Western Asset Mortgage Capital (WMC) 4 Nov 222022 Q3 Earnings call transcript

Good day and welcome to the Western Asset Mortgage Capital Corporation's Third 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.

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

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

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

date to of strategic making undertaken that until its definitive remarks and Safe result impact Reform factors of are Harbor refrain be and Securities review I forward-looking be the subject of this forward-looking presentation cause this will begin, of a transaction aimed Act. call. change the over status This enhancing Harbor and company those company. contain related the of to of the of the could many review strategic Actual comments conference of control meaning in merger assurance differ a made review the exploring not process, we our authorized the I'd can at process by will will ongoing could notice. those the Safe Board factors alternatives Reform be call outcomes given subject of the prepared to call not presentation of results update the a from now differ The process. the we in has section or has been value, intended completion with that included statements company review filed All protection or during timetable ended. a Risk forward-looking has materially other review are are the that to reports without now as as to that SEC. sale only I'll to this statements merger question-and-answer set limit forward-looking like materially conducting the will XXXX. statements include beyond the the this Litigation Therefore, are intends contained Certain session the obligation actual company. until statement. for by Factors that in or forward-looking process statements of from unless constitute turn to in from results to such agreement announced statements will reached company's the strategic which any alternatives being included in to of involving the company or our call required the due that, of forecasts to may Wongtrakool. the disclaim Act Private the within of Bonnie shareholder result Bonnie? statements and to the law. provided you All With Directors Before company No We the remind August, the sale the

and everyone. Larry, Thanks, welcome,

of to third ongoing like for results, our Before would financial strategic few words discuss say a company. about quarter I I the review our alternatives

investments pandemic I call, number primarily negatively our impacted the COVID-XX As on holdings. last discussed our commercial a within quarter's of

period, overarching stock seen the years, taking price. we progress significant a liquidity investments of earnings to aware, in and have made both we And residential the past we power. improve the and alternatives in goal price. our towards our have our our sheet, experienced Over two real decided of the our decline review on value. have shifting our actions and unlocking stock our well goal significant estate. actions stabilize Nonetheless, by of been has we balance Therefore, over with a portfolio to shareholder therefore, future by you're to not in As embark improve value reflected our strategic and this positive

to process a and or may move company. to the this transaction involve continue in analyze We that forward other merger alternatives involving sale,

us optimizing meantime, of the We period. shareholders turn and that with our run In to to provide assets continue process will which I are a manner attractive as quarterly company goal earnings, strategic truly possible this have focused stable pay maintaining updates ability on who our to is as that, with concluding quickly our appropriate. results. the as in review challenging and our With in support will our the will turn of value We the consistent appreciate now through remained an dividends. we will

additional value declined for stable XX.X%. prior loans, results quarter commercial generated declined net credit of after from asset combined third quarter widening our due on income share, interest the reflect to our the continue XX.X% our residential portfolio. fluctuating book from We while per which ongoing income book translated from into interest spread guest rate economic interest write per share to lower adjusting pre-payments Our value our rate which of the our again down put hedges quarter, an and during to challenges non-performing value, holdings. This volatility volatility with pressure market across

$X.X higher the the from moderately Consequently, distributable operating quarter. second or million, were was approximately share quarter our However, third of $XXX,XXX earnings by per offset $X.XX down this in expenses.

the earnings than for earnings were to supported power dividend per philosophy our less $X.XX While remain pay our distributable of the are share quarter, dividends that portfolio. the our by long-term

and quarter, and assets, or approximately the repayment sheet liquidity. proceeds our third $XX million from focused of balance downs these and we recourse strategies. to which sale, increasing our and confident of further additional retirement Xrd. any investments strengthening notes, We on debt retire target sufficient debt, reduce primarily our XXXX build have acquire liquidity to to on investment received the cash pay that use October the instead We balances, did During including our our and occurred execute full remain we not

to continue manner. our commercial orderly assets we in As non-core an monetize

that We our by also of underwritten a remain own confident residential equity, expected. as we significant been sheet and performing credit portfolio homeowner power The the balance supported In steps we of loans take have further to portfolio. portfolio. the continue overall are strengthen diligently in residential summary, and the quality and to is our stabilize earnings

always, to As for value shareholders. our we remain committed building

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

Thanks, Bonnie.

