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Section 1: 8-K (8-K)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 8-K
 
 
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
 
Date of Report (Date of earliest event reported):
 

May 4, 2020

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Western Asset Mortgage Capital Corporation
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
 DELAWARE
(STATE OF INCORPORATION) 
001-35543 27-0298092
(COMMISSION FILE NUMBER) (IRS EMPLOYER ID. NUMBER)
 
385 East Colorado Boulevard 91101
Pasadena, California (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)  
       (626) 844-9400
(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
 
[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
 
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Indicate by check mark whether the registrant is an emerging growth company as defined in as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading Symbol(s) Name of Each Exchange on Which Registered
Common Stock, $0.01 par valueWMC New York Stock Exchange




Item 2.02.       Results of Operations and Financial Condition
 
On May 6, 2020, Western Asset Mortgage Capital Corporation (the “Company”) issued a press release announcing its financial results for the fiscal quarter ended March 31, 2020. The text of the press release is furnished as exhibit 99.1 to this Form 8-K.

Item 2.03. Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant.

On May 4, 2020, the Company supplemented one of its existing securities repurchase facilities to confirm terms pursuant to which it will consolidate most of its CMBS and RMBS assets, which are currently financed by multiple counterparties, into a single term facility with limited mark to market margin requirements, as described below. Pursuant to this confirmation, a margin deficit will not occur until such time as the loan to value ratio surpasses a certain threshold (the “LTV Trigger”), on a weighted average basis per asset type, calculated on a portfolio level. If this threshold is reached, the Company may elect to provide cash margin or sell certain assets to the extent necessary to lower the ratio. The term of this facility is 12 months, subject to extensions at the counterparty’s option. All interest income generated by the assets during the term of the facility will be paid to the Company no less often than monthly, with a price differential based on three-month LIBOR plus a spread payable to the counterparty quarterly in arrears. Half of all income generated by principal repayments on the underlying assets will be applied to repay the obligations owed to the counterparty, with the remainder paid to the Company, unless the LTV Trigger has occurred, in which case all principal payments will be applied to repay the obligations.

The counterparty has a right of first refusal upon any repurchase by the Company of any asset subject to this confirmation, provided the Company may request the counterparty to solicit third party dealer bids with respect to such sale. All asset sale proceeds less 50% of any excess proceeds over the counterparty’s amortized basis will be applied to repay the obligations owed to the counterparty, with the remainder paid to the Company, unless the LTV Trigger has occurred, in which case all asset sale proceeds will be applied to repay the obligations. Customary bank financing breakage fees are also payable upon the sale of the underlying assets. The confirmation also provides for a certain minimum level of shareholders’ equity and cash, respectively.

The aggregate financing provided by the counterparty with respect to the assets covered under this confirmation is approximately $108.8 million and the market value of such assets is approximately $182.7 million.  

Item 7.01.        Regulation FD Disclosure
 
On May 7, 2020, the Company will be holding its quarterly conference call in which it will discuss its financial results.  The presentation for such call is furnished herewith as Exhibit 99.2 to this Form 8-K.
 
Pursuant to the rules and regulations of the Securities and Exchange Commission, Exhibits 99.1 and 99.2 and the information set forth therein and herein are being furnished and shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), nor shall they be deemed to be incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing.
 
Item 9.01.       Financial Statements and Exhibits
 
(d)  Exhibits
 
Exhibit No.Description
99.1  
99.2  




SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
 WESTERN ASSET MORTGAGE CAPITAL CORPORATION
   
   
 By:/s/ Adam C. E. Wright 
  Name:Adam C. E. Wright 
  Title:Assistant Secretary 
 
 
 
Date:  May 7, 2020


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Section 2: EX-99.1 (EX-99.1)

Document

Exhibit 99.1


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WESTERN ASSET MORTGAGE CAPITAL CORPORATION
ANNOUNCES FIRST QUARTER 2020 RESULTS
 
Conference Call and Webcast Scheduled for Tomorrow, Thursday, May 7, 2020 at
11:00 a.m. Eastern Time/8:00 a.m. Pacific Time
 
Pasadena, CA, May 6, 2020 – Western Asset Mortgage Capital Corporation (the “Company” or "WMC") (NYSE: WMC) today reported its results for the first quarter ended March 31, 2020.
 
FIRST QUARTER 2020 FINANCIAL RESULTS

Book value per share of $3.41.
GAAP net loss of $381.9 million, or $7.15 per basic and diluted share.
Core earnings plus drop income of $15.8 million, or $0.29 per basic and diluted share.1,5
Economic return on book value was a negative 67.7% for the quarter.1,2
1.84% annualized net interest margin on our investment portfolio. 1,3,4
9.5x leverage excluding non-recourse debt.(6)

OTHER FIRST QUARTER 2020 UPDATES

In response to the unprecedented market volatility at the end of the first quarter of 2020, the Company implemented measures to increase liquidity, reduce debt, and seek financing arrangements as an alternative to short term repurchase agreements with daily margin requirements. In March, these measures included, but were not limited to, the following:

Sold approximately $1.5 billion of Agency MBS and $142.4 million of Non-Agency MBS.
Reduced repurchase agreement financings by 48.0% to $1.6 billion.
Terminated all interest rate hedges and further reduced margin call volatility.
Suspended our first quarter common dividend to preserve liquidity.

ADDITIONAL BUSINESS UPDATES

Our Manager waived management fees for March 2020 and April 2020.
In April, we closed an 18 month term financing arrangement without margin requirements for our entire non-QM loan portfolio. The impact of this financing was to reduce our exposure to repurchase agreement financing by approximately $385 million and eliminate associated margin calls.
In April, we further reduced repurchase agreement financings by selling approximately $370.3 million of Agency MBS, $65.3 million of Non-Agency MBS, $148.6 million in conforming whole loans, and $18.2 million other securities.
In May, we closed a 12 month term financing arrangement for Non-Agency RMBS and Non-Agency CMBS, significantly mitigating exposure to margin volatility.
1  Non – GAAP measure.
2  Economic return is calculated by taking the sum of: (i) the total dividends declared; and (ii) the change in book value during the period and dividing by the beginning book value.
3   Includes interest-only securities accounted for as derivatives and the cost of interest rate swaps.
4 Excludes the consolidation of VIE trusts required under GAAP.
5 Drop income is income derived from the use of ‘to-be-announced’ forward contract (“TBA”) dollar roll transactions which is a component of our gain (loss) on derivative instruments on our consolidated statement of operations, but is not included in core earnings. Drop income was approximately $1.1 million for the three months ended March 31, 2020.
6 The debt amount used in the calculation of leverage is net of receivable under reverse repurchase agreements.
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MANAGEMENT COMMENTARY
“The first quarter was an extremely challenging environment for global equity and fixed income markets as the COVID-19 pandemic created unprecedented economic disruption, severe illiquidity, volatility and uncertainty,” said Jennifer Murphy, Chief Executive Officer of the Company. “These conditions were very prominent in U.S. mortgage markets, causing an extreme lack of liquidity combined with forced selling, resulting in swift and dramatic price declines. Our portfolio, despite its diversity and focus on high-quality mortgage investments, was negatively impacted by these extraordinary market pressures. Our results at quarter end reflect these market conditions, as we experienced a 67.7% decline in our book value per share and a GAAP net loss of $381.9 million, or $7.15 per share. While we generated core earnings plus drop income of $0.29 per share during the first quarter, relatively consistent with the previous quarter, we made the decision to retain those earnings and suspend the first quarter dividend to maintain additional liquidity and help protect the value of shareholder assets in this environment.”

