earnings plus drop income of $0.34 per share for the fourth quarter and $1.36 for the year, more than covering our dividends, which have been consistent at $0.31 per share for the last eleven quarters.”
“The generally wider spreads on our investments in the fourth quarter translated into a negative economic return on book value of 3.3% for the quarter,” Murphy continued. “However, our diversified portfolio and differentiated investment strategy enabled us to generate a positive economic return on book value of approximately 4.8% for the full year, which put us at the high end of the range of our mortgage REIT peers. In addition, the overall market sentiment for risk assets turned positive in the first two months of 2019, and as a result, we have experienced a partial recovery in our book value.”
Sean Johnson, Interim Co-Chief Investment Officer of the Company, commented, “Our strong core earnings and positive performance for 2018 were driven by contributions across our diverse holdings in a number of subsectors of the mortgage market and reflects our ongoing shift out of Agency RMBS investments into credit sensitive investments and Agency CMBS. During the year, we acquired $2.7 billion of target assets, including $1.8 billion of credit sensitive investments, particularly in Residential Whole and Bridge Loans, and Commercial Whole Loans, all where we saw opportunities to achieve attractive risk-adjusted returns.”
“Our current expectations are for continued, yet moderate, U.S. economic growth along with subdued inflation expectations and a more neutral Federal Reserve monetary policy. We remain constructive on both residential and commercial real estate. The U.S. housing market is entering a more normalized phase as home price appreciation is expected to remain modest. Commercial real estate fundamentals generally continue to be positive, driven by an ongoing economic expansion and job growth. As such, we believe that our strategy of holding a diverse investment portfolio, with an emphasis on credit sensitive investments, and our focus on risk management, positions us well to continue generating strong core earnings while preserving our book value, with the overriding goal of providing our shareholders favorable risk-adjusted returns,” concluded Mr. Johnson.











2

2018 Quarterly Results
 
The below table reflects a summary of our operating results (dollars in thousands, except per share data):
 
 
 
For the Three Months Ended
GAAP Results
 
December 31, 2018
 
September 30, 2018
 
June 30, 2018
 
March 31, 2018
 
 
 
 
 
 
 
 
 
Net Interest Income
 
$
17,128

 
$
15,944

 
$
19,020

 
$
19,030

Other Income (Loss):
 
 

 
 

 
 
 
 
Realized gain (loss) on sale of investments, net
 
(33,995
)
 
(24,229
)
 
(5,608
)
 
575

Other than temporary impairment
 
(2,757
)
 
(2,533
)
 
(2,974
)
 
(2,916
)
Unrealized gain (loss), net
 
62,855

 
13,128

 
(31,693
)
 
(68,961
)
Gain (loss) on derivative instruments, net
 
(54,728
)
 
24,625

 
28,490

 
79,582

Other, net
 
(89
)
 
(2
)
 
(145
)
 
47

Other Income (loss)
 
(28,714
)
 
10,989

 
(11,930
)
 
8,327

Total Expenses
 
5,915

 
5,845

 
5,601

 
5,315

Income (loss) before income taxes
 
(17,501
)
 
21,088

 
1,489

 
22,042

Income tax provision (benefit)
 
154

 
206

 
36

 
313

Net income (loss)
 
$
(17,655
)
 
$
20,882

 
$
1,453

 
$
21,729

 
 
 
 
 
 
 
 
 
Net income (loss) per Common Share – Basic/Diluted
 
$
(0.37
)
 
$
0.50

 
$
0.03

 
$
0.52

Non-GAAP Results
 
 

 
 

 
 
 
 
Core earnings plus drop income(1)
 
$
16,222

 
$
13,837

 
$
15,155

 
$
14,149

Core earnings plus drop income per Common Share – Basic/Diluted
 
$
0.34

 
$
0.33

 
$
0.36

 
$
0.34

Weighted average yield(2)(4)
 
4.71
%
 
4.53
%
 
4.36
%
 
4.14
%
Effective cost of funds(3)(4)
 
2.84
%
 
2.78
%
 
2.58
%
 
2.44
%
Annualized net interest margin(2)(3)(4)
 
