WMC - Earnings call transcript Q2 2021 | Western Asset Mortgage Capital Corp

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Operator

Welcome to Western Asset Mortgage Capital Corporation's Second Quarter 2021 Earnings Conference Call. Today's call is being recorded and will be available for replay beginning at 5:00 p.m. Eastern Standard Time. At this time, all participants have been placed in a listen-only mode. And floor will be open for your question following the presentation.

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

Larry Clark

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

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

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

Jennifer Murphy

Larry. everyone. Welcome, you, Thank

other updates, and our XX.X% quarter and were quarterly to one the quarters its holdings, value This, the credit-oriented last its decline as from in our operational from exception. recover it several earnings expectation improving $XX that number GAAP for our issues, notable value our meaningful economy challenges significant This value. in specific case junior A commercial has -- a with becoming among benefit. broadly As company's loss that in company. exposure portfolio the previous holdings to quarter first of a but been negatively our junior of portfolio's whole commercial to the is and million book as $X.XX to share, a fair GAAP you know U.S. reported $X.XX spreads was as continue or resulted per net was the That affected second million for resulted negatively likely turn, in very our prices portfolio a the loan loan in book nonperforming, contributing $XX.X in very share. fell per mezzanine impacted we narrowing credit the very across mezzanine will

support broader is and time the platform. Our with Western management team to devoting it significant resources Asset from

in mezzanine to loans status very WMC's for details We the of WMC discuss million are call. for to situation shareholders situation and we move can which $X.X quarter call doing the commercial will potential it of make of the outcome to more were the quarter. junior by also focused on improve to everything were a share continue $X.XX per priority. this this we core high used nonaccrual impacted this earnings, second later the during Greg distributable or and

impacting our of which amortization in the resulted higher level increased quarter, residential an also experienced we loan during whole premium portfolio addition, prepayments In in loan earnings.

already, the reopening discussed Greg Aside continued loan from the are Sean of mezzanine from steadily our and properties as economy, value the portfolio discuss. underlying benefiting holdings to will the the have of I've which improve challenged junior

and During their extended Directors the Lisa our Chief the favorable quarter, details maturities. this. Greg Investment have Johnson, will appointed Officer Sean as we amended more week, on X to conditions terms facilities Last under Officer. key and also Chief serve Board Investment financing more of company; Handler of and Deputy

Western of and those Co-Chief Interim serving you being roles investing As is to last been the Sean as and know, Greg credit December. Asset. investment He's consumer U.S. strategy is also team appointed in has role CIO Officers member forward mortgage the WMC to and leadership sector at in at since look we head both for He Committee. played and been Strategy the Investment a a role. mortgage Western, Asset's Greg key Western had the his and both years XX Broad than shaping continued of more in at

Deputy and for declared in June, $X.XX investment XXXX. second of we his an Sean the to dividend contributions XX a You roles In the quarter, than public has Western has part continued and more sustainable attractive dividends. since line been the team and committed with all know years strategy and cash integral of he's Sean paying We look initial two our as experience critical of at company's CIO. forward quarters. to as WMC and previous we in at offering remain Asset, share per investment

value were loan, see at we results and in second the the in by encouraged of the our mezzanine are quarter we significantly fair progress WMC. decline economy junior affected commercial by the home While

delivering value. objective sustainable on We enhancing continue core generating on focus earnings of attractive an our that support shareholder to while long-term dividend

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

Greg Handler

Jennifer. you, Thank

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

portion seeing of junior majority is entertainment by has complex located And our and As the has Jennifer The adversely value U.S. while complex retail mezzanine book during performance the drove delayed. was operating in high-quality this decline that mentioned, the pandemic the it and operating of retail quarter. entertainment been the the activity, a backed the Northeast impacted loan the asset. good in

the value $XX.X new of was million, and As around outcomes, by the of facts circumstances. the fair to down loan a potential result reflects which million the marked uncertainty $XX the

currently borrower the payments discussions a options towards senior These potentially the with funding regarding of and new or loan are variety reaching other include certain resolution. in deferral could lenders a advances. We of terms, of modifications

optimize noted, we our As to significant recovery and time of resources order Jennifer are amounts of spending in investment. the

no are a lenders. with assurances be will the borrower reached senior resolution However, there the with or that