Ms. Murphy continued, “We believe our focus on high quality borrowers and assets as well as our diversified approach will provide an opportunity for our assets to recover significantly as economic activity resumes. We are committed to taking the necessary steps to protect assets and preserve the opportunity for our shareholders to benefit meaningfully in the recovery. To this end, we have been actively seeking new and more stable sources of financing. Subsequent to quarter-end, we successfully secured two term financing facilities, one on a portion of our residential whole-loan portfolio and the second on a portion of our Non-Agency CMBS and RMBS portfolio. Our focus on behalf of shareholders is to protect the value of the portfolio, enable shareholders to benefit from recovery, and reposition the company to resume delivering on our long term objectives,” Ms. Murphy concluded.

Harris Trifon, Chief Investment Officer of the Company, commented, “While the broader market volatility resulting from the COVID-19 pandemic led to extreme price declines on our assets in March, we have experienced some recovery in their prices through the end of April. We believe that current prices in the credit sector of the U.S. residential and commercial real estate mortgage markets envisage severe economic scenarios last seen during the Global Financial Crisis. While assessing the longer-term economic damage of this crisis remains challenging given its unique nature and unprecedented scale, our view is the extraordinary amount of fiscal and monetary support that the U.S. government is providing our financial system and the broader economy will dampen the economic impact of the quarantine period and support liquidity conditions in the fixed income markets.”

“We believe valuations in mortgage credit assets are particularly favorable relative to fundamentals even given the increased uncertainty in the near term. We also believe that the current recession will eventually pass and give way to an economic recovery although the timing and strength of the recovery will be dependent on the spread of the virus and availability of therapeutics and a potential vaccine. Looking ahead, we believe mortgages secured by real estate assets with meaningful equity in the properties and higher quality credit will continue to perform well over the longer term. While many sectors of the mortgage market currently offer historically attractive valuations, our primary focus is on maintaining sufficient liquidity and reducing our overall debt while consolidating our financial relationships in order to protect against further book value erosion and position the portfolio for potential future appreciation. We feel that our current stance is the best way to put us back on course towards our long-term objectives of generating sustainable core earnings that can support an attractive dividend, with the overall goal of enhancing stockholder value,” concluded Mr. Trifon.
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OPERATING RESULTS
 
The below table reflects a summary of our operating results:
 
 For the Three Months Ended
GAAP ResultsMarch 31, 2020December 31, 2019
(in thousands-except share and per share data)
Net Interest Income$18,741  $18,927  
Other Income (Loss):  
Realized gain (loss) on sale of investments, net89,186  11,992  
Other than temporary impairment—  (2,228) 
Unrealized gain (loss), net(296,111) (52,896) 
Gain (loss) on derivative instruments, net(189,691) 42,007  
Other, net461  518  
Other Income (loss)(396,155) (607) 
Total Expenses4,534  5,209  
Income (loss) before income taxes(381,948) 13,111  
Income tax provision (benefit)(93) 622  
Net income (loss) $(381,855) $12,489  
Net income attributable to non-controlling interest —  
Net income (loss) attributable to common stockholders and participating securities$(381,857) $12,489  
Net income (loss) per Common Share – Basic/Diluted$(7.15) $0.23  
Non-GAAP Results  
Core earnings plus drop income (1)
$15,779  $15,790  
Core earnings plus drop income per Common Share – Basic/Diluted$0.29  $0.30  
Weighted average yield(2)(4)
4.90 %4.60 %
Effective cost of funds(3)(4)
3.28 %3.09 %
Annualized net interest margin(2)(3)(4)
1.84 %1.72 %
 
(1)          For a reconciliation of GAAP Income to Core earnings, please refer to the Reconciliation of Core Earnings at the end of this press release.
(2)          Includes interest-only securities accounted for as derivatives.
(3)          Includes the net amount paid, including accrued amounts for interest rate swaps and premium amortization for MAC interest rate swaps during the periods.
(4) Excludes the consolidation of VIE trusts required under GAAP.



3


Portfolio Composition
 
As of March 31, 2020, the Company owned an aggregate investment portfolio with a fair market value totaling $2.9 billion. The following tables sets forth additional information regarding the Company’s investment portfolio as of March 31, 2020:
 
Portfolio Characteristics

Agency Portfolio

The following table summarizes certain characteristics of our Agency portfolio by investment category as of March 31, 2020 (dollars in thousands): 
 Principal BalanceAmortized CostFair ValueNet Weighted Average Coupon
Agency CMBS$369,843  $387,166  $413,394  3.1 %
Agency CMBS Interest-Only Strips, accounted for as derivativesN/A  N/A  2,792  0.4 %
Total Agency CMBS369,843  387,166  416,186  2.3 %
Agency RMBS Interest-Only StripsN/A  8,102  9,952  3.1 %
Agency RMBS Interest-Only Strips, accounted for as derivativesN/A  N/A  4,490  2.9 %
Total Agency RMBS—  8,102  14,442  3.0 %
Total$369,843  $395,268  $430,628  2.5 %
 
Credit Sensitive Portfolio

The following table summarizes certain characteristics of our credit sensitive portfolio by investment category as of March 31, 2020 (dollars in thousands): 

 Principal BalanceAmortized CostFair Value
 Weighted Average Coupon(1)
Non-Agency RMBS$39,261  $23,799  $21,123  4.6 %
Non-Agency RMBS IOs and IIOsN/A  7,229  5,174  0.5 %
Non-Agency CMBS336,816  304,131  250,309  5.3 %
Residential Whole Loans1,352,778  1,381,099  1,309,795  5.1 %
Residential Bridge Loans(2)
29,650  29,688  28,634  9.5 %
Securitized Commercial Loans(1)
543,678  544,867  477,131  4.6 %
Commercial Loans332,576  332,263  320,308  7.1 %
Other Securities76,482  77,258  47,411  6.5 %
$2,711,241  $2,700,334  $2,459,885  4.2 %

(1) Includes Residential Bridge Loans carried at amortized cost of $2.6 million as of March 31, 2020. The fair value of these loans was $2.6 million as of March 31, 2020.
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PORTFOLIO FINANCING AND HEDGING
 
Financing Activity

Repurchase Agreements
 
As of March 31, 2020, the Company had borrowings under 19 master repurchase agreements. The following table sets forth additional information regarding the Company’s portfolio financing under the master repurchase agreements, which includes the outstanding balance under our $700 million residential whole loan and $200 million commercial whole financing facilities, as of March 31, 2020 (dollars in thousands):
 
Outstanding BorrowingsWeighted Average Interest Rate Weighted Average Remaining Days to Maturity
Short Term Borrowings:
Agency CMBS$437,577  1.38 %27
Agency RMBS11,852  2.35 %21
Non-Agency CMBS214,972  3.04 %24
Non-Agency RMBS20,148  3.09 %8
Residential Whole-Loans 272,458  2.99 %129
Residential Bridge Loans24,222  3.79 %28
Commercial Loans47,547  3.90 %28
Securitized Commercial Loan32,803  2.76 %29
Other Securities53,244  3.15 %28
Subtotal1,114,823  2.42 %51
Long Term Borrowings
Residential Whole-Loans (1)
285,409  2.67 %1004
Commercial Loans (1)
153,549  2.73 %503
Subtotal438,958  2.70 %829
Repurchase agreements borrowings$1,553,781  2.50 %271
Less unamortized debt issuance costs66  N/A  N/A
Repurchase agreements borrowings, net$1,553,715  2.50 %271

(1) Certain Residential Whole Loans and Commercial Loans were financed under two longer term financing facilities. These facilities automatically roll until such time as they are terminated or until certain conditions of default. The weighted average remaining maturity days was calculated using expected weighted life of the underlying collateral.

