Western Asset Mortgage Capital (WMC) 6 May 222022 Q1 Earnings call transcript

Welcome to Western Asset Mortgage Capital Corporation's First Quarter 2022 Earnings Conference Call. Today's call is being recorded and will be available for replay beginning at 5:00 PM Eastern Standard Time. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation.

Now, first I'd like to turn the call over to Mr. Larry Clark of Investor Relations. Mr. ahead, go Please Clark.

issued I section discuss thank Corporation's Western first in The for Jason. afternoon, release us it's the and financial for company's today the available company XXXX. of to Asset Investor quarter earnings want you, press everyone yesterday Relations to the joining results its of Thank Mortgage Capital website.

management included to are Chief the website today can refer during In Officer; call. President on from Wongtrakool, Lisa addition, Chief Johnson, that and Officer; Bonnie presentation Officer; our the Chief Executive Chief Deputy a slide and Sean Officer. company Greg us the has Investment With Meyer, Investment you Handler, Financial

now of call disclaim by forward-looking to section required harbor that review turn Actual the safe filed forecasts in such the from could this like we within materially This by Securities statements the We and our those control presentation to provided of constitute results contained I'll the Wongtrakool. meaning I'd All the subject any With of of to Before the that statements factors Bonnie? the the are only the change Act. due the Reform over statements the without materially safe Factors Certain harbor differ differ factors this Risk All update forward-looking Commission. impact included of reports of company. Reform in the XXXX. are statements begin, Act beyond be in of statements date Private statements the many are conference that, results made as to the presentation notice. to Bonnie statement. to intended law. protection and from actual included are and subject could forward-looking to outcomes those Litigation forward-looking contain to with call Securities will forward-looking company's cause obligation Exchange unless

welcome and everyone. you, Thank Larry,

our portfolio. in December, real to and plan out investments announced related investments may transition you last to our estate residential focus commercial As we recall, on the of

We quarters and market. maximize will strategic result will profile. strategically value address assets earnings over ultimately believe resources this allow residential the course that stable the to commercial improved more of seeking and this attractive the our opportunities coming making shift on the We transition focusing us and in be of market to a our by will

to the we During first to strengthen balance shift implement quarter, sheet. strategic proactively while this continue portfolio working our

our We of $XX on from along property. used call, discussed convertible on and the XXXX million saw sale hand approximately the received net repurchase gain proceeds, we with while to an on recording in that unencumbered As million of million an last the of to we cash additional we reinvest sale quarter's in $X.X our million the target foreclosed the hotel into property and assets proceeds on notes. $XXX XXXX $X.X

We and increased interest also of reduced interest spread light positions protect the portfolio volatility. hedge ongoing the in our to recourse quarter and during our rate the rate leverage

in environment. executing continue of have level, This spread loans. pool this strategy. residential confident interest to securitization a which at favorable long-term fixed in rising lock a enabled rate the completed at able third rate mortgages our an of through given on this In We financing weighted to this securitization $XXX million net were attractive by interest of our secure us $XXX to are rate X.X%, home review approximately market that we we liquidity environment February, backed We financing. average million residential sufficient interest investment of on

and rise challenges, income interest concurrent its without the across rates particular, widening However, sectors. all rapid in in spread quarter was the not fixed

economic again, while that case in per declined share impact to timing not X.X%. repositioning immune We the GAAP prior our create was portfolio XX.X% these and issues book per and quarter and could was that value share expected our would had first previously value the near-term quarter. transitioning portfolio book our from declined pressures this power Our the earnings

results lower the net of negatively first were down earnings interest our prepayments distributable impacted in Consequently, were share or loan elevated by quarter. $XXX,XXX the portfolio. income whole financial per $XXX,XXX Our $X.XX our combination on and quarter, residential from the fourth

no on challenged stock we quarter time confident right are these the over the one, committed was While a of are our our that reflected price steps sheet earnings be will to power and balance steps value remain portfolio. to building taking our in for believe our improve investments, difficult first progress the we strengthen shareholders. doubt, the resolve We and

want call published it. the Greg, I recently website our and annual turning we that you Relations our to to through report to to Sean to visit we and encourage highlight read Investor shareholders, XXXX Before

