Western Asset Mortgage Capital Corporation
Q1 2021 Earnings Call Transcript

Published: 6 May 2021

[Operator:]

Hello and welcome to welcome to the Western Asset Mortgage Capital Corporation's First Quarter 2021 Earnings Conference Call. Today's call is being recorded and will be available for replay beginning at 5

[Larry Clark:]

Thank you, Keith. I want to thank everyone for joining us today to discuss Western Asset Mortgage Capital Corporation's financial results for the first quarter of 2021.

[Jennifer Murphy:]

Thanks, Clark and thank you all for joining us today. We got a good start to 2021 as our positive momentum continued in the first quarter. The actions we've taken dispensing the balance sheet and protect our portfolio have enabled our shareholders to further benefit from the ongoing mortgage market recovery. WMC delivered an economic return on book value of 3.1%, mainly driven by higher valuations of our residential mortgages and securitized commercial loans. We recorded GAAP net income of $8 million or $0.13 per share and core earnings of $0.10. Our GAAP book value increased 1.7% during the quarter to $4.27 per share, and has increased by 36% since June 30, 2020 which reflects a partial recovery in the value we see in our portfolio. In March, we declared a cash dividend of $0.06 per share for the first quarter in line with the previous quarter. We remain committed to paying a sustainable and attractive dividend. We’ve set the dividend each quarter taking into consideration our view of the long term core earnings power of the portfolio, the company's liquidity needs and other factors.

[Sean Johnson:]

Thank you, Jennifer. In the first quarter of 2021, the US economic recovery continued, as more people were vaccinated, and businesses were to fully reopen. Equity and credit markets continue to improve albeit a slower pace than in the second half of 2020. This translated into higher valuations in a number of our portfolio holdings and improvements in our book value. Our Residential Home Loan portfolio continued to experience appreciation, benefiting from a strong housing market. You'll buy historically low mortgage rates and very tight supply and favorable consumer sentiment. First Quarter national home price indices again rose at double-digit annual rates. The residential credit market continues to improve as a result of lower delinquency and forbearance metrics for non-agency mortgages. Our residential loans continue to perform well and the percentage of loans that were part of a forbearance plan declined, dropping to 3.4% at quarter end from 6% at year end and a higher 19% in May of last year. Nearly all the loans in forbearance are now in their repayment period. And those that aren't represent about 1.5 of 1% of the total residential portfolio.

[Greg Handler:]

Thank you, Sean. While our residential loan has recovered in value, a number of our commercial real estate holdings have yet to experience a similar recovery. In general, commercial real estate continues to lag the residential market, as many property types are still impacted by the pandemic and performing its suboptimal level due to ongoing restriction and reduce demand. While the outlook has improved, there still is uncertainty around the timing and the extent of the recovery in the performance of these properties. Within non-agency, commercial mortgage backed securities, our holdings continue to be weighed down by concerns, regarding the future performance of the underlying property. A large loan credit portfolio consists mainly of Class A retail, hotel and office building. A number of these properties have seen their cash flows adversely impacted during COVID by lower occupancy and other operating metrics, and their recoveries have yet to materialize. This portion of our portfolio had an approximate 66% original loan to value and all but one of these loans remains current, representing less than 2% of our holdings in this bucket. These properties are generally high quality assets with strong equity sponsors. So we believe that their collateral values have not been materially or permanently impaired. In our commercial mortgage-backed conduit exposure, delinquency trends are improving as some loans have become current through a mix of improved cash flow and equity infusion. We continue to believe that these near-term challenges will eventually be overcome as COVID restrictions are lifted and the economy moves towards a full reopen.