For the reporting period ended March 31, 2020, we breached certain financial statement covenants in repurchase agreements with two counterparties with borrowings outstanding as of May 5, 2020. Both counterparties have waived the breaches until August 1, 2020. In addition we would have been in breach of certain covenants in another seven repurchase agreements with borrowings outstanding as of March 31, 2020 but with respect to those seven agreements we have either modified the covenants or paid off the repurchase agreement borrowings in full.

Convertible Senior Unsecured Notes

At March 31, 2020, the Company had $205 million aggregate principal amount of 6.75% convertible senior unsecured notes outstanding. The notes mature on October 1, 2022, unless earlier converted, redeemed or repurchased by the holders pursuant to their terms, and are not redeemable by the Company except during the final three months prior to maturity. The initial conversion rate was 83.1947 shares of common stock per $1,000 principal amount of notes and represented a conversion price of $12.02 per share of common stock.

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Mortgage-Backed Notes

The following table summarizes the residential mortgage-backed notes issued by the Company's securitization trust (the "Arroyo Trust") at March 31, 2020 (dollars in thousands):
 
ClassesPrincipal BalanceCouponCarrying ValueContractual Maturity
Offered Notes:(1)
Class A-1$634,467  3.3%$634,464  4/25/2049
Class A-233,996  3.5%33,995  4/25/2049
Class A-353,859  3.8%53,857  4/25/2049
Class M-125,055  4.8%25,055  4/25/2049
747,377  747,371  
Less: Unamortized Deferred Financing CostN/A  5,074  
Total$747,377  $742,297  
(1) The subordinate notes were retained by the Company.
The securitized debt of the Arroyo Trust can only be settled with the residential loans that serve as collateral for the securitized debt and are non-recourse to the Company.

Derivatives Activity

On March 3, 2020, the Federal Open Market Committee reduced the target federal funds rate by 50 basis points to 1.00% to 1.25%. This rate was further reduced to a target range of 0% to 0.25% on March 16, 2020. These reductions in interest rates and other effects of the COVID-19 outbreak caused volatility in interest rates. As a result, we received significant margin calls on our interest rate swaps. In this very low interest rate environment the Company's interest rate swaps were no longer effective. In March 2020, the Company terminated fixed-pay interest rate swaps with a notional value of approximately $3.1 billion and variable-pay interest rate with a notional value of approximately $1.9 billion to reduce hedging costs and associated margin volatility.

        The following table summarizes the Company’s derivative instruments at March 31, 2020 (dollars in thousands):

Other Derivative InstrumentsNotional AmountFair Value
Swaptions, asset$50,000  $195  
Credit default swaps, asset47,260  15,557  
TBA securities, asset778,200  17,923  
Total derivative instruments, assets33,675  
Swaptions, liability$255,000  $(14) 
Credit default swaps, liability97,260  (22,106) 
TBA securities, liability778,200  (21,847) 
Total derivative instruments, liabilities(43,967) 
Total derivative instruments, net$(10,292) 


DIVIDEND
 
6


As previously announced, due to the turmoil in the financial markets resulting from the COVID-19 pandemic, we suspended the first quarter dividend to preserve liquidity.
 
CONFERENCE CALL
 
The Company will host a conference call with a live webcast tomorrow, May 7, 2020 at 11:00 a.m. Eastern Time/8:00 a.m. Pacific Time, to discuss financial results for the first quarter 2020.
 
Individuals interested in participating in the conference call may do so by dialing (866) 235-9914 from the United States, or (412) 902-4115 from outside the United States and referencing “Western Asset Mortgage Capital Corporation.” Those interested in listening to the conference call live via the Internet may do so by visiting the Investor Relations section of the Company’s website at www.westernassetmcc.com.
 
The Company is enabling investors to pre-register for the earnings conference call so that they can expedite their entry into the call and avoid the need to wait for a live operator. In order to pre-register for the call, investors can visit http://dpregister.com/10143381 and enter in their contact information. Investors will then be issued a personalized phone number and pin to dial into the live conference call. Individuals can pre-register any time prior to the start of the conference call tomorrow.
 
A telephone replay will be available through May 21, 2020 by dialing (877) 344-7529 from the United States, or (412) 317-0088 from outside the United States, and entering conference ID 10143381. A webcast replay will be available for 90 days.

ABOUT WESTERN ASSET MORTGAGE CAPITAL CORPORATION
 
Western Asset Mortgage Capital Corporation is a real estate investment trust that invests in, acquires and manages a diverse portfolio of assets consisting of Agency CMBS, Agency RMBS, Non-Agency RMBS, Non-Agency CMBS, ABS, GSE Risk Transfer Securities, Residential Whole and Bridge Loans and Commercial Loans. The Company’s investment strategy may change, subject to the Company’s stated investment guidelines, and is based on its manager Western Asset Management Company, LLC's perspective of which mix of portfolio assets it believes provide the Company with the best risk-reward opportunities at any given time. The Company is externally managed and advised by Western Asset Management Company, LLC, an investment advisor registered with the Securities and Exchange Commission and a wholly-owned subsidiary of Legg Mason, Inc. On February 18, 2020, Franklin Resources, Inc. (“Franklin”) and Legg Mason announced that they had entered into an agreement under which Franklin would acquire Legg Mason and its affiliates, including Western Asset Management Company, LLC. The transaction is expected to close in the third quarter of 2020 and is subject to customary closing conditions. Upon completion of the transaction Western Asset Management Company, LLC would become a wholly owned subsidiary of Franklin. Please visit the Company’s website at www.westernassetmcc.com.



FORWARD-LOOKING STATEMENTS
 
The press release contains statements that may constitute "forward-looking statements" For these statements, the Company claims the protections of the safe harbor for forward-looking statements contained in such sections. Forward-looking statements are subject to substantial risks and uncertainties, many of which are difficult to predict and are generally beyond the Company’s control. In particular, it is difficult to fully assess the impact of COVID-19 at this time due to, among other factors, uncertainty regarding the severity and duration of the outbreak domestically and internationally and the effectiveness of federal, state and local governments’ efforts to contain the spread of COVID-19 and respond to its direct and indirect impact on the U.S. economy and economic activity. Other factors are described in Risk Factors section of the Company’s annual report on Form 10-K for the period ended December 31, 2019 filed with the Securities and Exchange Commission (“SEC”). The Company undertakes
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no obligation to update these statements for revisions or changes after the date of this release, except as required by law.



USE OF NON-GAAP FINANCIAL INFORMATION
 
In addition to the results presented in accordance with GAAP, this release includes certain non-GAAP financial information, including core earnings, core earnings per share, drop income and drop income per share and certain financial metrics derived from non-GAAP information, such as weighted average yield, including IO securities; weighted average effective cost of financing, including swaps; weighted average net interest margin, including IO securities and swaps, which constitute non-GAAP financial measures within the meaning of Regulation G promulgated by the SEC. We believe that these measures presented in this release, when considered together with GAAP financial measures, provide information that is useful to investors in understanding our borrowing costs and net interest income, as viewed by us.  An analysis of any non-GAAP financial measure should be made in conjunction with results presented in accordance with GAAP.
 
