Q2 2020 Western Asset Mortgage Capital Corp Earnings Call
With us today for management or Jennifer Murphy chief executive officer Lisa Meyer Chief Financial Officer and Harris your van Chief investment officer before he began. I like to review the Safe Harbor statement. This conference call will contain statements that constitute forward-looking statements within the meaning of the private Securities litigation Reform Act of 1995, Such forward-looking statements are intended to be subject to Safe Harbor protection provided by the Reform Act actual outcomes and results could differ materially from those forecasts to the impact of many factors took the control of the company.
All forward-looking statements included this presentation are made only as of the date of this presentation and are subject to change without notice certain factors that could cause actual results to differ materially from those contained in the forward-looking statements are included in the risk factors section of the company's reports filed with the SEC copies are available on the SEC website. We disclaim any obligation to update our forward-looking statements unless required by law with that. I'll now turn the call over to Jennifer Murphy Jennifer. Thank you very welcome everyone. Our main focus in this still challenging environment for credit oriented mortgage assets is to protect the portfolio to ensure the opportunity for our shareholders to meaningfully benefit if asset values recover as we suspect they will and to sustain the future earnings power of the portfolio that underlies our dividend.
In the second quarter, we significantly strengthened the company's balance sheet and improved the earning power of the portfolio. We did this by significantly reducing our leverage from 9 and 1/2 * 2 3 time securing longer-term fixed-rate financing at attractive levels reducing our Reliance on short-term repurchase agreements by over 75% increasing our liquidity and bowls common Equity by selling new shares at a premium to Gap book values. We recorded a gaap net loss of 15.6 million or 29 cents per share these results in June expensive cruel of 20.5 million or 35 cents per share related to a profit participation fee incurred on our June securitization of 356 million of non-human residential. Hold on.
The speed was fully.
Expense in the second quarter and represents more than 100% of the quarters law, but the benefits of the securitization are expected to be realized by the company for years to come through securitization refinanced a significant portion of our non-qm whole loans for thirty-five years at an attractive weighted average rate of 2% This was an important Milestone that strengthened the country's capital structure and positioned us for improved cash flows from these assets for a long period of time.
Our quarter earnings were eleven cents per share during the second quarter reflecting lower portfolio leverage as I mentioned and a smaller asset base. We decided to retain earnings in the second quarter to six additional liquidity and equity which we believe will help preserve shareholder value in this environment. It's a high priority for us to put the company in a position to resume paying an attractive dividend support sustainable quarter earnings. The key factors will evaluate when considering future Dividends are the sustainable earnings power of the portfolio and the liquidity needs of the company in the current environment.
We believe there continues to be the potential for Meaningful Improvement in the prices of our assets. If we expect the pandemic subside and economic activity resume.
For the past several years our investment strategy has focused on high quality borrowers and assets as well as a diversified investment approach as we get more clarity about the path of the economic recovery. We expect the underlying fundamental values to be more fully reflected in prices. This creates the potential for significant recovery in our book values.
To assist investors in assessing one aspect of this potential this quarter where they're including economic Book value a non-gaap calculation economic Book value should remove the Consolidated assets and liabilities of three securitizations from the balance sheet and add back the fair market value of our retained and acquired interest in these securitizations from our perspective this provides a view of what the company directly owns and what it owes this calculator calculation results in an economic Book value of $4.04 as of June 30th and $4.25 as of March 31st, Lisa. We'll talk about this in more details.
We made significant strides in the second quarter of the strength in our balance sheet and improve the sustainable earnings of the company as fellow shareholders. We remain committed to protect and grow the value of the portfolio page and preserve the opportunity for our shareholders to benefit meaningfully in the event asset values recover. We're highly focused on putting the company in a position to resume delivering on our long-term objective of generating sustainable core earnings that support at attractive dividend with relative stability in our book values with that. I'll turn the call over to Harris troupe on our chief investment officer. Thank you, Jennifer the second quarter of 2020 proved to be another volatile. Dominated by headlines regarding the covid-19 virus also like the phone number three months of the year. It was a quarter that started and ended with very different tones. The first few weeks mortgage credit markets exhibited more stability compared to the end of March. Yep.
prices remained at very depressed
Levels the unprecedented size and speed of the monetary and fiscal support measures did begin to improve sentiment and we subsequently saw a market Improvement in liquidity conditions and to a lesser extent prices by the end of June as markets began to heal. We continue to deal average and de-risk WMC and by quarters end had sold nearly six hundred million dollars of agency bonds and very high quality residential loans our ability to reduce risk and do so in an improving market help prevent additional realized losses from our office and for our shareholders. We also spent a significant amount of time and effort to improve the terms of our financing arrangements and the company's risk to that end. We completed that meaningful transactions that we believe accomplish all of our goals the first transaction resulted in consolidating the financing of our residential whole loan portfolio with one lender and a facility Jeff.
