Q4 2019 Earnings Call

15 consecutive quarters

We generated an economic return on Book value of two and half percent for the fourth quarter and 12.8% for the full year reflecting our focus on active portfolio volt auditioning and risk management. We continue to be committed to our primary objective of generating attractive Total return for our shareholders while also providing for greater book values divorce our success in 2019 is attributable to our differentiated investment strategy designed to balance our residential and Commercial Credit Holdings with our interest rate. And we continue to benefit from our focus in this area and it increased volatility in fixed-income markets in early 2020 and our portfolio has performed in line with our expectations page will provide an updated estimate of our book value when we announced our first quarter dividend in a few weeks.

We generated gaap. Net income of $0.23 per share for the fourth quarter core earnings of $0.30 per share for the quarter and $2.21 for the full-year our quarterly Courtney been very consistent over the last three years. They've averaged thirty two cents per share higher than our average quarterly dividend of $0.31 per share over that same time. We are we're quite active in the capital markets in 2019, issuing both equity and debt. We did this to enhance the overall earnings potential of the portfolio and support our long-term goal of growing company and gaining greater scale, which we believe will benefit shareholders long-term in may we completed a $49 Equity offering and in August and December we issued an additional $90 in total of our six and three-quarter percent convertible senior unsecured notes due in 2020. These important steps enable us to further invest in, New Jersey.

Target assets during the

Fourth-quarter. We also used our at-the-market program to issue $3 of equity. This program allows us to efficiently raise capital from time to time as market conditions permit wage also in may we completed a securitization of residential whole loans by issuing 919 million in mortgage back notes this transaction represented the company's First South Division and enabled us to finance our Target assets with longer-term fixed-rate financing at attractive levels.

I'd like to provide an update on a recent corporate development. As you may know two weeks ago Western assets parent company like Mason entered into a merger agreement with Franklin resources. The transaction is structured. So that Franklin will preserve the autonomy of our manager Western asset. Therefore. We don't expect any changes to wmc's relationship with Western Home or its investment approach. In fact, we believe that over time westerns affiliation with its new parent may open up additional growth opportunities.

The transaction is expected to close.

In the third quarter of this year.

In conclusion our shareholders benefited from wmc's strong financial results in 2019. Western assets Hallmark is it's team-based investment approach and W M performance is a testament to the work of our investment team led by Chief investment officer Harris Teeter van and deputy chief investment officer. Sean Johnson, we expect our differentiation investment strategy and our focus on risk management will continue to serve our shareholders. Well in twenty-twenty with that, I'll turn the call over to Lisa Meyer Lisa. Thank you. We are pleased with our strong financial results for the year and the fourth quarter a key contributor to our performance is at Diversified Investment Portfolio, which balances high-quality credit investment in both residential and Commercial loans with agency mortgages. As Harris will discuss shortly. We were very active during the quarter we acquired for him.

in seventy nine million a credit

Investments by rotating out of security that we believe we're fully valued and by deploying the proceeds raised in the capital market during the quarter. We generated net income of 12.5 million dollars or 23 cents per share and our core earnings was drop income with 15.8 million dollars or Thirty cents per share core earnings May fluctuate from quarter-to-quarter. However, the long-term earnings power of our portfolio has enabled us to pay a constant dividend for 15 consecutive quarters a portfolio generated net interest income of 18.7 million dollars inclusive of hedging costs, which is an increase from 18.4 million dollars in the third quarter of 2019. Our annualized net interest margin in the fourth quarter increased slightly to 1.72% from 1.69% in the third quarter. The increase was a result of higher higher yield on our portfolio wage.

and only a modest increase

You know effective cost of funds.

Urine, we had two point three billion dollars of a purchase agreement boring under-21 about 34 Master repurchase agreement and $536 outstanding longer term financing facility while there has been some recent disruption in the overnight repo Market. We are not affected by this vehicle financing is done on a longer maturity. We continue to have adequate access to this market and we are actively managing our counterparties and refill maturities in 2019. We added five financing counterparty and still have a number of new potential lenders that are interested in financing our investments. That being said we are closely monitoring the situation as of December 31st, our recourse leverage with 5.4 * consistent with the third quarter. Our objective is to main relatively stable Book value while generating core earnings sufficient to support.

I'll give it we can.

Can you to manage our leverage to balance these two objectives in addition over time? We expect our adjusted leverage ratio will vary upon the mix of our agency and credit app in the portfolio. We continue to operate with interest rate protection on our purchase agreement from our interest rate swap positions at your end. Our next Generation Chef agency portfolio was slightly positive at a little under one month with that. I will now turn the call over to have Stephon Harris. Thanks Lisa. I'm guessing our investment activity. I would like to spend some time talking about the recent Market volatility and its impact on interest rates and spread sectors.