###
 
Investor Relations Contact:Media Contact:
Larry ClarkTricia Ross
Financial Profiles, Inc.Financial Profiles, Inc.
(310) 622-8223(310) 622-8226
lclark@finprofiles.comtross@finprofiles.com
 
-Financial Tables to Follow-
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Western Asset Mortgage Capital Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands—except share and per share data)
(Unaudited)
 March 31, 2020December 31, 2019
Assets:  
Cash and cash equivalents$10,342  $31,331  
Restricted cash33,229  52,948  
Agency mortgage-backed securities, at fair value ($430,628 and $1,756,917 pledged as collateral, at fair value, respectively)430,628  1,795,255  
Non-Agency mortgage-backed securities, at fair value ($265,647 and $292,613 pledged as collateral, at fair value, respectively)276,606  361,833  
Other securities, at fair value ($47,307 and $80,031 pledged as collateral, at fair value, respectively)47,411  80,161  
Residential Whole Loans, at fair value ($1,309,795 and $1,375,860 pledged as collateral, at fair value, respectively)1,309,795  1,375,860  
Residential Bridge Loans ($26,050 and $33,269 at fair value and $27,571 and $34,897 pledged as collateral, respectively)28,634  36,419  
Securitized commercial loans, at fair value477,131  909,040  
Commercial Loans, at fair value ($320,308 and $350,213 pledged as collateral, at fair value, respectively)320,308  370,213  
Receivable under reverse repurchase agreements24,826  —  
Investment related receivable ($41,214 and $0 pledged as collateral, respectively)72,826  19,931  
Interest receivable14,805  19,413  
Due from counterparties117,670  98,947  
Derivative assets, at fair value33,675  5,111  
Other assets5,697  4,509  
Total Assets (1)
$3,203,583  $5,160,971  
Liabilities and Stockholders’ Equity:  
Liabilities:  
Repurchase agreements, net$1,553,715  $2,824,801  
Convertible senior unsecured notes, net197,984  197,299  
Securitized debt, net ($396,824 and $681,643 at fair value and $53,527 and $142,905 held by affiliates, respectively)1,139,121  1,477,454  
Interest payable (includes $536 and $647 on securitized debt held by affiliates, respectively)6,429  15,001  
Due to counterparties24,811  709  
Derivative liability, at fair value43,967  6,370  
Accounts payable and accrued expenses6,307  3,188  
Payable to affiliate3,237  2,148  
Dividend payable—  16,592  
  Other liabilities 45,779  52,948  
Total Liabilities (2)
$3,021,350  $4,596,510  
Commitments and contingencies  
Stockholders’ Equity:  
Common stock: $0.01 par value, 500,000,000 shares authorized, 53,423,876 and 53,523,876 outstanding, respectively535  535  
Preferred stock, $0.01 par value, 100,000,000 shares authorized and no shares outstanding—  —  
Treasury stock, at cost, 100,000 and 0 shares held, respectively(578) —  
Additional paid-in capital889,392  889,227  
Retained earnings (accumulated deficit)(707,158) (325,301) 
Total Stockholders’ Equity182,191  564,461  
Non-controlling interest42  —  
Total Equity182,233  564,461  
Total Liabilities and Equity$3,203,583  $5,160,971  



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Western Asset Mortgage Capital Corporation and Subsidiaries
Consolidated Balance Sheets (Continued)
(in thousands—except share and per share data)
(Unaudited)
 
 March 31, 2020December 31, 2019
(1) Assets of consolidated VIEs included in the total assets above:
      
Cash and cash equivalents$4,542  $7,589  
Restricted Cash33,229  52,948  
Residential Whole Loans, at fair value ($1,309,795 and $1,375,860 pledged as collateral, at fair value, respectively)1,309,795  1,375,860  
Residential Bridge Loans ($24,987 and $31,748 at fair value and $27,571 and $34,897 pledged as collateral, respectively)27,571  34,897  
Securitized commercial loan, at fair value477,131  909,040  
Commercial Loans, at fair value ($71,684 and $90,788 pledged as collateral, at fair value, respectively)71,684  90,788  
Investment related receivable24,738  19,138  
Interest receivable10,226  10,829  
Other assets101  90  
Total assets of consolidated VIEs$1,959,017  $2,501,179  
(2) Liabilities of consolidated VIEs included in the total liabilities above:
  
Securitized debt, net ($396,824 and $681,643 at fair value and $53,527 and $142,905 held by affiliates, respectively)$1,139,121  $1,477,454  
Interest payable (includes $536 and $647 on securitized debt held by affiliates, respectively)3,215  3,886  
Accounts payable and accrued expenses128  185  
Other liabilities33,229  52,948  
Total liabilities of consolidated VIEs$1,175,693  $1,534,473  
 


10


Western Asset Mortgage Capital Corporation and Subsidiaries
Consolidated Statements of Operations
(in thousands—except share and per share data)
 (Unaudited)
Three months ended
 March 31, 2020December 31, 2019
Net Interest Income  
Interest income$54,846  $55,761  
Interest expense36,105  36,834  
Net Interest Income18,741  18,927  
Other Income (Loss)  
Realized gain (loss) on sale of investments, net89,186  11,992  
Other than temporary impairment—  (2,228) 
Unrealized gain (loss), net(296,111) (52,896) 
Gain (loss) on derivative instruments, net(189,691) 42,007  
Other, net461  518  
Other Income (Loss)(396,155) (607) 
Expenses  
Management fee to affiliate1,039  1,987  
Other operating expenses1,000  1,079  
General and administrative expenses:
  Compensation expense 662  671  
  Professional fees1,480  1,031  
  Other general and administrative expenses353  441  
Total general and administrative expenses2,495  2,143  
Total Expenses4,534  5,209  
Income before income taxes(381,948) 13,111  
Income tax provision (benefit)(93) 622  
Net income (loss)$(381,855) $12,489  
Net income attributable to non-controlling interest —  
Net income (loss) attributable to common stockholders and participating securities$(381,857) $12,489  
Net income (loss) per Common Share – Basic$(7.15) $0.23  
Net income (loss) per Common Share – Diluted$(7.15) $0.23  

11


Reconciliation of GAAP Net Income to Non-GAAP Core Earnings
(in thousands—except share and per share data)
(Unaudited)
 
The table below reconciles Net Income to Core Earnings for the three months ended March 31, 2020 and December 31, 2019:
Three months ended
(dollars in thousands)March 31, 2020December 31, 2019
Net Income (loss)$(381,855) $12,489  
Income tax provision (benefit)(93) 622  
Net Income before income taxes(381,950) 13,111  
Adjustments:  
Investments:  
Unrealized (gain) loss on investments, securitized debt and other liabilities296,111  52,896  
Other than temporary impairment—  2,228  
Realized (gain) loss on sale of investments(89,186) (11,992) 
One-time transaction costs280  154  
Derivative Instruments:  
Net realized (gain) loss on derivatives180,156  (35,918) 
Net unrealized (gain) loss on derivatives8,807  (6,097) 
Amortization of discount on convertible senior unsecured notes273  257  
Non-cash stock-based compensation165  165  
Total adjustments396,606  1,693  
Core Earnings$14,656  $14,804  
Basic and Diluted Core Earnings per Common Share and Participating Securities$0.27  $0.28  
Basic and Diluted Core Earnings plus Drop Income per Common Share and Participating Securities$0.29  $0.30  
Basic weighted average common shares and participating securities53,670,550  53,482,765  
Diluted weighted average common shares and participating securities53,670,550  53,482,765  