That provided no mark-to-market features and provided 18 months of term. The transaction not only allowed us to remove margin requirements of the assets during a very volatile time. And avoid potentially problematic liquidity issues. It also provided a meaningful amount of stability to the overall portfolio that we were able to build on.
Shortly after the close of the residential loan facility. We reached an agreement to move the majority of financing related to our Securities portfolio to one provider in one structure this transaction also provided a streamlined counterparty relationship limited March and call risk extended term and most of all more stability lastly. We were able to take advantage of the achievement in the securitization Market in the second half of the quarter and issued a $356 transaction of our non-qm loans under the Arroyo show. This was WMC second job security station. And first of the year our ability to issue securitizations is a critical part to our success and we were able to benefit from the improving Market Bond investors support and strong credit quality the securitization further solidified our funding sources and dramatically lowered the cost of financing.
In all through these transactions and asset sales. We've reduced our exposure by over 76% in the quarter in terms of our mortgage credit portfolio performed the 91 presidential portfolios performing. Well given the severe economic background 84% of the loans remain current receive. This is a strong indication that borrowers wage earning full equity in their homes will prioritize their mortgage payments in order to remain current on that obligation the commercial loans and non-agency cmbs portfolios are performing in line with expectations under the current pandemic conditions the large loan cmbs portfolio has an approximate LTV of 63% and despite being concentrated in retail and hotel assets over 70% of the loans by principal balance remain current all the borrowers of the delinquent loans in the non-agency cmbs portfolio are in negotiations for forbearance and modifications dead.
the company believes that
There's a reasonable likelihood that the majority of the delinquent loans will return to performing status in the coming months. Although there is no assurance that this will be the case the commercial loan portfolio is a 65% Original El TV and all but one of the loans remains current we expect the Outlook will remain challenging and dependent on the path of covid-19. The availability of improved Therapeutics and vaccines and continued fiscal and monetary support in recent weeks. There has been both good news and bad which we expect will continue for the foreseeable future given the uncertainty we expect central banks will remain extraordinarily accommodative and supportive of economic growth. This is one of the reasons we have repositioned the portfolio to be concentrated in residential and Commercial Credit assets, which we believe will be primary beneficiaries of an economic recovery and offer shareholders the best chance for Recovery in our birth.
Value with that. I'll turn the call over to our CFO Lisa Meyer.
Thank you Harris. We provided a great amount of detail regarding our portfolio and our second-quarter results in both our press release and our earnings presentation. So I'm only going to focus on items that warrant some additional explanations during the second quarter. We focused on reducing our exposure to short-term recourse borrowing increasing liquidity life proving shareholders Equity as both Jennifer and Harris discussed. We completed a number of financing transactions that created a more stable capital structure home and helped lay the foundation for Approved earnings going forward.
In addition to the financing transactions. We also undertook measures that strengthened our balance sheet and improved shareholders equity in June. We sold six million shares in our at-the-market Equity program at an average price of $3.70 per share for a total net proceeds of twenty two million dollars. This transaction was at a premium to get book value per share in July. We opportunistically retired five million in principal amounts of our 6.75% convertible senior notes due in 2022 at a 25% discount to par value in exchange for one point three five million shares of our common stock. Both of these transactions were accreted to book value and more importantly strengthened our Equity base.
As of June 30th a recourse Finance funded with short-term repurchase agreement of less than a year with $87 or 23% of the outstanding recourse borrowing. We also reduce the leverage levels against all of those borrowings to the risk of future margin calls remain low.
finals
Our manager Western asset waived its management fees for April and May.