And recently we finally, proxy we Meeting in Annual Virtual holding our materials addition, June and the filed out XXth process on be In will welcome statement participation. of under the Friday, shareholders. your our to mailing

the detail it I'll over into investment to and Greg hand Now to Sean? about portfolio. go Sean more

Bonnie. Thanks

this third we continuing strategy reduce in non-qualified on to and the financing and home on In of purchasing non-QM residential this continue loan we permanent financing adding rates spreads securities us holdings. and Bonnie active long-term allow loans residential mark-to-market favorable our our portfolio, again noted, mortgages as both February, securitizations volatility. to via that plan to our funding securing our widen. As are should quarter We securitization, repositioning successfully executed holdings non-QM of strategy and our lock

to spreads We the newly during the loans widen make housing RMBS attractive market, on levels at levels Especially originated in to spreads, value, the non-QM these XXX the basis quarter, We the The point million XXX and the to points range. point as basis the widen present investments loans. as well balance in Securitizations strong the AAA we transition were as to continue addition worth attractive to had consumer our basis portfolio, basis low XXX pricing well. non-QM at speed, points during securities. wider first between unemployment XXX During of we attractive spread million acquired fundamental opportunity assets $XXX loans, benefiting added at with purchases residential solid quarter. in our quarter purchasing and able sheets. $XX purchase these of non-QM from to these

lender, While dynamics strong we demand expect home believe price to standards. appreciation well from recent remain housing we will supply as the a performance, favorable supported moderate market given very and the discipline underwriting as well

to days credit on underwriting quarter high This homes. quality delinquent than focusing less of end. total our X% loans Our value the in well that effectiveness standards, dollar meaningful borrowers our equity non-GM portfolio continues more XX at than perform with being have of by their underscores

our value weighted loan borrowers portfolio average Our to at average XX% origination FICO XXX. is score and for the is

rates. During refinance were non-QM mortgage attractive the at rates relatively the able of and quarter, loans rise non-QM lagged borrowers mortgage to much in on conventional many rates

As a result, portfolio elevated experience level our an continued of prepayments. to

First the in More prepayments non-QM rise quarter moderate. the the XX.X rates substantial in were our in quarter. XX.X than cause of anticipate to compared that CPR portfolio last mortgage previous We activity refinancing to half and will CPR to the loan them scheduled next rate non-QM consists of duration leads rates interest mortgages have in rise. approximately higher as reduces XX% portfolio of resets income to XX rate adjustable our months. interest This with of portfolio quarter

overall credit positive fundamentals. remain on Going residential forward, we

they that, reflects at While were pre-COVID, securitizations Greg holdings. currently wider With to this. pricing Greg? turn over discuss the than new levels are Handler loan our already I'll to commercial trading call

Thank you, Sean.

but value and million modestly commercial with were $XXX our held the currently only of discount cost. quarter at sector, holdings seven of performing a principle credit balance expectations. first loans of quarter, are spread marked $XXX but six the loans widened commercial in whole across at represent a loans line During market the million, a fair one generally these have impacted we aggregate move. in all At million, performed commercial negligible $XXX mortgage to by end, The

We expect loans as pay sold these either quarters several off properties over the next refined. to or are

of assurance these With pertaining complex there property However, or occur. backed payoffs on factors to to depends to be by specific whether when and loan the the mezzanine realization in and loan respect continue We upside retail well potential and believe junior and entertainment ultimate will alternatives as no our each payoffs the engage and located activity. can attendance, are process. a the momentum significant has in discussions encouraging seeing as other property as Northeast, leasing judicial and the lenders and borrower to the regarding we certain sales with in positive to timing growth

As remains noted have further under risk there scenarios. certain of we impairment a previously,