Alternatively, our Core Earnings can also be derived as presented in the table below by starting net interest income adding interest income on Interest-Only Strips accounted for as derivatives and other derivatives, and net interest expense incurred on interest rate swaps and foreign currency swaps and forwards (a Non-GAAP financial measure) to arrive at adjusted net interest income. Then subtracting total expenses, adding non-cash stock based compensation, adding one-time transaction costs, adding amortization of discount on convertible senior notes and adding interest income on cash balances and other income (loss), net:

12


Three months ended
(dollars in thousands)March 31, 2020December 31, 2019
Net interest income
$18,741  $18,927  
Interest income from IOs and IIOs accounted for as derivatives91  103  
Net interest income from interest rate swaps
(1,133) (347) 
Adjusted net interest income
17,699  18,683  
Total expenses(4,534) (5,209) 
Non-cash stock-based compensation165  165  
One-time transaction costs280  154  
Amortization of discount on convertible unsecured senior notes273  257  
Interest income on cash balances and other income (loss), net
775  754  
Income attributable to non-controlling interest(2) —  
Core Earnings$14,656  $14,804  

Reconciliation of Interest Income and Effective Cost of Funds
(dollars in thousands)
(Unaudited)
 
The following table reconciles total interest income to adjusted interest income which includes interest income on Agency and Non-Agency Interest-Only Strips classified as derivatives (Non-GAAP financial measure) for the three months ended March 31, 2020 and December 31, 2019:
 
Three months ended
(dollars in thousands)March 31, 2020December 31, 2019
Coupon interest income$57,761  $59,586  
Premium amortization, discount accretion and amortization of basis, net(2,915) (3,825) 
Interest income54,846  55,761  
Contractual interest income, net of amortization of basis on Agency and Non-Agency Interest-Only Strips, classified as derivatives(1):
  
Coupon interest income636  951  
Amortization of basis (545) (848) 
Subtotal
91  103  
Total adjusted interest income$54,937  $55,864  
 
(1)                Reported in "Gain (loss) on derivative instruments, net" in the Consolidated Statements of Operations.
 
The following table reconciles the Effective Cost of Funds (Non-GAAP financial measure) with interest expense for three months ended March 31, 2020 and December 31, 2019:
 
Three months ended
 March 31, 2020December 31, 2019
 (dollars in thousands)
ReconciliationCost of Funds/Effective Borrowing CostsReconciliationCost of Funds/Effective Borrowing Costs
Interest expense$36,105  3.34 %$36,834  3.18 %
Adjustments:
Interest expense on Securitized debt from consolidated VIEs1
(6,754) (4.42)%(6,283) (3.95)%
Net interest (received) paid - interest rate swaps
1,133  0.10 %347  0.03 %
Effective Borrowing Costs$30,484  3.28 %$30,898  3.09 %
Weighted average borrowings$3,733,045   $3,971,551   
(1) Excludes third-party sponsored securitized debt interest expense.
13
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Section 3: EX-99.2 (EX-99.2)

a1q20ex992ng
First Quarter 2020 Investor Presentation May 6, 2020


 
Safe Harbor Statement We make forward-looking statements in this presentation that are subject to risks and uncertainties, many of which are difficult to predict and are generally beyond the Company's control. In particular, it is difficult to fully assess the impact of COVID-19 at this time due to, among other factors, uncertainty regarding the severity and duration of the outbreak domestically and internationally and the effectiveness of federal, state and local governments’ efforts to contain the spread of COVID-19 and respond to its direct and indirect impact on the U.S. economy and economic activity. These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives. When we use the words "believe," "expect," "anticipate," "estimate," "plan," "continue," "intend," "should," "may" or similar expressions, we intend to identify forward-looking statements. Statements regarding the following subjects, among others, may be forward-looking: our business and investment strategy; our projected operating results; our ability to obtain financing arrangements; financing and advance rates for MBS and our potential target assets; our expected leverage; general volatility of the securities markets in which we invest and the market price of our common stock; our expected investments; interest rate mismatches between MBS and our potential target assets and our borrowings used to fund such investments; changes in interest rates and the market value of MBS and our potential target assets; changes in prepayment rates on Agency MBS and Non-Agency MBS; effects of hedging instruments on MBS and our potential target assets; rates of default or decreased recovery rates on our potential target assets; the degree to which any hedging strategies may or may not protect us from interest rate volatility; impact of and changes in governmental regulations, tax law and rates, accounting guidance and similar matters; our ability to maintain our qualification as a REIT; our ability to maintain our exemption from registration under the Investment Company Act of 1940, as amended; availability of investment opportunities in mortgage-related, real estate-related and other securities; availability of qualified personnel; estimates relating to our ability to make distributions to our stockholders in the future; our understanding of our competition; and the uncertainty and economic impact of pandemics, epidemics or other public health emergencies, such as the recent outbreak of COVID-19. The forward-looking statements in this presentation are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. You should not place undue reliance on these forward-looking statements. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us. Some of these factors are described in our filings with the SEC under the headings "Summary," "Risk factors," "Management's discussion and analysis of financial condition and results of operations" and "Business." If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made. New risks and uncertainties arise over time, and it is not possible for us to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. This presentation is not an offer to sell securities nor a solicitation of an offer to buy securities in any jurisdiction where the offer and sale is not permitted. 1


 
First Quarter 2020 WMC Earnings Call Presenters Jennifer W. Murphy Lisa Meyer Harris Trifon Chief Executive Officer & Chief Financial Officer & Chief Investment Officer President Treasurer 2


 
Overview of Western Asset Mortgage Capital Corporation Western Asset Mortgage Capital Corporation (“WMC”) is a public REIT that benefits from the leading fixed income management capabilities of Western Asset Management Company, LLC ("Western Asset") • One of the largest U.S. fixed income asset managers with AUM of $448.0 billion(1) ◦ The AUM of the Mortgage and Consumer Credit Group is $77.7 billion(1) ◦ Extensive mortgage and consumer credit investing track record ∙ Publicly traded diversified mortgage REIT positioned to capture attractive current and long-term investment opportunities in the residential and commercial mortgage markets ∙ Completed Initial Public Offering in May 2012 Please refer to page 15 for footnote disclosures. 3


 
First Quarter Financial Update First Quarter 2020 Financial Results ▪ March 31, 2020 book value per share of $3.41 ▪ GAAP net loss of $381.9 million, or $7.15 per basic and diluted common share. ▪ Core earnings of $15.8 million(2), or $0.29 per basic and diluted common share. ▪ Economic return on book value was a negative 67.7%(3) for the quarter. ▪ 1.84%(4) annualized net interest margin on our investment portfolio. ▪ 9.5x(x) leverage excluding non-recourse debt as of March 31, 2020. Please refer to page 15 for footnote disclosures. 4


 
Impact of the COVID-19 Pandemic - Market Dynamics ▪ Agency RMBS and CMBS experienced excessive market movements starting around March 9, 2020 when spreads widened by approximately 51 bps. The Agency spread widening began to normalize when the Federal Open Market Committee directed the Federal Reserve Bank of New York to purchase Agency RMBS and Agency CMBS bonds. • Non-Agency CMBS also saw widening in late February and early March, but the truly violent moves were in the second half of March. • To date, there has been less recovery in Non-Agency CMBS spreads than other sectors especially for lower rated bonds. 5