Now turning to a discussion about our core earnings. We reported earnings of 5.8 million dollars or $0.11 per share for the second quarter our lower earnings with primarily driven by a small smaller portfolio and reduce leverage due to our assets sales partially offset by higher net interest. Margin as we discuss an important step taking to improve the sustainable core earnings of the portfolio was the new Arroyo 2021 securitization, which allowed us to redeem an income drag experience under the interim residential home facility since the securitization closed on June 29th. Any benefit of this financing was not reflected in second thoughts running with this new lower-cost and longer-term financing now in place, we believe that it will have a positive impact on our core earnings going for
Additionally as Jennifer mentioned we have disclosed a new non-gaap Financial metric economic Book value, which we feel provides investors with a useful supplemental measure to evaluate our financial position. It reflects our actual Financial interests in all of our investments and eliminate the account mismatch that arises from our Royal securitization where we fair value of loans, but not the death
Economic Book value was $4.04 per share, which is significantly higher than our Gap book value per share of $3.17. The higher economic Book value. It's primarily due to fair value of the the retained or required interest in the three Consolidated securitizations, which were priced independently owned by third-party pricing service being greater than the Gap Equity resulting in an eighty-seven cents mismatch in summary. We are encouraged by the steps. We took to solidify our capital structure. We have lowered our recourse leverage to three times a significant improvement from 9.5 times at the end of March and from 5.4 times at the beginning of the year our net interest margin remains healthy and with a significant portion of our assets financed by attractive long-term financing We believe We Are well-positioned wage.
For improved earnings in the third quarter with that. We will open up the call to your questions operator, please go ahead.
We will now begin the question-and-answer session plus the question. You may press start in one on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the key to withdraw from the bank you please press star then to our first question is from Trevor Cranston of JMP Securities, please go ahead.
All right.
Thanks your first question you guys mentioned in the opening, you know about believing that there's still significant recovery potential in the long route sets in light of the new disclosure. You have around economic Book value is wondering if you could provide some context around, you know, where where the assets that you've retained from. The securitizations are marked today kind of versus where they were marked, you know pre March and and how much recovery potential there specifically as an aging effects. Thanks.
Lisa do you want to come in on where they were marked before is that I think that's I think I understand your question Trevor. Thank you for the question. By the way, I'm sure so before March 9th One loans were marked at 103. I think one of the 3 and 1/2 most recently. I think the marks we've got on those loans are probably around 96.5 to the 97 and half range.
So we do feel that there is a significant upside even if the loans actually just go back up to par. There is significant values that that that is that we will you know, recognize and in addition. We think that you know inheritance can chime in that we think there is probably more value Beyond probably par.
As you know as the as the economy starts to recover.
Okay. Got it. Maybe Trevor. I'm sorry. If I could just add on to that briefly that speaks to the portion of our portfolio and the economic Book value measure real life provides insight into those assets. We we do think there's recovery potential in our commercial, you know assets as well.
Right. Sure. Okay. Thank you for that. And you know what the securitization you guys were able to do at the end of June. You know, it look like there were seven million of loans. They're still on the on the financing line outside of securitization. Can you comment on you know why those weren't included in in the June sterilization and sort of what the what the plan is for that remaining loan balance. If if you're going to sort of hold it on the financing line and f that could be securitized at some point as well.
Sure charger, I'll take that one. The reason that the majority of those loans were not included in. The securitization is many of those loans are off. The borrowers are in forbearance. And we made the decision to intentionally hold them out of the securitization in order to secure more favorable treatment both from rating agencies as well as reception from investors in the transaction. I think if you look at the execution that we were able to obtain on the deal with it certainly validated that decision so looking forward our plan is to you know, of course monitor the performance of of those loans and either include them in a future securitization as they return to current performing status and or the forbearance. Burns off.
or potentially
Or potentially transfer them to uh, another facility.
Okay, got it. That makes sense. And then I wasn't wanted to clarify something. I wasn't sure I caught it all in the prepared comments on the non-agency MBS portfolio. So I guess first did you disclose what the property types were specifically for? The the single asset part of the cmbs portfolio off and then I also wanted to clarify just to make sure I heard correctly. Was it 80% of the loans within that portfolio? You said it was still current?
So on that portfolio, we did not disclose. I don't believe they exact property type concentration in our in the investor reporting package. The LTV that I referenced was 63% for that portfolio and the current pay is 70% in that portfolio.
Okay, can you can you comment on what the property types are or is that something we should would be able to find in the tank U?
I'll come in generically a lot of vas at are are either Hospitality or retail related, you know, when we're sold a lot of the assets that we did on the non-agency side at the end of q1 and the beginning of second-quarter just given the dislocation in the market. We did so sort of non-hotel and and non-retail securities. So it it did push up the the concentration in those asset classes, but I would note that within each one of those property types. There's a fair amount of dispersion. In other words not all of the retail assets are secured by Regional model portfolios. There's a number of power centers and shopping centers that are doing quite well similarly on the hotel side. There's a fair amount of concentration and dead.