2.25
%
 
2.06
%
 
2.05
%
 
1.94
%
 
(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.
(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 December 31, 2018, the Company owned an aggregate investment portfolio with a fair market value totaling $4.3 billion. The following tables sets forth additional information regarding the Company’s investment portfolio as of December 31, 2018:
 
Portfolio Characteristics

Agency Portfolio

The following table summarizes certain characteristics of our Agency portfolio by investment category as of December 31, 2018 (dollars in thousands): 
 
Principal Balance
 
Amortized Cost
 
Fair Value
 
Net Weighted Average Coupon
Agency CMBS
$
1,493,675

 
$
1,499,495

 
$
1,481,984

 
3.3
%
Agency CMBS Interest-Only Strips, accounted for as derivatives
N/A

 
N/A

 
4,158

 
0.4
%
Agency CMBS
1,493,675

 
1,499,495

 
1,486,142

 
3.0
%
 
 
 
 
 
 
 
 
Agency RMBS Interest-Only Strips
N/A

 
11,480

 
12,135

 
2.2
%
Agency RMBS Interest-Only Strips, accounted for as derivatives
N/A

 
N/A

 
7,702

 
2.9
%
Total Agency RMBS
—

 
11,480

 
19,837

 
2.5
%
Total
$
1,493,675

 
$
1,510,975

 
$
1,505,979

 
2.9
%
 

Credit Sensitive Portfolio

The following table summarizes certain characteristics of our credit sensitive portfolio by investment category as of December 31, 2018 (dollars in thousands): 

 
Principal Balance
 
Amortized Cost
 
Fair Value
 
 Weighted Average Coupon(1)
Non-Agency RMBS
$
54,887

 
$
38,065

 
$
39,026

 
4.8
%
Non-Agency RMBS IOs and IIOs
N/A

 
11,154

 
11,529

 
0.6
%
Non-Agency CMBS
240,431

 
197,925

 
200,301

 
5.9
%
Residential Whole Loans
1,023,524

 
1,038,008

 
1,041,885

 
5.1
%
Residential Bridge Loans
222,257

 
223,059

 
221,602

 
9.1
%
Securitized Commercial Loans(1)  
1,013,065

 
1,013,496

 
1,013,511

 
5.8
%
Commercial Loans
216,432

 
215,491

 
216,123

 
7.6
%
Other Securities
47,042

 
55,284

 
59,906

 
9.0
%
 
$
2,817,638

 
$
2,792,482

 
$
2,803,883

 
5.1
%

(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 December 31, 2018, the fair value of the securitized loan was $989.1 million and the securitized debt was $938.9 million after principal paydown.  


4

Portfolio Financing and Hedging
 
Financing Activity

Repurchase Agreements
 
As of December 31, 2018, the Company had $2.8 billion of borrowings under 15 of our 29 master repurchase agreements with maturities of twelve months or less. The following table sets forth additional information regarding the Company’s portfolio financing under the master repurchase agreements as of December 31, 2018 (dollars in thousands):
 
Repurchase Agreements
 
Balance
 
Weighted Average Interest Rate (end of period)
 
Weighted Average Remaining Maturity (days)
Agency RMBS
 
$
14,650

 
3.09
%
 
21
Agency CMBS
 
1,392,649

 
2.71
%
 
40
Non-Agency RMBS
 
30,922

 
4.06
%
 
18
Non-Agency CMBS
 
134,814

 
4.05
%
 
48
Residential Whole Loans
 
863,356

 
4.08
%
 
93
Residential Bridge Loans
 
204,754

 
4.50
%
 
25
Commercial Loans
 
131,788

 
4.55
%
 
26
Securitized commercial loans
 
7,543

 
4.30
%
 
15
Other Securities
 
38,361

 
4.18
%
 
26
Total
 
$
2,818,837

 
3.45
%
 
54
 
Convertible Senior Unsecured Notes

At December 31, 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.