Increasing concerns surrounding the coronavirus has resulted in significant Equity Market volatility and during the first two months of 2020. We have C seen outside moves in both u s t e r u and U S Credit spread however spreads on our investments have performed in line with our expectations in January the positive Market environment benefited our book value, but the latter part of February was more challenging and has largely offset the earlier games.

our current

Macro Outlook remains generally the same with the exception that our Global GDP views have been knocked down somewhat given concerns about the impact of the coronavirus. However, we believe that the US will continue to be a bright spot relative to the global economy as it has consistently shown an incredible amount of resiliency, even in light of weaker growth around the world off the fan remains very accommodative and ready to support the economy as evidenced by the fifty basis point cut in rates this week with additional costs priced in

And central banks around the world appeared to be following suit while we can't predict when the markets will become highly volatile or when the economic cycle will turn our focus on higher-quality collapse that fax our credit Investments coupled with our interest rate investment strategy is designed to perform under a variety of economic scenarios. We have assembled the balanced portfolio of quality mortgage assets on the credit side and combine them with interest rate drip and security that have structural protection against prepayments by employing this approach. We believe that we're able to gate the two primary risks faced by mortgage rates credit risk and prepayment risk.

Going forward we intend to further deploy Capital selected.

Link to credit but also to opportunistically invest in agency Securities as they become more attractive when market conditions warrant now turning to our results as Jennifer Mission 2019 was a great year for WMC as we continue to deliver on our strategic goals and remain focused on active portfolio positioning and risk management are strong performer for the fourth quarter and full-year were driven by contributions across our diverse Holdings in a number of sub-sectors of the mortgage market and also reflects our efforts to increase our exposure to bring it in 2019 our total adjusted portfolio grew by 26% primarily as a result of our Capital raising activities during the year, which enabled us to invest more of our targeted assets.

Over the last three years, we have strategically increased our exposure to credit as of December 31st credit assets represented 58% of our total adjusted portfolio woke up from 34% 3 years ago as part of this process. We have reduced our overall leverage and Book value volatility all while maintaining the earnings power of the portfolio off. Our approach in this area has been to invest across several sectors of the market by primarily in residential and Commercial loans in 2019. We added nearly six hundred million thousand presidential hold on to the portfolio and have them December 31st. We held approximately one point four billion dollars in total representing 32% of the overall portfolio. Additionally, we added over $840 billion dollars in commercial loans in 2019, including non-agency cmbs, and this asset class represented approximately 22% of our phone number.

polio at your end

In the residential sector we continue to focus on recently issued non-qm mortgages made to high quality borrowers with low LTS.

Our view of residential real estate remains favorable as the US housing market continues to be healthy driven by improved affordability do to lower mortgage rates and Rising incomes this housing demand particularly at the entry level is overlaid against a backdrop of limited Supply and it's providing support for ongoing home price appreciation in the low-to-mid single-digit with commercial, We continue to Target short-term loans that are secured by properties with solid credit fundamentals and strong covenants that protect our interests as lenders overall. We expect commercial real estate on the mentals to remain stable given the ongoing economic expansion and the favorable outlook for the job market. We focus on investments in this area that have attractive economics and we're Western has the ability to drive the structuring of the transaction allowing for more control over collateral borrower profiles loan terms and Covenants. This is a good example of WMC being able to leverage wage.

asset investment platform and

Having access to opportunities that we would not have as a stand-alone mortgage read.

In conclusion, we believe that our differentiated investment approach upholding a balanced portfolio of high-quality assets combined with our focus on risk management positions us well to continue generating a strong core earnings while preserving our book value with that. We will open the call up to questions operator, please go ahead. Thank you. We will now begin the question-and-answer session Tuscany question. You may press star then one on your telephone keypad. If you're using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press * then two years time. We will pose pause momentarily to assemble our roster.

The first question comes from Eric Hagen from KBW, please go ahead. Hi. Good morning guys. Thank you very much. I'm sure you guys can probably predict that I want to ask a little bit more about them recently. Can you just share how pricing and spreads have behaved for your your to Anchor assets? Right the the agency dust and the non-qm. I know that you mentioned some there's bound to spread widening in the market but has the spread widening been on a credit related basis has the credit assumptions, you know weekend in the market or is that really just a function of the fact that Benchmark rates have decreased so rapidly. Thanks higher morning. Thanks for the question as as I said during my prepared remarks spreads have moved in line with our expectations. I think your ladder point was spot-on in that the market has not yet changed nor have we or expectations for the underdog

Credit performance of of assets. So the spread widening that we've seen in the market.

Bar has largely been a function of the shark moved lower and Benchmark rate level as well as the increased volatility and and risk aversion that's associated with that.

Okay. Anyway, you can get kind of specific with with you know spread levels on on on Dustin agent. Excuse me. Non-qm.