Limited service hospitality which has actually held up relatively well throughout the last few months and certainly our expectations going forward is dead. And that sub-sector within Hospitality will continue to outperform for the foreseeable future.
Okay. Thanks. Thanks for that color. And then last question, you know, you were able to retire some of the some of the convertible notes in July month. Can you say anything about you know, whether or not that was a a unique opportunity or if you think you might be able to pursue, you know potentially retiring some more of the convertible notes going for life.
Hi Teresa, I'm sorry no, go ahead Lisa. I I think that we will continue to look for opportunities in which we can do similar transactions of the one that we did at a quarter and I think that it just it makes sense for us to do transactions like that cuz it strengthens our Equity base and reduces, you know, birth or liability. I'm Jennifer's would you like to add anything just a wee Trevor? We those are the we've had both inbound incorrect from a convertible noteholders as well. As you know, we've had we've made initiated discussions in in one or two cases ourselves. So so we're hopeful that we could continue with those transactions.
Okay, great. Appreciate the call or thank you.
The next question is from both Georgia, please go ahead.
Hey, this is Eric Hagen a follow-up on the whole loans and and the yields that you show on page twenty-three the deck down the yield on the retained prompt as in those in those structures and is the plan going forward to finance those with any additional debt or essentially just you know, hold them with Equity. Thanks.
Harris do you want to comment on that or yeah, I don't I don't believe we we break out the the yields on the bulb 614 Securities for the securitization. I would say that they're quite a creative particularly in light of you know, the favorable execution that we were able to get on the security situation that I that I referenced a few minutes ago as far as what our plans are, you know that package of Securities along with everything else we have in the portfolio, you know, we're constantly trying to think about what makes the most sense to where we should be taking leverage the cost of that leverage the terms of that I think, you know twenty twenty that's more true now than it's ever been. So, you know those Securities on an unlimited basis certainly are accretive to to our income into the overall wage.
folio and where and when we can take opportunistic leverage on that portfolio automat sub-sector within the portfolio is something that we're ordering on a daily basis and when we think it makes sense in order to further our strategic objectives, we will
okay.
And where are you guys reinvesting run off? And what was your economic Book value when you raised the $22 of capital during the quarter and what did you do with the capital that you were raised?
Eric, it's Jennifer. I would comment that the you know some the runoff as you turned. It is helped us build liquidity that's been so our priorities have been to remain current on all of our bills, you know, you know, make sure the companies in a healthy financial position also build our liquidity which is part of our overall plan for ensuring the stability of the company. So we really focus on that run off in the second quarter on those priorities. So as we said given all the progress we made in this quarter, I think in the third quarter we can start to think more forwardly bout, you know how to potentially use those those earnings. But our focus in this quarter is really to strengthen the balance sheet and put ourselves in a position to improve sustainable core earnings.
I think I thought I think you had another question that I didn't address.
The economic Book value when you raise the $22 of capital and what you did with the capital during the quarter. Yeah. Sure. I don't I don't know the poem the economic Book value at the time of the race. So I'm guessing it's in between the two numbers. We disclosed Lisa. Would that be correct or just somewhere in that range?
Yeah, exactly. And again Eric our our priority with that Capital was to improve our liquidity position, you know, obviously it was very helpful to improve our thoughts of our balance sheet or Equity position. And so, you know, we we use those proceeds to help us build the quiddity in some cases at least a mentioned. We've lowered our our our loan amounts of in virtually every in a relationship we have so in part proceeds went to parties like that.
And just add to a Jennifer said I mean the overall Equity rates do the aftermarket program, you know was pretty much about 2% of creative to Book value.
Okay. Hey going back to the my previous question on the on the retain tranches from the recent. Non-qm deals are those is the collateral from those from those bulbs or tranches pledged on any repo lines right now.
They are not pledged.
Okay. Thank you. Thanks for the comments guys.
again, if you have a question, please press * then 1
This concludes our question-and-answer session. I would like to turn the conference back over to Jennifer Murphy for closing remarks. Thank you everyone for joining us and we look forward to updating you again soon Mike what conference is now concluded? Thank you for attending today's presentation. You may now disconnect.