held rates rose on majority and the pressure of two book yields During portfolio. our our The securitization. mitigated widened marginally vast residential across value value. our whole which are recent the whole residential also most rose impact put spreads quarter because third our our book This loan our dramatically, transactions the on partially within loans on

have focus sufficient securitizations did accounting we address maturity was this to use. GAAP maintaining offset two the method the However, quarter due did on our not We as during the loans our first liquidity non-QM our acquire not of any notes. to XXXX

the loans non-QM mortgage expected, prepayment quarter as environment During alongside And on the slow. caused rate rose rates origination rates higher rates. meaningfully conventional to

Third the in XX second were quarter the the quarter. CPR, in first CPR to compared XX.X XX.X non-QM CPR quarter, and portfolio prepayments for

from from will to remain cause an As will our two year. $XXX,XXX, anticipate the higher the activity low. prepayments portfolio was loan that We a premium in refinancing and quarters first amortization continue down relatively the million average of for mortgage result, of X.X quarter rates

X.XX% our effectiveness average our with to high-quality loans delinquent equity total Our the end. days the standards, their weighted that This loan perform to non-QM than well, at was origination, portfolio borrowers our our homes. credit XX continues approximately underwriting At in have of quarter score focus more was for underscores XX% and of FICO XXX. meaningful borrowers value ratio on average which

online lack pandemic, booming prices and market. have markets Now even begun overall to of to demand. during chain in higher a inadequate delay will be the under of rates. speed we waning be there supply the the determined to mortgage was the market pressure economic the home construction, that and of word demand, surge the the by but view past the home XX to relative magnitude rates during affordability. anticipate primarily supply to Supply in of on our housing growth decline absolute pandemic face issues of continued level The and as broader due mortgage the pressure The prices. next home new continued of months X increased on levels likely comes certain and housing After downward a over stall will

cool, implies, mainly a well housing financial we or current to as not to XX sector have While of expected non-QM high-quality, is standards that of our crisis home as great disciplined pricing credit risk market significant hallmark years since lender targeting correction the approach the underwriting been price ago. of default borrowers, due the do that see

spreads combined and high turn Feds as rates Greg? we more timing With the holdings. Greg on our cycle. that, tightening pace the expect Additionally, call to Handler to get with and commercial will interest we the discuss value volatility and that believe decline we over holdings. I'll Therefore, normalization our upside residential spread provide to to of carry clarity

Thanks, Sean.

Now turning to our portfolio. commercial

loans one performed continued to of third at quarter-end, non-performing the across held the loans fair commercial only line that commercial but the loans our credit a later. in But million. sector. exception widen of with commercial commercial At have these value will expectations. we with were During quarter, spread All the XX.X six impacted modestly mortgage I address whole holdings of

currently repayment full a one performing to million, and from principal pay The another a from $XX total remaining million XX five a received down and over million. of are of we loan quarter, at the represent negligible XX over for discount just just During partial cost. a balance marked being loans

properties We the as expected next or over pay sold to quarters refinanced. either loans several off are

to its late we timing located in loan, the also as served of complex, consummated each loan as the specific junior the in by property, However, for the With depends loan and payoffs northeast, U.S. in loan. whether which as no assurance interest this realization or value to October, respect on when of a the of there to fair payoffs mezzanine reduced the and our the senior these factors the foreclosure mezzanine ultimate collateral and lender property, equity will primary entertainment can be retail occur. backed pertaining

a supporting result, As but collateral loan. the our benefit outstanding, without remains primary of the loan

