Q1 2021 Western Asset Mortgage Capital Corp Earnings Call

[music].

Hello, and welcome to the Western asset mortgage mortgage capital Corporation's first quarter of 2021 earnings conference call.

Today's call is being recorded and will be available free play beginning at five P. M. Eastern standard time.

At this time all participants have been placed on listen only mode now for will be up for your questions. Following the presentation now.

Now I'll turn the call over to Mr. Larry Clark Investor Relations. Please go ahead Mr. 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.

The company issued its earnings press release yesterday afternoon, and it's available on the Investor Relations section of the company's website at Www Dot Western asset M. C C dot com.

In addition, the company has included a slide presentation on the website that you can refer to during the call.

With us today from our management team are Jennifer Murphy, Chief Executive Officer, Lisa Meyer Chief Financial Officer.

And Greg Handler, and Sean Johnson interim co chief investment officers.

Before we begin I'd 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, all such forward looking statements are intended to be subject to the safe Harbor protection provided by the Reform Act.

Actual outcomes and results could differ materially from those forecasts due to the impact of many factors beyond the control of the company.

All forward looking statements included in this presentation are made only as of the day to 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.

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.

Thanks, Larry and thank you all for joining US today, we've had a good start for 2021 as our positive momentum continued in the first quarter.

Yes, we have taken to strengthen the balance sheet and protect our portfolio have enabled our shareholders to further benefit from the ongoing mortgage market recovering.

WMC delivered an economic return on book value of three 1%, mainly driven by higher valuations of our residential mortgages and securitized commercial loan.

We recorded GAAP net income of $8 million or 13 cents per share and core earnings of 10%.

Our GAAP book value increased one 7% during the quarter to $4 from 2007 cents per share.

Increased by 36% June 32020, which reflects the partial recovery and the value we see in our portfolio.

In March we declared a cash dividend of <unk> <unk> per share for the first quarter in line with the previous quarter.

We remain committed to paying a sustainable and attractive dividend, we assess the dividend each quarter, taking into consideration our view of the long term core earnings power portfolio, the company's liquidity and other factors.

We continue to focus on strengthening our balance sheet, maintaining relatively low leverage increasing liquidity and positioning the company for growth.

During the quarter, we again repurchase some of our outstanding senior convertible notes at a discount for car, which reduces our leverage and increase in shareholders equity.

Continue to approve improve the funding terms for our asset as we have renewed and extended some of our.

Answering arrangement at more attractive rates than term, while reducing our exposure to short term repo Lisa.

To talk more about that later.

One of western asset core strength as a team based investment approach and a deep bench of seasoned investors as a result of their efforts led by debt Canberra and Sean Johnson, we continue to make good progress on protecting and growing the value of the portfolio and positioning it to benefit from the full reopening of the economy.

While many of our asset in near full recoveries in value, particularly our residential whole loan.

<unk> have yet to experience a similar rebound most notably our commercial real estate holdings.

However, the outlook for commercial real estate has improved especially as more states have announced their full reopening plan.

Therefore, we're cautiously optimistic that the value of our commercial investment will benefit as economic activity moving closer to pre COVID-19 level.

We're encouraged by all of the progress we see in the economy and at WMC. We continue to focus on delivering on our long term objective of generating sustainable core earnings that support an attractive dividend, while enhancing shareholder value.

Sean is going to go into more detail about our residential holding and then Greg will provide some color on our commercial real estate portfolio share.

Sean.

Thank you Jennifer and the first quarter of 2021, the U S. Economic recovery continued as more people were vaccinated and businesses work to fully reopen.

Equity and credit markets continue to improve albeit at a slower pace than in the second half of 2020.

This translated into higher valuations in a number of our portfolio holdings and improvement in our book value.

Our residential whole loan portfolio continued to experience appreciation benefited from a strong housing market.

Fueled by historically low mortgage rates in very tight supply and.

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 lower delinquency and forbearance metrics for non agency mortgages.