So there is a risk impairment of this loan. of further

we bankruptcy $XX significant listed that we The loan expect remainder the on the a this to full have will actively near back improvement final realize there the is back, the no hotel of the par we encouraged by portfolio a portfolio. fundamentals the loan by In resolution that and the a recovery this on estate two are we partial of nursing also have of near is step this situation our a payoff guarantee repayment to facilities, received Taking the July, loan in loan, received, have is the loan likelihood proceedings, previously the been process. the have is are written sale, monitoring that And offers during and majority in a interest as principal nonperforming real and a and was second of there We the skilled we missed asset. on a $XX discussed those for recovered. hotel million in that be Based future. we there feel reasonable future, still commercial another loan or in secured we although The in in full million asset. up will value result, interest of quarter. payments to is hope

As briefly again has Sales the to led estate consumer been economy the have momentum, to since which gain in continued of of we this summer The across resurgence country. beginning many picked commercial higher real retail spending have after strong the late the improvement have seen spring. of pausing has signs year. in of the up sales, markets

As a rates result, are in and retail markets. rental many improving collections occupancy

travel the also metrics limited resort Hotel of the have to in a hotel market. segments recovery and recovered pre-pandemic nearly healthy levels, service in a has We fueled leisure which in particularly center. seen operating have the rebound

backdrop, post some biggest commercial a was large is securitized increased space. this see and activity the lending Given the trends June loan that in office and saw month we market. significant major to the favorable hotel There were are and seeing back activity we COVID, got coming securitization demand. and securitization transactions

collateral our loan-to-value properties of $X strong these mix been less loan are that market original are CMBS properties. Within improved Class we A of starting credit flows to or ultimately current, investments are bucket. values of leisure pleased in sponsors, mortgage-backed delinquency portfolio large and loans our a the see will had as positive number In consists have their trends cash permanently portfolio XX% equity reopening with mortgage-backed are retail at to believe approximate cater traveler, This conduit momentum through improving and These this hotels portion assets representing remains of of of not our exposure, a become and impaired. have see but we all that We this to again we infusions. than it mainly generally commercial as current these benefit so our non-agency one loans securities, materially commercial non-agency believe holdings. our operating that some high-quality million and

In discuss be expect the now Sean call are and the overcome economy to to towards liquidity future appreciation, positioning We holdings. which Sean? that maintaining our restrictions continue full will believe over strengthen. remain occur portfolio economy reopening. and moves challenges meantime, as turn to the residential we to the continues eventually a on our these for I'll to focused we sufficient near-term as lifted COVID

Sean Johnson

Thanks, Greg.

build growth second the economic we and biggest by U.S. recovery COVID-XX was reopening. the the noted, As quarter. restrictions contributor of more momentum in businesses Consumer the fully to spending to loosening continued boosted have

began equity positively, across markets valuations into generally As This last and higher a continuing trend our year. portfolio. that result, credit the translated responded

and housing appreciate continued portfolio fueled rates, market from very quarter, sentiment. strong historically loan whole consumer residential mortgage supply during benefiting low by a tight this to favorable Our

a borrower credit to than and rose Nomura increase the in home result overall equity from mortgages. as and availability COVID and made of loans months continues average in quarter double-digit loosened forbearance at tightness LTVs X% new non-Agency higher indices notes of to home price lower seen annual rates. delinquency FICOs, while last the an of continue have Second metrics credit Research those the XX the lower that Residential during national again months, universe still period, improve the non-QM seen has before COVID. performance for the in

total those and year-end part Our May Nearly X.X% are from residential This that X% performance less high the represent We repayment in last as see borrowers confirmation of all end to at who underwriting a forbearance were credit that a we plan payments. of in on than quarter meaningful their a borrowers current year. well. perform remain to the aren't equity this now equity at of X.X% their our of homes. good forbearance loans The in loan residential have focus their incentive the percentage of on period, loans of in as and declined continue strong to XX% loans for mortgage of a creates portfolio. effectiveness

did on strong -- the level the non-QM market pent-up as refinancing we agency in during and grow elevated experience an prepayments slows. given to volumes of originators Given and continue portfolio. refocus Non-QM refinancing second quarter our non-QM origination long production refi the demand,

over that, with I'll continue originator new and purchase engage new our originators turn with closing during With Meyer. call a We a small second the CFO, Lisa the Lisa? to quarter. to existing

Lisa Meyer

Sean. you, Thank

Before to some proactively highlight results, we made of our I the recent have our second improvements arrangements. financing reviewing want quarter on

million CMBS assets. platform, to strategic repurchase Asset Western partners the second improve June during from secured to significantly was finances the broader The of our longer-term continue borrowings term liquidity attractive benefit amended and had of facility value plus extended our We XX, million. obtained facilitating assets this to We At lowering outstanding RMBS LIBOR quarter, rates fair with our with plus financing. primary borrowing mainly non-Agency securities more year. a $XXX by ability X XXX. secured We of LIBOR and from XXX we which work on secure to our improved by advance $XXX.X our facility attractive pricing, facility the and costs

every amended $XXX.X automatically facility X-year In whole a by with At $XXX.X commercial maturity. facility we a now had rolled June during secured this a of to XX, we borrowings commercial value million. quarter, on days facility fair converting of outstanding from loan addition, our that having it XX the loans million