Hedging
 
As of December 31, 2018, the Company had $3.1 billion notional value of pay-fixed interest rate swaps, which have variable maturities between June 14, 2019 and April 27, 2037. The following table summarizes the average fixed pay rate, average floating receive rate and average maturity for the Company’s fixed pay interest rate swaps as of December 31, 2018 (dollars in thousands):
  
Remaining Interest Rate Swap Term
 
Notional Value
 
Average
Fixed Pay
Rate
 
Average Floating Receive Rate
 
Average
Maturity
(Years)
1 year or less
 
$
400,000

 
1.5
%
 
2.8
%
 
0.5
Greater than 1 year and less than 3 years
 
200,000

 
1.8
%
 
2.6
%
 
1.4
Greater than 3 years and less than 5 years
 
1,104,700

 
2.3
%
 
2.5
%
 
3.8
Greater than 5 years
 
1,423,100

 
2.5
%
 
2.5
%
 
9.9
Total
 
$
3,127,800

 
2.3
%
 
2.6
%
 
6.0

5


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 December 31, 2018 (dollars in thousands):

Remaining Interest Rate Swap Term
 
Notional Amount

 
Average 
Variable Pay Rate
 
Average Fixed Receive Rate
 
Average Maturity (Years)
Greater than 5 years
 
$
728,400

 
2.5
%
 
2.4
%
 
8.3
Total
 
$
728,400

 
2.5
%
 
2.4
%
 
8.3

Dividend
 
On December 19, 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 $16.54 per share in a combination of cash and stock.
 
Conference Call
 
The Company will host a conference call with a live webcast tomorrow, March 6th, at 11:00 a.m. Eastern Time/8:00 a.m. Pacific Time, to discuss financial results for the fourth quarter and year ended December 31, 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/10128577 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 tomorrow.
 
A telephone replay will be available through March 20, 2019 by dialing (877) 344-7529 from the United States, or (412) 317-0088 from outside the United States, and entering conference ID 10128577. 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, GSE Credit Risk Transfer Securities and Residential Whole, 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

6

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; and legislative and regulatory changes that could adversely affect the business of the Company. 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)
 
 
 
December 31, 2018
 
December 31, 2017
Assets:
 
 

 
 

Cash and cash equivalents
 
$
21,987

 
$
48,024

Restricted cash
 
55,808

 
—

Agency mortgage-backed securities, at fair value ($1,505,979 and $2,833,595 pledged as collateral, at fair value, respectively)
 
1,505,979

 
2,858,600

Non-Agency mortgage-backed securities, at fair value ($237,107 and $266,189 pledged as collateral, at fair value, respectively)
 
250,856

 
378,158

Other securities, at fair value ($59,780 and $89,823 pledged as collateral, at fair value, respectively)
 
59,906

 
122,065

Residential Whole-Loans, at fair value ($1,041,885 and $237,423 pledged as collateral, at fair value, respectively)
 
1,041,885

 
237,423

Residential Bridge Loans ($211,999 and $64,526 at fair value and $221,486 and $106,673 pledged as collateral, respectively)
 
221,719

 
106,673

Securitized commercial loan, at fair value
 
1,013,511

 
24,876

Commercial Loans, at fair value ($196,123 and $0 pledged as collateral, at fair value, respectively)
 
216,123

 
—

Investment related receivable ($0 and $0 pledged as collateral, respectively)
 
42,945

 
7,665

Accrued interest receivable
 
21,959

 
13,603

Due from counterparties
 
39,623

 
86,930

Derivative assets, at fair value
 
2,606

 
728

Other assets
 
2,488

 
2,161

Total Assets (1)
 
$
4,497,395

 
$
3,886,906

Liabilities and Stockholders’ Equity:
 
 

 
 

Liabilities:
 
 

 
 

Borrowings under repurchase agreements, net
 
$
2,818,837

 
$
3,251,686

Convertible senior unsecured notes, net

 
110,060

 
108,743

Securitized debt, at fair value (includes $246,802 and $10,945 held by affiliates, respectively)
 
949,626

 
10,945

Interest payable (includes $816 and $70 on securitized debt held by affiliates, respectively)
 