$XX down a outcomes, primarily estimated around quarter, fourth the in possible down regarding timing is $XX uncertainty to from slightly ongoing our loan market the credit value to assumptions consists the million changes currently Class the the of resolution due of slightly and the Given that that our $X current. strong securities, This are single non-agency hotel not leisure remain valued Within permanently situation. quarter. mortgage at retail million asset, our positive high to and are portfolio portfolio mainly portion original values properties. materially but all one we we of representing portfolio their but This equity been approximate travellers of less have had than to these the collateral million million to these of operating generally momentum an properties loan quality believe of impaired. with at and These value borrower is commercial $XX.X prior cater portfolio sponsors, single a A assets of properties backed continuing see XX% or loans number from

$XX at up slightly credit valued the challenged. on Our others trends CMBS exposure from remain quarter while million improving and loans, conduit some is prior are

underlying a to during benefit not optimizing our and as positions payoffs anticipated towards deploying in Lisa? growth. more potential the to the turn during the are assets values will of in CMBS positions with continue on investments full evaluate our longer call any recovery CFO. we the and properties view be sales placed offer restrictions to our to We first now from and attractive operating economy remain will COVID quarter, adjusted lifted first our but the a moves two I'll positions believe performance and of taking focused is As and space exit on into sales the returns. the than We as that Meyer, Lisa over this result, continue our proceeds recover. status did quarter, the target CMBS risk new to investments President non-accrual

Greg. you, Thank

securitization WMC support I our first work results, Earlier for liquidity financing. some fixed asset $XXX under to as completed this non-agency our loan previously platform, and reviewing loans, million we a sheet. to extension financed continues financing facility. term ability long-term recently noted, Western non-QM further facilitating want longer financing have month, and secure to a third broader rate to on taken CMBS from RMBS previous one-year we whole of our facility. which strategic improve our non-agency our balance residential executed of In of we February benefit the provided with loans, quarter partners the attractive, financing highlight the measures Before improve our to of

believe senior premium an the to repurchase have we notes. at $X.X XXXX their we XX, October outstanding maturity, existing accretive weighted and $XX.X ample prior had notes of over of quarter par on X.XX% We also next at XXXX opportunity of then liquidity to approximately bonds additional convertible X.X%. notes to end, exist and balance XXXX repurchasing remaining million We At to months the a a address due repurchase million remaining maturity. retiring continue the average six provided our

to regarding our press great and earnings our quarter release detail and our have portfolio provided first our results turning presentation. in results, Now we financial our

discussion. on only per We of So fourth drove the or am decline. here the I down factors focus primary items reported first from additional quarter, distributable for $XXX,XXX that $X.XX $XXX,XXX. earnings level quarter's to Three share warrant of going

interest primarily the change $XXX,XXX accounting an approximately due conduit that lower net recorded put distressed to we bonds of portfolio, non-accrual income during non-agency were on CMBS First on two quarter. our

$XX.X experienced income elevated quarter. residential during in whole prepayments of which downs pay we to portfolio in first were loan of the million level the of no Second, approximately net quarter, lower our loan an There interest led $XXX,XXX.

to million the of addition, of the similar amortization, prepayments. level on pay $X.X premium last which amortization roughly was in quarter's same downs In resulted

XX% $XXX,XXX of in year-end our These to fees accounting, a reduction and by fees fees to in in result related internal of fees management we higher external $XXX,XXX lower went audit as January. paid effect into were partially Third, our professional experienced the higher audit as manager, offset items reporting.

$XX,XXX reduction expense. compensation also recorded an We in

our level our a While than per earnings that lower include sustainable dividend it's dividend several every were factors. note quarter the for long-term share, to earnings These our evaluate and $X.XX of income. disable factors outlook based on of portfolio important first taxable for the power the the the we of quarter,