 
Impact of the COVID-19 Pandemic - Portfolio Dynamics The extreme lack of liquidity in mortgage markets combined with forced selling led to swift and dramatic price declines in March 2020. The illiquidity was exacerbated by inadequate demand for MBS among primary dealers due to balance sheet constraints. These market conditions caused the following; • On March 23, 2020, the significant decrease in our asset values resulted in margin calls of approximately $116.5 million from our repurchase agreement counterparties. Additional margin calls occurred in the following days. • To meet margin calls and increase liquidity WMC implemented the following measures in March 2020; ◦ Sold approximately $1.5 billion of Agency MBS and $142.4 million of Non-Agency MBS. ◦ Reduced repurchase agreement financings by 48.0% to $1.6 billion. ◦ Terminated all interest rate hedges and further reduced margin call volatility. ◦ Suspended our first quarter common dividend • In April 2020, WMC continued to reduce repurchase agreement financings by selling approximately $370.3 million of Agency MBS, $65.3 million of Non-Agency MBS, $148.6 million in residential conforming whole loans, and $18.2 million of other securities. • Our Manager waived management fees for March 2020 and April 2020. • WMC completed two financing arrangements; ◦ An 18 month term financing arrangement without margin requirements for our entire non-QM loan portfolio. The impact of this financing was to reduce our exposure to repurchase agreement financing by $385 million and the associated margin calls from such agreements, and . ◦ A 12 month term financing arrangement for Non-Agency RMBS and Non-Agency CMBS, significantly mitigating our exposure to margin volatility. • While our Manager's view is that the economic impact of COVID-19 will be transitory, the full impact of COVID-19 on our results of operations, financial position and cost of capital is still uncertain as it depends on several factors beyond our control. We continue to operate with a defensive stance to preserve liquidity, reduce our exposure to short-term repurchase agreement financings, and reduce expenses. 6


 
Portfolio Composition Total Investment Portfolio ($ in millions) March 31, 2020 45.3% Agency CMBS $ 416 Agency RMBS 15 Agency RMBS Non-Agency CMBS 251 Agency CMBS Non-Agency RMBS Non-Agency RMBS 26 Non-Agency CMBS 1.0% Residential Whole-Loans Residential Whole-Loans 1,310 8.7% Residential Bridge Loans Residential Bridge Loans(5) 29 Securitized Commercial Loans Commercial Loans Securitized Commercial Loans(6) 477 Other Securities 0.9% 16.5% Commercial Loans 320 Other Securities(7) 47 14.4% Total $ 2,891 0.5% 1.6% 11.1% Select Sector Categories Agency Portfolio Credit Sensitive Securities Loan Portfolio 1.3% 96.0% 77.3% 22.3% 61.3% 14.6% 6.5% 0.7% 15.0% 1.6% 3.3% Non-Agency RMBS Residential Whole Loans Non-Agency RMBS IO Residential Bridge Loans Agency CMBS Non-Agency CMBS Securitized Commercial Loans Agency CMBS IO's ABS and GSE CRT Securities Commercial Loan Agency RMBS IO's Please refer to page 15 for footnote disclosures. 7


 
Income Attribution(8) For the Three Months Ended March 31, 2020 (in thousands except per share data) Non- Non- Residential Residential Other Securitized Agency Agency Agency Agency Whole- Bride Investments Commercial Commercial CMBS RMBS CMBS RMBS Loans Loans(5) (7) Loans Loans(14) Total Interest Income(9) $ 10,350 $ 1,991 $ 5,765 $ 510 $ 16,302 $ 886 $ 1,340 $ 6,677 $ 11,116 $ 54,937 Interest expense(10) (8,517) (1,487) (2,095) (166) (12,595) (334) (523) (2,451) (7,937) (36,105) Net interest rate swap interest income(11) (953) (46) (72) (62) — — — — — (1,133) Net Interest Income 880 458 3,598 282 3,707 552 1,276 4,226 3,179 18,158 Realized gain/(loss) on investments 87,852 10,382 (8,801) (16) — (345) 113 — — 89,185 Unrealized gain/(loss) on investments(12) (34,942) (8,018) (55,307) (5,840) (95,972) (215) (36,034) (12,462) (127,171) (375,961) Securitized debt unrealized gain/(loss) — — — — — — — — 79,012 79,012 Gain/(loss) on derivative instruments, net(13) (154,673) (7,408) (11,673) (10,102) — — (3,954) — — (187,810) Portfolio Income (loss) $(100,883) $ (4,586) $(72,183) $(15,676) $ (92,265) $ (8) $ (38,599) $ (8,236) $ (44,980) $ (377,416) BV Per Share Increase (Decrease) $ (1.89) $ (0.09) $ (1.35) $ (0.29) $ (1.73) $ — $ (0.72) $ (0.15) $ (0.84) $ (7.06) Please refer to page 15 for footnote disclosures. 8


 
Financing Summary Borrowings under 19 master repurchase agreements Repurchase Agreement Financing March 31, 2020 ($ in thousands) Weighted Average Weighted Average Outstanding Interest Rate Interest Remaining Days to Borrowings Rate Maturity Short Term Borrowings Agency CMBS $ 437,577 1.38% 27 Agency RMBS 11,852 2.35% 21 Non-Agency CMBS 214,972 3.04% 24 Non-Agency RMBS 20,148 3.09% 8 Residential Whole-Loans 272,458 2.99% 129 Residential Bridge Loan 24,222 3.79% 28 Commercial loans 47,547 3.90% 28 Securitized commercial loans 32,803 2.76% 29 Other securities(7) 53,244 3.15% 28 Subtotal 1,114,823 2.42% 51 Long Term Borrowings Residential Whole-Loans(15) 285,409 2.67% 1004 Commercial Loans(15) 153,549 2.73% 503 Subtotal 438,958 2.69% 829 Repurchase agreements borrowings $ 1,553,781 2.50% 271 Less unamortized debt issuance costs 66 N/A N/A Total/Weighted Average $ 1,553,715 2.50% 271 9 Please refer to page 15 for footnote disclosures.


 
Financing Summary Convertible Senior Unsecured Notes ▪ At March 31, 2020, the Company had $205.0 million aggregate principal amount of 6.75% convertible senior unsecured notes. The notes mature on October 1, 2022, unless earlier converted, redeemed or repurchased by the holders pursuant to their terms, and are not redeemable by the Company except during the final three months prior to maturity. The initial conversion rate was 83.1947 shares of common stock per $1,000 principal amount of notes and represented a conversion price of $12.02 per share of common stock. Mortgage-Backed Notes ▪ The following table summarizes the residential mortgage-backed notes issued by the Company's securitization trust (the "Arroyo Trust") at March 31, 2020 (dollars in thousands): Principal Contractual Classes Balance Coupon Carrying Value Maturity Offered Notes:(16) Class A-1 $ 634,467 3.3% $ 634,464 4/25/2049 Class A-2 33,996 3.5% 33,995 4/25/2049 Class A-3 53,859 3.8% 53,857 4/25/2049 Class M-1 25,055 4.8% 25,055 4/25/2049 747,377 747,371 Less: Unamortized Deferred Financing Cost N/A 5,074 Total $ 747,377 $ 742,297 The securitized debt of the Arroyo Trust can only be settled with the residential loans that serve as collateral for the securitized debt and are non-recourse to the Company. ▪ As of March 31, 2020, the Company had two consolidated variable interest entities that had an aggregate securitized debt balance of $396.8 million. The securitized debt of these trusts can only be settled with the collateral held by the trusts and is non-recourse to the Company. 10 Please refer to page 15 for footnote disclosures.