Our residential loans continued to perform well and the percentage of loans that were part of a forbearance plan decline dropping to three 4% at quarter end from 6% at year end and a high of 19% in may of last year.

Nearly all of the loans in forbearance are now in their repayment period.

And those that arent represent about one half of one percentage of total residential portfolio.

We see this as a confirmation of the effectiveness of our credit underwriting where we focus on borrowers that have meaningful equity in their homes as we believe it creates a strong incentive to remain current on their mortgage payments.

The non QM origination market was fairly slow for most of last year and into the early part of this year as mortgage originators focus on making agency deliverable loans.

As low mortgage rates drove high refinance volumes.

With the recent modest rise in rates and a corresponding decline in refinance applications originators.

Originators are once again, beginning to refocus on non QM production.

During the quarter, we have actively engaged with both new and existing non QM originators to grow this portion of our portfolio in the near term with the goal of financing these investments through another securitization.

I'll now turn the call over to Greg to discuss our commercial portfolio Greg.

Thank you Sean.

Residential loans had 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 at sub optimal level due to the ongoing restrictions and reduced demand. While the outlook has improved there is still as uncertainty around the timing and extent of the recovery and the performance of.

These property.

Within non agency commercial mortgage backed securities our holdings continue to be weighed down by concerns regarding the future performance of the underlying property.

IPhone credit portfolio.

Mainly of class a retail hotel and office building a number of these properties have seen their cash flows adversely impacted during COVID-19 by lower occupancy and other operating metrics and the recovery have yet to materialize.

This portion of our portfolio had an approximate 66% original loan to value and all but one of these loans remain current representing less than 2% of our holdings in this bucket.

These properties are generally high quality asset 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 essentially be overcome as COVID-19 restrictions are lifted and the economy move towards a fully opened.

Our commercial mortgage portfolio, which carries an approximate 65% original loan to value is generally performing according to our expectations and all but one of these loans remain current.

<unk> 30 million hotel loan that we have previously discussed continues to be in default.

Property is in the midst of bankruptcy proceeding and we are actively monitoring.

For the profit. Additionally, the hotels currently listed for sale and there appears to be significant interest in the asset.

We feel there is strong value in the property and we have the added benefit of recourse to the borrower. We continued to reinforce our rate on the personal guarantee and we believe that there is a reasonable likelihood that ultimately the majority of the principle and this payment will be recovered. Although there is no guarantee that will be the case.

As we also discussed on our last call we hold the junior mezzanine loan with a face value of $90 million in this portfolio.

Underlying property is of high quality retail and entertainment complex located in New Jersey and owned by a prominent equity sponsor.

The pandemic has adversely impacted the operating performance of this asset. However, the property is now operating at 50% capacity versus approximately 25% capacity in the fourth quarter of last year.

We are encouraged that new Jersey is planning for a full reopening of their economy on July <unk> and eliminating capacity constraints on many 19th for all retail restaurants and amusement parks.

We believe that as this happens it will accelerate but are already improving operating trends at the premier property.

This loan remains marked down to a value of just over $80 million.

While we still believe there is significant equity value of the asset he recognizes the borrowers still need time to stabilize the property before bringing the low current and being able to refinance the capital for that.

As a rule we worked closely with our impacted commercial real estate borrowers to achieve customized solution designed to help them weather the near term disruption caused by the pandemic when necessary our team become actively involved in assisting them and working through property stabilization plan.

We believe that these measures.

Allow us to protect our collateral and increase the probability of an eventual recovery in our investments.

However, there remains significant challenges and losses could occur to the reopening stall and financial conditions deteriorate.

In the meantime, we remain focused on maintaining sufficient liquidity and positioning our portfolio for future appreciation.

Which we expect to occur as the economy continues to be up.

With that I'll turn the call over to our CFO Lisa Meyer.

Thank you Greg.

Before I review, our first quarter results I want to discuss further improvement 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 part.

To improve liquidity and reduce our exposure to short term daily mark to market financing from.

From its high level at nine five times at the end of March 2020.