8,532

 
8,322

Investment related payables
 
—

 
17,217

Due to counterparties
 
17,781

 
1,490

Derivative liability, at fair value
 
10,130

 
4,346

Accounts payable and accrued expenses
 
3,858

 
3,118

Payable to affiliate
 
4,615

 
2,041

Dividend payable
 
14,916

 
12,960

Other liabilities
 
56,031

 
—

Total Liabilities (2)
 
3,994,386

 
3,420,868

Commitments and contingencies
 
 

 
 

Stockholders’ Equity:
 
 

 
 

Common stock, $0.01 par value, 500,000,000 shares authorized, and 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
 
833,810

 
768,763

Retained earnings (accumulated deficit)
 
(331,282
)
 
(301,912
)
Total Stockholders’ Equity
 
503,009

 
466,038

Total Liabilities and Stockholders’ Equity
 
$
4,497,395

 
$
3,886,906


9

 


10

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

 
 

Cash and cash equivalents
 
$
674

 
$
—

Restricted cash
 
55,808

 
—

Residential Whole-Loans, at fair value ($1,041,885 and $237,423 pledged as collateral, at fair value, respectively)
 
1,041,885

 
237,423

Residential Bridge Loans ($211,999 and $64,526 at fair value and $221,486 and $106,673 pledged as collateral, respectively)
 
221,486

 
106,673

Securitized commercial loan, at fair value
 
1,013,511

 
24,876

Commercial Loans, at fair value ($196,123 and $0 pledged as collateral, at fair value, respectively)
 
196,123

 
—

Investment related receivable
 
42,945

 
7,665

Accrued interest receivable
 
15,540

 
3,358

Other assets
 
178

 
—

Total assets of consolidated VIEs
 
$
2,588,150

 
$
379,995

(2) Liabilities of consolidated VIEs included in the total liabilities above:
 
 
 
 
Securitized debt, at fair value (includes $246,802 and $10,945 held by affiliates, respectively)
 
$
949,626

 
$
10,945

Interest payable (includes $816 and $70 on securitized debt held by affiliates, respectively)
 
2,419

 
70

Accounts payable and accrued expenses
 
708

 
189

Other liabilities
 
$
56,033

 
$
—

Total liabilities of consolidated VIEs
 
$
1,008,786

 
$
11,204

 



11

Western Asset Mortgage Capital Corporation and Subsidiaries
Consolidated Statements of Operations
(in thousands—except share and per share data)
 
 
 
Three Months Ended(1)
 
The Year Ended
 
 
December 31, 2018
 
September 30, 2018
 
June 30, 2018
 
March 31, 2018
 
December 31, 2018
Net Interest Income
 
 
 
 
 
 
 
 
 
 

Interest income
 
$
58,020

 
$
54,461

 
$
57,154

 
$
39,727

 
$
209,362

Interest expense
 
40,892

 
38,517

 
38,134

 
20,697

 
138,240

Net Interest Income
 
17,128

 
15,944

 
19,020

 
19,030

 
71,122

Other Income (Loss)
 
 
 
 
 
 
 
 
 
 

Realized gain (loss) on sale of investments, net
 
(33,995
)
 
(24,229
)
 
(5,608
)
 
575

 
(63,257
)
Other than temporary impairment
 
(2,757
)
 
(2,533
)
 
(2,974
)
 
(2,916
)
 
(11,180
)
Unrealized gain (loss), net
 
62,855

 
13,128

 
(31,693
)
 
(68,961
)
 
(24,671
)
Gain (loss) on derivative instruments, net
 
(54,728
)
 
24,625

 
28,490

 
79,582

 
77,969

Other, net
 
(89
)
 
(2
)
 
(145
)
 
47

 
(189
)
Other Income (Loss)
 
(28,714
)
 
10,989

 
(11,930
)
 
8,327

 
(21,328
)
Expenses
 
 
 
 
 
 
 
 
 
 

Management fee to affiliate
 
1,950

 
2,284

 
2,259

 
2,180

 
8,673

Other operating expenses
 
1,943

 
1,609

 
1,555

 
969

 
6,076

General and administrative expenses
 
 
 
 
 
 
 
 
 