 
New Financing Facilities Residential Whole Loan Financing Facility ▪ On April 21, 2020, WMC entered into amendments with respect to certain of its loan warehouse facilities. These amendments mainly served to convert an existing residential whole loan facility into a term facility by removing any mark to market margin requirements, and to consolidate the Company’s Non-Qualified Mortgage loans, which were previously financed by three separate, unaffiliated counterparties, into a single facility. ▪ The term of the facility is 18 months and all income generated by the loans during the term of the facility will be used to incrementally repay all obligations thereunder. Upon the securitization or sale by the Company of any whole loan subject to this amended and restated facility, the counterparty will be entitled to receive an exit fee of 0.50% as well as 30% of all realized and projected cash flow on any whole loans above such counterparty’s amortized basis. • The impact of this financing was to reduce our exposure to repurchase agreement financing by $385 million and the associated margin calls from such agreements. Non-Agency MBS Financing Facility • On May 4, 2020, WMC supplemented one of its existing securities repurchase facilities to confirm terms pursuant to which it will consolidate most of its CMBS and RMBS assets, which are currently financed by multiple counterparties, into a single term facility with limited mark to market margin requirements. Pursuant to this confirmation, a margin deficit will not occur until such time as the loan to value ratio surpasses a certain threshold (the “LTV Trigger”), on a weighted average basis per asset type, calculated on a portfolio level. If this threshold is reached, the Company may elect to provide cash margin or sell certain assets to the extent necessary to lower the ratio. The term of this facility is 12 months, subject to extensions at the counterparty’s option. All interest income generated by the assets during the term of the facility will be paid to the Company monthly. Half of all income generated by principal repayments on the underlying assets will be applied to repay the obligations owed to the counterparty, with the remainder paid to the Company, unless the LTV Trigger has occurred, in which case all principal payments will be applied to repay the obligations • All asset sale proceeds less 50% of any excess proceeds over the counterparty’s amortized basis will be applied to repay the obligations owed to the counterparty, with the remainder paid to the Company, unless the LTV Trigger has occurred, in which case all asset sale proceeds will be applied to repay the obligations. • The aggregate financing provided by the counterparty with respect to the assets covered under this confirmation is approximately $108.8 million and the market value of such assets is approximately $182.7 million. 11


 
(17) Hedging Summary ▪ All interest rate swaps were terminated as of March 31, 2020. ▪ The following tables provide information on other derivative instruments as of March 31, 2020 ($ in thousands): Other Derivative Instruments Notional Amount Fair Value Futures contracts, asset $ 50,000 $ 195 Credit default swaps, asset 47,260 15,557 TBA securities, asset 778,200 17,923 Total derivative instruments, assets 33,675 Futures contracts, liability 255,000 (14) Credit default swaps, liability 97,260 (22,106) TBA securities, liability 778,200 (21,847) Total derivative instruments, liabilities (43,967) Total other derivative instruments, net $ (10,292) 12 Please refer to page 15 for footnote disclosures.


 
2020 Outlook ▪ COVID-19 related growth setbacks have meaningfully reduced global and US growth ▪ The medical battle will take time with prolonged efforts; recent developments are encouraging ▪ US and global inflation rates will remain very subdued ▪ Central banks will remain extraordinarily accommodative ▪ Fiscal policy will continue to ramp up to provide relief efforts ▪ Even after recovery begins, central banks will keep rates ultra low ▪ Spread products ultimately should be primary beneficiaries of recovery ▪ The timing and scope of the eventual recovery remains the largest uncertainty 13


 
Portfolio View Our focus is to protect the value of the portfolio, enable shareholders to benefit from recovery, and reposition the company to resume delivering on our long term objectives ▪ We believe our credit investments secured by real estate assets with significant equity in the properties and higher quality credit will continue to perform over the longer term. ▪ We are focused on preserving liquidity and reducing our exposure to short- term repurchase agreement financing. ▪ We committed to preserving long term value for shareholders. 14


 
Footnotes (1) As of March 31, 2020. (2) Core earnings is a non-GAAP measures which includes the cost of interest rate swaps and interest income on IOs and IIOs classified as derivatives. Drop income is income derived from the use of ‘to-be-announced’ forward contract (“TBA”) dollar roll transactions which is a component of our gain (loss) on derivative instruments on our consolidated statement of operations, but is not included in core earnings. Drop income was $1.1 million for the three months ended March 31, 2020. (3) Economic return, for any period, is calculated by taking the sum of (i) the total dividends declared and (ii) the change in net book value during the period and dividing by the beginning book value. (4) Non-GAAP measures which include interest income, interest expense, the cost of interest rate swaps and interest income on IOs and IIOs classified as derivatives, and are weighted averages for the quarter ended March 31, 2020. Excludes the net income from the consolidation of VIE Trusts required under GAAP. (5) The bridge loans acquired prior to October 25, 2017 are carried at amortized costs, since we did not elect the fair value option for these loans. For the bridge loans acquired subsequent to October, 25, 2017, we elected the fair value option to be consistent with the accounting of other investments. Accordingly, the carrying amount of the bridge loans as of March 31, 2020 includes $26.1 million of residential bridge loans carried at fair value and $2.6 million of residential bridge loans carried at amortized costs. (6) In March 2019, the Company acquired a $65.3 million Non-Agency CMBS security which resulted in the consolidation of a variable interest entity and the recording of a $904 million securitized commercial loan and $904 million of securitized debt. (7) Other investments include ABS and GSE Credit Risk Transfer securities. (8) Non-GAAP measure which includes net interest margin (as defined in footnote 4) and realized and unrealized gains or losses in the portfolio. (9) Non-GAAP measure which includes interest income on IO's and IIO's accounted for as derivatives and other income. (10) Convertible senior notes interest expense has been allocated based on fair value of investments at March 31, 2020. (11) Net interest rate swaps interest income have been allocated based on average duration contribution. (12) Non-GAAP measure which includes net unrealized losses on IO's and IIO's accounted for as derivatives. (13) Gain (loss) on derivative instruments, net, has been allocated based average duration contribution (excluding cost of hedging and gains or losses on IO's and IIO's accounted for as derivatives). (14) The portfolio income attribution for securitized commercial loan is presented on a consolidated basis (15) Certain Residential Whole Loans and Commercial Loans were financed under two longer term repurchase agreements. The Company entered into a $700.0 million residential and $150.0 million commercial facility. These facilities automatically renew until such time as they are terminated or until certain conditions of default. The weighted average remaining maturity days was calculated using expected weighted life of the underlying collateral. (16) The subordinate notes were retained by the Company. (17) While we use hedging strategies as part of our overall portfolio management, these strategies are not designed to eliminate all risks in the portfolio. There can be no assurance as to the level or effectiveness of these strategies. (18) The debt amount used in the calculation of leverage is net of receivable under reverse repurchase agreements. 15


 
Supplemental Information 16


 
Book Value Roll Forward Amounts in 000's Per Share Book Value at December 31, 2019 $ 564,461 $ 10.55 Stock repurchase (578) N/A 563,883 10.55 Portfolio Income (Loss) Net interest margin(4) 18,870 0.35 Net realized gain (loss) on investments and derivatives (127,011) (2.38) Unrealized gain (loss) on investments and derivatives (269,275) (5.03) Net portfolio income (loss) (377,416) (7.06) Operating expenses (2,039) (0.04) General and administrative expenses, excluding equity based compensation (2,330) (0.04) Provision for taxes 93 — Book Value at March 31, 2020 $ 182,191 $ 3.41 17 Please refer to page 15 for footnote disclosures.