Recourse leverage has declined to two times at the end of the quarter also significantly lower than five four times at December 31 2019.

Just this week, we amended our primary securities repurchase facility, which finances, most of our non agency MBS and EMEA asset.

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 asset fair value of $199 4 million.

Additionally, we recently amended our commercial whole loan facility converting it from its filling that automatically rolls every 30 days to now having a one year maturity and March 31, we had outstanding borrowings.

This facility at a $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 amount of our convertible senior notes.

An average six 3% discount to par value and March 31, the outstanding balance of our 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 <unk> <unk> per share for the first quarter.

Our core earnings more than covered our first quarter dividend of <unk> <unk> 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 one 7%, mainly driven by the overall improved valuation of our residential mortgage book.

Which fully offset the significantly lower valuations on two non agency MBS.

Economic book value, which reflects the value of our retained in strength.

In the consulting.

In the consolidated consolidated securitization trusts.

Rather than the growth asset and liability.

<unk> decreased by four 1% for the quarter to $4 <unk> per share.

The decrease was mainly driven by lower valuations on our non agency MBS, which was not partially offset by the improved valuation ability retained interest.

As we have discussed in the past these non-GAAP financial metric reflects the actual financial Inc strength.

In all of our investments and eliminate the accounting mismatch that may arise from our ROI of securitization, where we fair value the loans and not the debt.

In summary, we continue to focus on actions that will solidify our capital structure.

Increased our liquidity and enable us to participate meaningfully in the reopening of the economy post COVID-19.

Our net interest margin remains healthy and with a significant portion of our asset now financed by a track debt longer term financing. We believe that we are well positioned to selectively grow our portfolio with the objective of improved financial results in the quarters ahead.

With that we will open up the call to your questions.

Operator. Please go ahead, yes.

Yes. Thank you.

We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.

James Speaker phone please pickup your handset before pressing the keys to try a question. Please press Star then two.

At this time, we will pause momentarily to assemble the roster.

And the first question comes from Trevor Cranston with JMP Securities.

Alright, thanks, good morning.

And thank you for the day.

Update on the status of the properties in the CRE loan portfolio.

That's very helpful.

I guess when I look at the portfolio I was kind of focused on.

<unk> nine where you showed the see MBS investments.

Which obviously you still have a 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 you know as you guys run credit analysis on that portfolio.

Is there like a projected loss level.

You see embedded within that.

Basically trying to.

<unk>.

Sort of size how much of that discount you think is ultimately likely to be recover recoverable within the CIB some lessons.

Thanks, Jennifer.

Yes in terms of the unrealized losses.

I assume that that is on the upper end of what is recoverable.

I would say in the <unk>.

First quarter some of the <unk>.

Challenges that we faced from the commercial mortgage backed.

Securities portfolio were related to near term.

Maturity, which the market is still very negative on the outlook.

However, we typically do you have the control rights for the securities that 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 for.

Coverage on these securities.

The upper end of that range.

Okay got it thats helpful.

And then in terms of financing.

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 is.

Room for further.

Further improvements either in the rates for the structure of the financing that you guys have in place today or.

With the improvements Youre able to get the two facilities in the second quarter.

Do you think that for.

Dancing side is pretty well squared away at this point.

Trevor It's Sean Yes, I think we do have the opportunity to.

Improved some things on the margin those two facilities, where the source of a lot of interest expense for us. So.

So making changes there was extremely important in addition to making them more longer term.

And reducing our <unk>.

Margin call upon our ability 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.

Trying to improve that side of the book.

So there is there is some marginal opportunity to improve things from here.

Okay got it I appreciate the comments thank you guys.

Thank you.

And once again. Please press Star then one if you would like to ask a question.

Just one from a pressing star then one while you speak.

Alright.

For some time. This concludes our question and answer session I would like to turn the conference back to Jennifer Murphy for any closing comments.

Great. Thank you all for joining us today and please.

So up with US if you have any additional questions and have a great day.

Thank you.

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

Okay.