[Lisa Meyer:]

Thanks. Thank you, Greg. Before I review our first quarter results, I want to discuss further improvements, we have proactively made on our financing arrangements to improve our balance sheet. Since the onset of the pandemic, WMC has benefited from the broader Western asset platform, which has facilitated our ability to work with our strategic financing partners to improve liquidity and reduce our exposure to short term daily mark-to-market financing. From its high level at 9.5 times at the end of March 2020, our recourse leverage has declined to 2 times at the end of the quarter, also significantly lower than 5.4 times at December 31, 2019. Just this week, we amended our primary securities repurchase facility, which finances most of our Non-Agency CMBS and RMBS assets. The term of the facility was extended by one year. We obtained improved advance rates and secured more attractive pricing, significantly lowering our borrowing costs from LIBOR plus 500, to LIBOR plus 200. At March 31, we had outstanding borrowings on this facility of $93.9 million, secured by assets with a fair value of $199.4 million. Additionally, we recently amended our Commercial Whole Loan Facility, converting it from a facility that automatically rolled every 30 days to now having a one year maturity. At March 31, we had outstanding borrowings of the earnest facility of $119.2 million, secured by commercial loans with a fair value of $243.5 million. During the first quarter, we further reduced our recourse debt by repurchasing an additional $6.7 million in principal amounts of our convertible senior notes at an average 6.3% discount to par value. At March 31, the outstanding balance about convertible notes was $168.3 million, down from $205 million at December 31, 2019. Moving to earnings, we have provided great detail regarding our portfolio and our first quarter results in both our press release and our investor presentation. So I'm only going to focus on items that warrant some additional explanation. We reported core earnings of $6.1 million or $0.10 per share for the first quarter. Our core earnings more than covered our first quarter dividend of $0.06 per share. We evaluate the level of the dividend every quarter, based on a number of factors, including our outlook for the sustainable earnings power of the portfolio. GAAP book value for the quarter increased by 1.7%, mainly driven by the overall improved valuation of our residential mortgages, which fully offset the significantly lower valuations on two Non-Agency CMBS bonds.

[Operator:]

Yes. Thank you. We will now begin the question-and-answer session. And the first question comes from Trevor Cranston with JMP Securities.

[Trevor Cranston:]

Hey, thanks. Good morning. And thank you for the update on the status of the properties in the CRE loan portfolio. That was very helpful. I guess, when I look at the portfolio, I was focused on slide 9, where you share the CMBS investments, which obviously are still under fair value, which is a pretty big discount in it. So I was wondering if you could maybe talk a little bit more about that. And as you guys run credit analysis on that portfolio, is there like a projected loss level? You see embedded within that and basically trying to size how much of that discount you think is ultimately likely to be recoverable within the CMBS investments? Thanks.

[Greg Handler:]

Thanks Trevor. Yeah, in terms of the unrealized loss, we would assume that is on the upper end of what is recoverable. I would say, in the first quarter, some of the challenges that we face in the commercial mortgage-backed security portfolio were related to near-term maturity, which the market is still very negative on the outlook. However, we typically do have the control rights and security, so we have the ability to effectuate loan workout, and we are actively pursuing those opportunities to maximize the value of these properties. So while, I can't give you an exact number, I would say we are actively working to maximize the recovery on the security towards the upper end of that range.

[Trevor Cranston:]

Okay, got it. That's helpful. And then in terms of financing, it sounds like you guys made some nice improvements to the financing agreements you have in place after the end of the first quarter. I was curious as you as you look at your financing profile today, do you see any areas where there's room for further improvements, either in the rate or the structure of the financing that you guys have in place today, or with the improvements you're able to get and then two facilities in the second quarter, do you think the financing side is pretty well squared away at this point?

[Sean Johnson:]

Trevor, its Sean. Yes, I think we do have the opportunity to improve some things on the margin. Those two facilities were the source of a lot of interest expense for us. So, making changes there was extremely important in addition to making them more longer term and reducing our margin call vulnerability. So, there are there are a couple other financing facilities that we think we can improve and we're going to continue to work on that. That's always been a focus, especially this first quarter; we spent a lot of time trying to improve that side of the book. So, there is some marginal opportunity to improve things from here.

[Trevor Cranston:]

Okay, got it. Appreciate the comments. Thank you guys.

[Operator:]

Thank you. All right. And as there is nothing at the present time, this concludes our question-and-answer session. I would like to return the conference back to Jennifer Murphy for any closing comments.

[Jennifer Murphy:]

Great. Thank you all for joining us today and please follow-up with us if you have any additional questions and have a great day.

[Operator:]

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.