Moving to earnings.

presentation. press detail our earnings results great provided and have regarding We second portfolio our our in quarter release and our

am warrant additional items I focusing only that So explanation. on

to earnings per increase net our comment interest we We May share, first, the million premium million core some in There of loan $X experienced junior rename for share of received portfolio the on to distributable first the level income mortgage from investment to earnings led in calculation. to decided put prepayments of in XXXX from nonperforming recently of quarter's level nonaccrual recorded peers. was of that our non-QM we down in $X.X changes drove quarter, decline: REIT elevated the distributable quarter $X.X SEC during primary factors per mentioned, million or an or of amortization. earnings address two we lower that became million to an status; that Jennifer were $X.X mezzanine second, our loan As no by reported the $X.XX the second letters second $X.XX of

of $X.XX share. distributable $X.XX dividend less per Our were quarter our than earnings

discussed the book $X.XX, per a mezzanine every valuation evaluate the for the earnings GAAP we was the among portfolio things, decrease our lower of factors, value several taxable loan junior earlier. based of the including, level quarter for $X.XX share. dividend power by However, sustainable per and was income. of decline quarter the on driven our outlook of other share our $X.XX of the

portfolio, slightly paydowns However, lower lower and driven the per junior the for gross reflects book obtained across which rather valuation securitizations. trust Economic decrease Royal in retained saw of generally, which the to XX.X% due assets value a loan our interest the offset securitization our than these decline. by our decreased this $X.XX improved securitizations by we The of mezzanine quarter and in valuations of to in was the remainder liabilities consolidated value the the of share. the value, interest mainly partially

a was at a our modest times and June from The we the rebounding sectors the financed commercial leverage to increase and non-QM from that and value in a million position financing, us by book slightly recourse estate of the liquidity leverage repurchase most decrease solidify benefit focus primarily and to the of Our due purchase was securities X an from assets In improved in that will With actions improved in recovery March XX, by with questions. now facility. objective $XX real focus up ahead. were XX. significant financial combined at your growing higher our loans, summary, rate X.X on our go With selectively of to call will advance quarters to portfolio structure capital on we on intend our with Operator, continue the times certain pandemic. longer-term please to our economy portion impacted we up results ahead. increase of open the attractive that,

Operator

first from the comes Please [Operator Instructions] JMP Securities. And Cranston question with ahead. go Trevor

Trevor Cranston

obviously, current write-down with were you loan. guess In potentially but could it June of nothing the are working on into you I junior to what help value? would loan, question assured. of factored my mezz the remarks, you're first prepared some valuation be kind of And lead the guys what on started type XX? resolutions the to said exactly scenarios further scenarios Can us that understand that of loan respect

Greg Handler

Trevor, this is Greg.

yes, there's of in. can the scenarios. markdown So around of priced a there's being those lot see lot And scenarios a you that uncertainty by

being so And quite that's rate high. applied the is discount

being, for the decline in or factor of to as we on write-down several foreclosure date, on either rates. resolutions. in think potentially. we outcomes, position, more in including potential further accrual clarity bankruptcy the have And through need those extension maturity time we'll negotiations asset But I potential of through the continue, also factor income or get to the

outcome, wide a across we distribution given have so that could the scenarios potentially affect areas. meaningful those range this of And

Trevor Cranston

any of there And might comment be think long or loan? context an provide or ongoing could of to sort around likely is are of how you sort And when you some resolution? sort see negotiations that agreement we for

Greg Handler

is are situation, think have around tremendous say there And being property that that, on uncertain and but it's that fluid attraction. is We very an the ongoing. but would -- negotiations very work uncertainty a one. made the the this together I think a we valuable we It's believe timing. that progress timing still is lenders still it's a to incentive the towards

Trevor Cranston

pay the then those It be these second that capital of to -- you on some loans think And of of I end prioritization July. thinking the I payoffs your different likely about as could of of of And loan others maybe you redeploying off those up most looks half as at second about you're portfolio, some point, you like had set are that mentioned guess commercial this part there you of expectation believe loans sort are you the is think guess, maturities, do the you off? the rest in upcoming investment question, one can talk that do that Or that loans paid of year. loans, several over I mature the can to get extending? into opportunities? this