Sure starting first with with nine q and I would actually extend it to commercial loans as well. We have not observed up until this point any material shift in in pricing. If anything what we've seen is is pricing continuing to hold firm and then in some limited number of cases actually moving up on with the agency just died and and agency mortgages more. Generally. We certainly have seen pressure on the market as rates have moved sharply lower to all time lows. So on Thursday agency rmbs side, of course prices have been impacted largely as a reflection of increased concerns about much higher prepaid rates going forward and on the agency just died wage really been a function of the high dollar price has given the move lower in in rates. So we certainly have seen some pressure. I would say so far anywhere from 10 to 12 a.m.

the 25 basis points, uh

On the agency. Is what we've seen? Okay. Okay got it. So so any so the retracement in your book value during February appears to be mostly a function of the widening in dust because that's where your head is. Where is the credit while it's white and has it necessary, you know, the price hasn't changed that hasn't necessarily driven a choice one in your book value my sort of correct in assuming that yeah, that's correct. Okay. Got it on the hedging side. It seems like the reduction to your head ratio, you know last quarter now you guys to to benefit relatively quickly from the feds cut earlier this week. The question is whether you guys have made any further changes on the hedging side and what's your best estimate for how your cost of funds will change with respect to the fact that the FED did cut this past week?

Sure. Well, as you know as we've discussed on on this call over the last few quarters, we do actively managed our duration profile and and by extension our our swap portfolio. That is something that that's ongoing particularly in environments like this where where there's an enormous amount of volatility and markets are extraordinarily fluid off. So, you know, I think the changes that you observed in the fourth quarter or largely reflection of our active management of of the portfolio in terms of your question on cost of financing, you know, certainly with the surprise fifty basis point cut by the federal earlier this week and our expectation of continued fed Cuts going forward, we expect to see the cost of of our financing continue to go down which is largely what we've seen over the last few months, but obviously we expect an accelerated wage.

instead of those declines

Okay. Got it. Thank you. And then the the long and short ta positions. I realize it's a net neutral but what what coupons are those in and can you discuss how dollar roll profitability issue so far this year, especially in light of the fact that you know, give it just giving all the volatility over the last two weeks. Thank you. Most of our positions were in threes and 3 and 1/2. But again, you know, we're we're obviously actively trading in in the market and so, you know, there are a number of coupons that were using to you know, take positions both both long and short in the marketplace, you know, in terms of the dollar roll, you know, obviously given the fluidity and and markets it's it's it's moved around quite a bit most of our exposure life continues. However, to be sort of in the in the belly of the coupon stack and freedom fries and 1/2 3 and 1/2.

Okay has the role improved though over the last two weeks or has you know any color that would be good. Thank you.

Hey Shaun. Yeah, it's it's improved on a nominal basis. Obviously, everybody has to recalibrate their expected speeds going into you know, our future months given given more erase. All right now, but from a normal basis, you know roll pricing has improved.

Got it. Thank you very much for the for the comments guys. Appreciate it. Thanks, Eric. Have a good day.

Again, if you have a question, please press * then 1 the next question comes from Trevor Cranston from JMP Securities, please go ahead. All right. Good morning follow up on the question or the comments you made about, you know, the spread widening you've seen so far in February. Can you, on sort of how you guys are thinking about prioritizing sort of marginal Investments today, you know, if it's the the most attractive opportunities to might be in the agency cmbs month. Or non agency cmbs or curious sort of how you're where you're deploying capital and how you're thinking about that right now. Thanks.

Good morning.

Whichever. Yeah, certainly the the opportunities that you know is is is pretty buried at this point. Just just given as I said before the fluidity and Market wage, you know, we continue to like the relative value propositions that are targeted asset classes particularly on the credit side offer namely non-qm residential loans as well as certain types of of commercial loans. So we continue to be very actively engaged with the marketplace there and and have a significant pipeline of of Investments on the rate sensitive subject. You know, as I said a moment ago agency dust spreads have certainly been under pressure that sector and looks much more interesting from a relative value perspective at the same time an agency rmbs has has certainly cheap and. Uh or continue to cheat enough and you know, we've been more actively engaged in in that market as it relates to w e

T then we have been historically

Then you also commented that you hadn't seen, you know, a material change in spreads on the non-qm loans or commercial whole loans. Can you provide any commentary on sort of what you've seen or any color you've heard on the securitization markets particularly as it relates to the non-qm side, and if you'd expect, you know, the spread widening in another markets to maybe impact the profitability or or viability of securitizing loans in the in the near-term. Anyways, sure, you know, we of course I am seeing some very modest spread whining in in non-qm and just Structured Products and in general, however, the vast majority of that we would attribute to just general conversion as a function of the increased volatility that we've seen in in macro West Market our expectation right now. However, is that the ultimate execution? Yep,

Non-qm securitization has not changed materially. And so it's just

Okay, that makes sense.

So a outlet that we think it offers an incredible amount of of value and and one that we expect to utilize going forward.

Okay. Appreciate the comment. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Jennifer Murphy for any closing remarks.

Thank you everyone for joining us today, and we look forward to updating you again soon.

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

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