 
Compensation expense
 
552

 
552

 
572

 
510

 
2,186

Professional fees
 
1,121

 
1,065

 
818

 
1,295

 
4,299

Other general and administrative expenses
 
349

 
335

 
397

 
361

 
1,442

Total general and administrative expenses
 
2,022

 
1,952

 
1,787

 
2,166

 
7,927

Total Expenses
 
5,915

 
5,845

 
5,601

 
5,315

 
22,676

Income (loss) before income taxes
 
(17,501
)
 
21,088

 
1,489

 
22,042

 
27,118

Income tax provision (benefit)
 
154

 
206

 
36

 
313

 
709

Net income (loss)
 
$
(17,655
)
 
$
20,882

 
$
1,453

 
$
21,729

 
$
26,409

Net income (loss) per Common Share – Basic
 
$
(0.37
)
 
$
0.50

 
$
0.03

 
$
0.52

 
$
0.61

Net income (loss) per Common Share – Diluted
 
$
(0.37
)
 
$
0.50

 
$
0.03

 
$
0.52

 
$
0.61

Dividends Declared per Share of Common Stock
 
$
0.31

 
$
0.31

 
$
0.31

 
$
0.31

 
$
1.24


(1) Consolidated Statements of Operations for each of the three months ended March 31, 2018, June 30, 2018 September 30, 2018 and December 31, 2018 are unaudited.


12


Reconciliation of GAAP Net Income to Non-GAAP Core Earnings
(Unaudited)
(in thousands—except share and per share data)
 
The table below reconciles Net Income (Loss) to Core Earnings for each of the three months ended March 31, 2018, June 30, 2018, September 30, 2018 and December 31, 2018 and the year ended December 31, 2018:
 
 
Three Months Ended
 
The Year Ended
(dollars in thousands)
 
December 31, 2018
 
September 30, 2018
 
June 30, 2018
 
March 31, 2018
 
December 31, 2018
Net Income (loss) – GAAP
 
$
(17,655
)
 
$
20,882

 
$
1,453

 
$
21,729

 
$
26,409

Income tax provision
 
154

 
206

 
36

 
313

 
709

Net income (loss) before income tax
 
(17,501
)
 
21,088

 
1,489

 
22,042

 
27,118

 
 
 
 
 
 
 
 
 
 
 
Adjustments:
 
 

 
 

 
 

 
 

 
 
Investments:
 
 

 
 

 
 

 
 

 
 
Unrealized (gain) loss on investments, securitized debt and other liabilities
 
(62,855
)
 
(13,128
)
 
31,693

 
68,961

 
24,671

Other than temporary impairment
 
2,757

 
2,533

 
2,974

 
2,916

 
11,180

Realized (gain) loss on sale of investments
 
33,995

 
24,229

 
5,608

 
(575
)
 
63,257

One-time transaction costs
 
298

 
310

 
163

 
41

 
812

 
 
 
 
 
 
 
 
 
 
 
Derivative Instruments:
 
 

 
 

 
 

 
 

 
 
Net realized (gain) loss on derivatives
 
50,126

 
(29,569
)
 
(22,973
)
 
(79,118
)
 
(81,534
)
Unrealized (gain) loss on derivatives
 
8,921

 
7,036

 
(4,268
)
 
(1,308
)
 
10,381

 
 
 
 
 
 
 
 
 
 
 
Amortization of discount on convertible senior note

 
138

 
137

 
138

 
137

 
550

Non-cash stock-based compensation expense
 
70

 
70

 
50

 
75

 
265

Total adjustments
 
33,450

 
(8,382
)
 
13,385

 
(8,871
)
 
29,582

Core Earnings – Non-GAAP
 
$
15,949

 
$
12,706

 
$
14,874

 
$
13,171

 
$
56,700

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

 
$
0.30

 
$
0.35

 
$
0.32

 
$
1.30

Basic and Diluted Core Earnings plus Drop Income per Common Share and Participating Securities
 
$
0.34

 
$
0.33

 
$
0.36

 
$
0.34

 
$
1.36

Basic weighted average common shares and participating securities
 
48,228,236

 
42,168,806

 
41,707,291

 
41,844,798

 
43,496,387

Diluted weighted average common shares and participating securities
 
48,228,236

 
42,168,806

 
41,707,291

 
41,844,798

 
43,496,387



13

Reconciliation of Interest Income and Effective Cost of Funds
(Unaudited, in thousands)
 