did relative hotel, holdings, led value partially of a securitization $X.XX we fair as quarter. for debt share than $X.X mismatch the size decrease accounting of consolidated costs value, in or We and for the quarter of retained incurred was widening by was the realized earnings, sale to interest well $X.XX in per million and Debt our required decreased securitized order million did $XX.X Economic elected of liabilities across reflects the our the from transaction rather value. $XX.X of a per decision residential gains caused by whole debt. assets $X.XX X.X% value securitization to loan interest our $X.XX by losses $X.XX fair impact not book the $X.X our unrealized per the debt. per per approximately the fourth option was it expense growth The spread the share of share. widest While book reduce the option elect spreads for the earnings residential from mainly impacted during per quarter. our share quarter This or loans value in by share. whole derivative value the to to were due the gains consolidated incur offset the our XXXX. in the their book for on net The rate of completed GAAP because or one-time a was as costs distributable share the February related fair not to expense portfolio. to We overall activity value decline to hedging of which associated driven of million the to $X.XX the that trust We that and in million our from these mainly assets due

at December times, quarter Turning ratio at from was X.X XX, X.X down recourse XXXX. leverage to leverage, our times end

in As as expected. completed we securitization the ratio is declined non-recourse, our which February, recourse leverage

grow actions we portfolio leverage and while real recourse conditions that our to most longer fluctuate questions. improved with executing by ahead. go the financing, we the on we goal investment continue sectors of continue economic ratio up will pandemic. financed our term as solidify the impacted results that financial portion our ongoing with Our the by In our significant benefit structure recovery select and of we With opportunities maintain well-positioned commercial securitizations. a of WMC will the grow estate quarters from summary, in improving to positioning that With the are attractive of capital Operator, assets were to now feel the focused to your to that, objective please open portfolio liquidity additional remain through ahead. certain we will call

Jason the question-and-answer JonesTrading. begin first now will Stewart go ahead. from Please comes session. instructions] from [Operator We Our question

one, address of bit the based forward, then Hey, on could there I on any a want in expect could sort to that see you the going impact I little and new on drag that helpful. you loan in a was thank say dislocation and a you expect should on you. yields, residential that go-forward side be and with the Obviously XQ. margin margin start we bifurcate to on to if be guess markets would of securitization that basis what in was margin residential if there of side. terms

that answer question. can I Sean. It's sure. Yeah,

wide yields as funds I whole good. on cost in in April the bit around range printed pricing and non-QM so deals since pretty seen think, towards is of to out of early couple the little had the NIM X.XX% But, the We've were in then. of I last end is the loan a was of with X.XX% X%. There's, sort March market. widened improvement the mentioned and week, still that securitization

still NIM we're over basis So of seeing, points. XXX all a in

given So those the securitization market is accretive still pretty numbers.

do to Under in That's additional you a gears switching what restructuring? under you helpful. then for appreciated. disclosure is advance scenario all, to scenario, having the funds of much Okay. this thank first envision And what CREX,

expect investment. in it recovery, I is investment significant that significant for we to such the, sorry, this any need proceed, would would to think -- Greg, need obviously

So isolation. additional something it additional think we support something on already I from would outside I very that But, exposure, investment in strongly to committee it's this significant collateral say, the about that investment. our we would would make obviously or something very felt given planning need at doing require it's point. we're not any that

as chance looks on a Any this process you've Okay. gone LTV us current what could you you're -- like. update through

lot depend for a it of think I of on stage the modification property. of will sort this the final

but the mentioned still, cash there's for look the continued, point. flow rate highly increase, like in term the of this terms -- obviously at what run long performance, will terms we there's variable continued, as of property final In that's

looking that to ability So property we a this well LTV that the re-struck finalized fully definitely gives refinance. and negotiations has the at instance. within as together structure do that the as to this working some we a obviously we're do We are progress haven't feel for resolution. point, project but the feel towards time lenders it this giving see for enough recover beneficial been time in We the

do so capital hoping a see have We're or we'll progress two. final some structure in coming to more the stabilized quarter we there. that present And

for questions. it. taking Appreciate the Thanks Great.

question comes Trevor JMP The from from next Securities. Cranston go Please ahead.