Greg Handler

sure. Yes,

loans off to their yes, So mix to that is. maturity we're a paying maturity maturity or or seeing of prior -- earliest at

the on We underlying feel for types. all to flows have improve on that these off still of extensions, comments, a market continue we as -- continues track to cash moderate open well very assets. that property loans are the very but and And couple loans the to have across going are pay money noted strongly in to

are progress. encouraged we by that So

believe as opportunities loans that as will originations, to real whether we're residential from flow, opening reviewing that's as for always is best the looking more see possible for is In we deal opportunities continue We well as mentioned, estate terms risk-adjusted portfolio. the whole other lending commercial of do up, that opportunities, that well. we're back I mortgage deployment of return paydown, the nonqualified

Trevor Cranston

the speeds increased portfolio, like from more you It for forward think anything, they're some was activity seems space. sounded XQ. mentioned that that you out is look portfolio, prepayment in elevate there around further bring focus chance lenders I origination within attributable as the could the that kind just increasing. On they it Or levels? of the market? products outlook prepay increased origination non-QM as about mostly speeds in that in to Do guess and book? like you to How you that are remain thinking activity going non-QM lenders is if in non-QM XQ

Sean Johnson

seen the than already We've in Sean. quarter second saw be It's recent we in the or earlier the peaks lower that print the most prepayment quarter.

do So that pent-up prepayment was demand speeds prepayment were COVID artificially we think of a little when activity some period during low. the

So we to due you do remain all-time originators the is in speed of increasing on prepayment the think do as a rates just that mortgages. that. the decline bit accreting and should And activity But the little the near things. is space competition focus interest naturally lows and said,

higher be So it do period, it not will last we than high we as during as was COVID think but saw the probably quarter.

most, a many Our -- note bit have our speeds non-QM average prepayment portfolio slower is generally than our rate competitors. and the other of than little been lower on

positioned we pretty did for we're that buy. extremely we So well loans on think avoided high do these the premiums rates. We've paying

paid So we that despite for non-QM this activity in have is We're on an space it opportunity it. as we isn't quarter, the bad increased could continue had going the it to focus to intend that we to saw last as manage amortization that higher strategy and premiums. us much been

Operator

of from ahead. Derek from Hewett next go America. The Please comes Bank question

Derek Hewett

portfolio be to residential what Will relatively of commercial How actually as replaced think plus that remain should kind this get other those next see residential non-QM flat months? terms next the should say, opportunities. payoffs you just opportunities given point? growth the your little growth leverage or credit? portfolio or will about we And XX XX the of and a then -- taking so over portfolio higher are in credit Or bit over we thoughts by at year will

Greg Handler

evaluating set the in opportunity Sure. time. Obviously, real are we

you lending But towards lending are cap really of commercial subject estate change. the the still think most on very being And really side, seeing in are COVID to you're market signs meaningfully. I'd declined real say I although targeted the the it's seeing So rates of encouraging positive, terms winners. the

offices So winning perfection of some I would and higher-quality COVID things and uncertainty surrounding assets more say, type somewhat the still like the premium and on risk hotels. priced to

triggered more fundamental pretty opportunity So I think we in no we much origination the strong. products there set, some And XXXX. Clearly, GSE ag the was some do do right on there is into back the where residential space, non-Agency focused see of just being pushing in and terms of mortgage it's side. the backdrop the believe quite now limits

we relative So the assets the that evaluating landscape. we credit remains ability still quality tightness the we is the best that really and the believe are encouraging, that given box do but And to of that priced select appropriately. have

Sean Johnson

some seen more some out which the in We've including originators, really interesting XX-year non-QM of focus a conservative product, our products our Yes. fits of coming into space. non-QM

So that. new ones as by originators our have very are and We've we're discussions productive. that that encouraged with to well had been current us

that we'll FHFA as Greg some of think of some label growth And targeted from private the potentially we in non-QM some loans mentioned, into space. towards those had limits the that the where agency the area. pushed product have do So see

right now looking there. making we're progress those and at So opportunities

Greg Handler

conservatively we we're with leverage. we as on the do have term, less that point risk. could place. And these some conservatively in point. opportunities, on longer much have, we on to lines more the And portfolio. at more that and grow believe, just still We reduce on room amount pretty drag our do lines mentioned, a are cash Depending we now look that of Lisa fair think of levered rollover one And structured this

appropriate find we feel we opportunities. opportunity the the comfortable should increasing -- So leverage