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 December 31, 2018, September 30, 2018, June 30, 2018 and March 31, 2018:

 
 
 
Three Months Ended
 
The Year Ended
(dollars in thousands)
 
December 31, 2018
 
September 30, 2018
 
June 30, 2018
 
March 31, 2018
 
December 31, 2018
Coupon interest income
 
$
62,225

 
$
59,045

 
$
60,043

 
$
40,557

 
$
221,870

Premium amortization, discount accretion and amortization of basis, net
 
(4,205
)
 
(4,584
)
 
(2,889
)
 
(830
)
 
(12,508
)
Interest income
 
$
58,020

 
$
54,461

 
$
57,154

 
$
39,727

 
$
209,362

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

 
 

 
 

 
 

 
 
Coupon interest income
 
869

 
1,209

 
1,011

 
1,422

 
4,511

Amortization of basis (Non-GAAP Financial Measure)
 
(691
)
 
(996
)
 
(783
)
 
(1,191
)
 
(3,661
)
Subtotal
 
178

 
213

 
228

 
231

 
850

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
 
$
58,198

 
$
54,674

 
$
57,382

 
$
39,958

 
$
210,212

 
(1)                Reported in gain (loss) on derivative instruments in the Consolidated Statement of Operations.
 
The following table reconciles the Effective Cost of Funds (Non-GAAP financial measure) with interest expense for each of the three months ended December 31, 2018, September 30, 2018, June 30, 2018 and March 31, 2018:
 
 
 
Three Months Ended
 
 
December 31, 2018
 
September 30, 2018
 
June 30, 2018
 
March 31, 2018
 (dollars in thousands)
 
Interest
 
Effective
Borrowing
Costs
 
Interest
 
Effective
Borrowing
Costs
 
Interest
 
Effective
Borrowing
Costs
 
Interest
 
Effective
Borrowing
Costs
Interest expense
 
$
40,892

 
3.76
 %
 
$
38,517

 
3.50
 %
 
$
38,134

 
3.20
 %
 
$
20,697

 
2.38
 %
Adjustments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense on Securitized debt from consolidated VIEs
 
(13,065
)
 
(5.17
)%
 
(13,975
)
 
(4.85
)%
 
(14,340
)
 
(4.62
)%
 
(1,060
)
 
(5.23
)%
Net interest (received) paid - interest rate swaps
 
(4,208
)
 
(0.39
)%
 
(1,962
)
 
(0.18
)%
 
(1,044
)
 
(0.09
)%
 
1,056

 
0.12
 %
Effective Borrowing Costs
 
$
23,619

 
2.84
 %
 
$
22,580

 
2.78
 %
 
$
22,750

 
2.58
 %
 
$
20,693

 
2.44
 %
Weighted average borrowings
 
$
3,304,271

 
 

 
$
3,224,915

 
 

 
$
3,535,268

 
 

 
$
3,444,171

 
 














14


The following table reconciles the Effective Cost of Funds (Non-GAAP financial measure) with interest expense for the years ended December 31, 2018 and 2017:
 
 
The Year Ended
 
 
December 31, 2018
 
December 31, 2017
 (dollars in thousands)
 
Interest
 
Effective
Borrowing
Costs
 
Interest
 
Effective
Borrowing
Costs
Interest expense
 
$
138,240

 
3.19
 %
 
$
48,373

 
1.94
 %
Adjustments:
 
 
 
 
 
 
 
 
Interest expense on Securitized debt from consolidated VIEs
 
(42,440
)
 
(4.43
)%
 
(981
)
 
(8.93
)%
Net interest (received) paid - interest rate swaps
 
(6,158
)
 
(0.14
)%
 
14,082

 
0.51
 %
Effective Borrowing Costs
 
$
89,642

 
2.65
 %
 
$
61,474

 
2.18
 %
Weighted average borrowings
 
$
3,376,557

 
 

 
$
2,821,942

 
 



15