XX% loan measures case, compared second at down XX.X exploring will approximately our those that properties is securities, with hotel million cater consists million million mainly We our to value that and XX.X are asset, from a loss total down borrower non-agency the maximize quarter. these these But operating we a investment. in a travelers. million, to A measures And of remain a of less equity to of portfolio This original single positive -- million mortgage-backed of $XX Class continuing the all of representing single This value. sponsors. XX prior of at see experience the XX, momentum X.X portfolio marked assets the million available valued one properties. properties commercial the of in These Within end September to on there was our leisure at credit approximately of are high-quality loans all number strong portfolio retail no portion the these are we our of quarter. be are generally assurances to which loan. could And had successful, portfolio any recovery the than At loan with X currently current.

their permanently value or impaired. collateral been has So that we materially not believe

reinvest values and valued in assets call proceeds I'll backed over portfolio remained to to offer that new attractive mortgage million the commercial debt pay now Our continue We risk exposure second recourse Bob down Bob? focused opportunistically and into recovery quarter. our Lehman, to returns. XX.X use turn to slightly is those from levels to optimizing on adjusted our intend down CFO. the commercial at the our conduit target

We provide presentation. a press our earnings you, release quarter regarding detail portfolio and our Thank Greg. third our in great

of million, on So reverse share implemented attention. items we that one or we've only stock We earnings July distributable additional of during I'm XX. quarter's or from amounts amortization, X.X third earnings per down resulted going share. million, adjusted level in that second on for to have the in And been as from the $X.X This down $XXX,XXX the $X.XX quarter. quarter, to $XX.X noted warrant quarter. split received second million per the of sale loans in the down We repayment XX.X million XX focus per the $X.X in share for release, the million all and reported of from was which second here the reflect whole from quarter, premium $X.XX residential

and and and we the associated Our controller by to quarter that increases higher a We management while incur will strategic expenses core June in that of result. CFO a continue were the were slightly compensation support result some lower that management likely operating increase in expense review discipline in transaction as professional primarily additional, XXXX offset new began costs process recognizing to our some in on related fee. focused expenses remain will fees

While earnings $X.XX of the dividend of our distributable short our in quarter per fell share.

the sustainable portfolio $X.XX taxable will our of factors. the value earnings We quarter several dividend per was $XX.XX was long-term a factors, evaluate level driven quarter based from decline continue book our two the quarter, decrease the to every including the the for and income. outlook for of on second GAAP power of the or by XX.X% share

size retained associated our widening negatively unrealized in loss the book whole further the Greg due to trust, junior $X.XX but share, mainly rather book for to the loan securitization second, across in Economic value, relative portfolio. decreased residential our of $XX.XX assets their by per and loans spread interest that to noted, overall XX.X% value the the impacted by the than which First, reflects the increase per of consolidated our share. holdings quarter liabilities mezzanine value gross and

our Turning end X.Xx the at of ratio from to was up fourth leverage, in after the early time. X.Xx recourse that leverage July, securitization quarter at our completion

that X.Xx XXXX was ratio the of notes October leverage reduced occurred after our Our to further on X. retirement

million. as after maturity of XXXX year. liquidity, to extended our million the to November the of was XXXX, to on commercial we X, to XX date facility we scheduled November with mature Turning the $XX.X ended end, our quarter we're our unrestricted remaining loan unrestricted of quarter cash cash $XX.X million notes, of whole X retiring Subsequent this

we of our significant XX, now we and a attractive capital solidify remarks. in October call assets With actions our distributable the whole addition, will remain earnings by with feel portion In the turn With dividend extended maturity facility financed objective summary, longer-term generate loan residential maintain closing Bonnie In to we we focused our for our consistent ahead. are to XXXX. well the of quarters that the date I'll that financing, liquidity. on of positioned structure to our supporting back that, Bonnie?

you We of again for Have And call. and in continued us months apprised of Thank thank in you look keeping progress you, the Bob. good all joining to a our ahead. WMC. for your day appreciate interest we today's forward

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

You may now disconnect.