 
Adjusted* Portfolio Composition Total Investment Portfolio ($ in millions) March 31, 2020 Consolidated Third Party Company Sponsored Unconsolidated (As Reported) Consolidated Trust Securitization (Non GAAP) Agency CMBS $ 416 $ — $ — $ 416 Agency RMBS 15 — — 15 Non-Agency CMBS 251 80 — 331 Non-Agency RMBS 26 — 54 80 Residential Whole-Loans 1,310 — (733) 577 Residential Bridge Loans 29 — — 29 Securitized Commercial Loans 477 (477) — — Commercial Loans 320 — — 320 Other Securities(7) 47 — — 47 Total $ 2,891 $ (397) $ (679) $ 1,815 *Excludes consolidation of VIE Trusts required under GAAP 18.2% 31.8% Agency RMBS Agency CMBS 4.4% Non-Agency RMBS Non-Agency CMBS Residential Whole-Loans Residential Bridge Loans Commercial Loans Other Securities 1.6% 22.9% 0.8% 17.6% 2.6% Please refer to page 15 for footnote disclosures. 18


 
Adjusted* Portfolio Income Attribution(8) For the Three Months Ended March 31, 2020 (in thousands except per share data) Non- Non- Residential Residential Other Agency Agency Agency Agency Whole- Bride Investments Commercial CMBS RMBS CMBS RMBS Loans Loans(5) (7) Loans Total Interest Income(9) $ 10,350 $ 1,991 $ 10,837 $ 510 $ 16,302 $ 886 $ 1,340 $ 6,677 $ 48,893 Interest expense(10) (8,517) (1,487) (3,276) (166) (12,595) (334) (523) (2,451) (29,349) Net interest rate swap interest income(11) (953) (46) (72) (62) — — — — (1,133) Net Interest Income 880 458 7,489 282 3,707 552 1,276 4,226 18,870 Realized gain/(loss) on investments 87,852 10,382 (45,154) (16) — (345) 113 — 52,832 Unrealized gain/ (loss) on investments(12) (34,942) (8,018) (67,826) (5,840) (95,972) (215) (36,033) (12,462) (261,308) Gain (loss) on derivative instruments, net(13) (154,673) (7,408) (11,673) (10,102) — — (3,954) — (187,810) Portfolio Income (loss) $(100,883) $ (4,586) $(117,164) $(15,676)$ (92,265) $ (8) $ (38,598) $ (8,236) $(377,416) BV Per Share Increase (Decrease) $ (1.89) $ (0.09) $ (2.19) $ (0.29) $ (1.73) $ — $ (0.72) $ (0.15) $ (7.06) *Excludes the securitized commercial loan and debt from the consolidation of VIE trusts required under GAAP. Reflects only our interest in the Non-Agency CMBS security that was acquired. 19 Please refer to page 15 for footnote disclosures.


 
Adjusted Credit Sensitive Portfolio as of March 31, 2020 Adjusted Credit Sensitive Portfolio* ($ in thousands) Principal Amortized Net Weighted Net Weighted Balance Costs Fair Value Average Coupon Average Yield Non-Agency RMBS $ 39,261 $ 23,799 $ 21,123 4.6% 5.2% Non-Agency RMBS IOs and IIOs N/A 7,229 5,174 0.5% 4.8% Non-Agency CMBS 426,220 393,603 330,616 5.9% 8.4% Residential Whole Loans 1,352,778 1,381,099 1,309,795 5.1% 5.1% Residential Bridge Loans 29,650 29,688 28,634 9.5% 7.8% Commercial Loans 332,576 332,263 320,308 7.1% 7.3% Other Securities(7) 76,482 77,258 47,411 6.5% 7.0% $ 2,256,967 $ 2,244,939 $ 2,063,061 4.2% 6.1% *Excludes consolidation of third-party sponsored VIE Trusts required under GAAP Commercial Loans: 15.5% Residential Bridge Loans: 1.4% Other Securities: 2.3% Non-Agency RMBS: 1.0% Non-Agency RMBS IO and IIOs… Non-Agency CMBS: 16.0% Residential Whole Loans: 63.5% Please refer to page 15 for footnote disclosures. 20


 
Commercial Loans as of March 31, 2020 ($ in millions) Acquisition Principal Fair Maturity Extension Loan Date Loan Type Balance Value LTV Interest Rate Date Option Collateral Interest-Only First 1-Month LIBOR plus One-Year CRE 2 June 2018 Mortgage 30.0 28.8 65.0% 4.5% 6/9/2020 Extension Hotel Principal & Interest 1-Month LIBOR plus Two One-Year Nursing CRE 4 June 2019 First Mortgage 50.0 48.7 75.0% 4.75% 1/11/2022 Extensions Facilities Interest-Only 1-Month LIBOR plus Two-Year First Entertainment CRE 5 August 2019 Mezzanine loan 90.0 85.8 57.9% 9.25% 6/29/2021 Extension and One- and Retail Year Second Interest-Only First 1-Month LIBOR plus Two One-Year CRE 6 September 2019 Mortgage 40.0 38.4 63.0% 3.02% 8/6/2021 Extensions Retail Interest-Only First 1-Month LIBOR plus 1-Month LIBOR CRE 7 December 2019 Mortgage 24.5 23.3 61.8% 3.75% 11/6/2021 plus 3.75% Hotel Interest-Only First 1-Month LIBOR plus 1-Month LIBOR CRE 8 December 2019 Mortgage 13.2 12.5 61.8% 3.75% 11/6/2021 plus 3.75% Hotel Interest-Only First 1-Month LIBOR plus 1-Month LIBOR CRE 9 December 2019 Mortgage 7.3 6.9 61.8% 3.75% 11/6/2021 plus 3.75% Hotel Interest-Only First 1-Month LIBOR plus 1-Month LIBOR CRE 10 December 2019 Mortgage 4.4 4.4 79.0% 4.85% 12/6/2022 plus 4.85% Assisted Living Interest-Only First One-Month LIBOR Two One-Year Nursing SBC 1 July 2018 Mortgage 45.2 44.3 74.0% plus 4.25% (1) 7/1/2020 Extensions Facilities Interest-Only One-Month LIBOR One-Year Apartment SBC 4 January 2019 First Mortgage 13.6 13.3 84.0% plus 4.0% (2) 12/1/2021 Extension Complex Interest-Only One-Month LIBOR Nursing SBC 5 January 2019 First Mortgage 14.4 14.1 49.0% plus 4.1% 7/1/2021 None Facilities $ 332.6 $ 320.5 Footnotes (1) Subject to LIBOR floor of 1.25%. (2) Subject to LIBOR floor of 2.0%. 21


 
Contact Information Western Asset Mortgage Capital Corporation c/o Financial Profiles, Inc. 11601 Wilshire Blvd., Suite 1920 Los Angeles, CA 90025 www.westernassetmcc.com Investor Relations Contact: Larry Clark Tel: (310) 622-8223 [email protected]


 
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