Hey, thanks.

stabilize moved you over the to terms quarters? of, maybe existing where us out expect portfolio supply can what Can in strategy the back Thanks. on think that of of will of next much kind on of speed couple give and decline. prepayment talk to a as you in sense the up you guys are how seeing you portfolio, you that non-QM given that mentioned speeds originators have the coming on loans question from then Another about you terms rates

Sure.

from origination originators talked a couple having then halt to the we've supply, buying ground seen back that of rates as been picked think up jumped and again. we've for weeks to a recently I

we production. year a think, I of non-QM record expecting were

right they now are to originations were down rise. think I from a where probably before rates third by began

first right of a bit a I supply. now. early quite is lower third quarter But So do expect pace

opportunity I originators sorry, think it's more agency that in the going as to we'll a prepays, where non-QM see refinance focusing agency in be shift market decline.

expecting quarters. by next over So recovery strong to the in decrease not few supply a that originations. We're seeing already much I'm

report index in sorry based right As prepays, decline the prepays level by mortgage low extremely is we far refi index, now. pre-pay as bankers XX-year saw the XX%, last the refi XX and

So not to to it expect prepaids we should do extent, decline. but exactly well. I'm sure slow what pretty

time the prepayments borrower has more a think I borrower than non-QM do for couple prepay pretty loan an XX bit a given to to turnover days expect down to should versus and agency, days I average a originate said, we the but, new little non-QM XX maybe the decline. Like incentive XX% agencies and if clients weeks to see the happen we soon. is,

that you. in you the your of securitization? also you investments you the where in secondary own Got say about how loans mentioned acquiring capital guys investments view Then Okay. made returns stack in market Can and available were purchases million non-QM you those doing MBS. versus $XX and MBS

Sure. seen spreads in widen Trevor. in new markets concert. Yeah issue the at secondary We've definitely

similar targeting, the that take advantage we we've risk So say attractive. profiles historically it of I'd is ones to and originated that credit

rated made risk extension investment than of the coordinated short were the tranches. purchases with of I the duration fairly we we rated maybe think grade less majority lower did some

to think staying higher is I returns we attractive still of in do still but, mindful staying obviously the structure financing those lever assets, securitization. capital have liquid, via So, goal long-term on our see and

as see an securities still the we forms. the time. as of real acquisition more rotation securitization that's opportunities view in and committed to we of So, investment But opportunistic

Sure.

comment. sense. Makes Thank you. Appreciate Okay. the

question from Management Holtz ahead. Services. next comes [ph] The from DIA Please go Dan

Good Thank -- question you what to just and taking for split. fail your split. have rational a if Yes. I of approve if explain could the the do reverse morning. a wondering reverse you recent a goals about investors my call. is plan a please proposal I

that factors diversifying and the the this one they're Sure. Yeah, approving of considered Bonnie. the the the board is this in Dan, is investor we've Thanks recommending for question. to base.

institutional are that there of level based some have So constraints upon investors price. the stock

expand And so base stock buy investors potential that split of implemented, if we reverse felt WMC. could that the the could

pass, is we situation at levels. part it So not a If are our of that in obviously it. does operating current

to plan on That's focus strategy value. And the forward quo and so vote. the our building and shareholder transition our focusing we'll just of of results on continue to we status look the

of price towards as of supporting what current the the you in Asset do the continue, split doesn't trends of the -- this and the happen. getting with see training if company area stepping stock, manager Western would reverse and de-risk company level to be the if continues Now it's

fundamental So of did Western They in do support fully will XXXX, expect Asset management their the they is and that we the lend continue know, for while they as full support the external does entity. grant value managerial manager we waiver to and and WMC WMC. the believe will to

you Thank

turn are session. for no closing This the like instructions] Wongtrakool I'd over conference the our questions [Operator concludes remarks. to any Bonnie There more to in queue. back question-and-answer

Thank the operator of has you you thank all a WMC, we us everyone look rest appreciate that safe. for to and for in the ahead. again call. interest and weeks remains healthy hope your day forward with today's personally We continued in good connecting joining you, and We and

presentation. Thank attending has conference The for concluded. you now today's

You now disconnect. may