Derek Hewett

I QX it Has this speeds drag prepayment that far? $X then so of was million prepayments, -- was terms in there in normalized roughly quarter. believe a higher And

Sean Johnson

the prepayment one only really seen far so it's We've from June. collections that print speeds in

that So lower. -- and was

but slightly one declined so far. it's speeds prepayment seen have we only So observation

for over what make the to seen it couple see months, say, next does but be, So the us come speeds sense down prepayment of will remains to them it be

Derek Hewett

you in the that for loan me. lastly sort of of any then of hotel time And Did bankruptcy? in provide resolution terms line that's

Greg Handler

uncertain. still It's

gave any time So it's think there's line. continue. And proceedings -- definitive I the believe don't But bankruptcy definitely we I

Derek Hewett

of technical could write-up issues be little by it the I out mean, the it Are this could Or I drag where year? resolved Given -- bit a certain guess there end longer?

Greg Handler

think good it the there's by I definitely a chance resolved of year. end the could get

Operator

[Operator next JonesTrading. comes Stewart go ahead. from Instructions] The question of Jason Please

Jason Stewart

resolve loan. do First, I investors think appreciates mezz everybody Western's this junior commitment certainly to

So on they've guess, the for you senior thank update putting if time a the if have us to done extending all assignment XX? could since the or technical resources it I led lenders again behind give that. this factors an third What question it. for July you maybe

Greg Handler

Yes.

Apologies. So seen which brought in would a the all has good and to I earnest, eventual say, definitely but parties and of very started the not amount shape has of in the the May in second, say, there thereof, this timing of but terms towards been and year I back would We've -- table. the uncertain sorry. progress negotiations, forth still a resolution, one

those So again, fluid that's negotiations are and it's -- ongoing. situation, a

Jason Stewart

Okay. right entity into you guess, to mezz force a I have there, bankruptcy? technically And the the as lender do junior

Greg Handler

complicated. high that's be much don't very more complicated think a that That I probability. a side -- it's resolution. be would a I would think

Jason Stewart

something that. plans like part that the of any are the then there. the to mean, What plus-ish leave Okay. million, I'll -- out I we're plans on XX retirement convert? to the convert, XXX for months And

Lisa Meyer

Lisa. it's Jason,

in XXXX. mindful maturity of So the we're very

as would continue the what's outstanding. of in include buying back to opportunities evaluate of outright notes a well refinance we convert, So to that an as which open portion market smaller more continually refinancing

Jason Stewart

mean, to a it yield at X% Okay. I call. trades

you of at you I this in this challenged converted regardless when go seems bit to at look looking other, What one these could you this to look tighter does from credits spread? you how think And some I maturity this Jennifer, once a goes are are little to point. WMC the a guess, we point? Would XXXX, forward mean, mean, holistically? go you question it's what pull it scale just like resolve yield it like that less at you. So nonchallenged all refinance credits, that way, resolved, you does or more I like of going the to it some platform. together,

Jennifer Murphy

you. Yes. Thank

You're right.

-- I as this day mean, Western helping into I -- to roles sort team their the the obviously think at have the we're in at the as Asset and broader portfolio, Greg the have I and new and we're point, mostly from issues stemming Sean engaged come through think really pandemic. in

on. I the said, -- Greg ones term trouble in get likely we're and really very other, The sort about. by I of think think holdings actively beyond working the hotel as talked the we've we near holding, the think encouraged is two to actively resolved we're

to perform Again, lot So in about I will I it year there. portfolio again. ahead construct the a think there's a assets Sean highlighted performance way them. that looking a two, or allow and of think in we're optimistic good our ability to

is I the think highlight certainly, our a portfolio. non-QM of strategy

Sean Western, commercial Also are our So focus there. also on at very to I'd and add team continue to our expect think -- we've I professionals. some about that. additional us ability And optimistic Greg to to we're added

will we're that we've M&A. we're I And also, past, high-quality looking So think capital allow considered portfolio, to our us know, towards markets. and as Yes, in rebuilding small. access you the

considered to do fellow We've some are have past. M&A also expect again. of small. would in -- We that us the some peers our I

M&A that capital could I be shareholders. access looking combination markets to will potential So beneficial opportunities a performance, for us and allow of will it WMC be which to think

Operator

Murphy over concludes closing This question-and-answer now would I conference session. any remarks. to for our the back Jennifer like to turn

Jennifer Murphy

to Just Thank all talking look we forward thank you and want us you. today, to you soon. joining for with

Operator

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

You may disconnect. now

Western Asset Mortgage Capital (WMC) 4 Aug 212021 Q2 Earnings call transcript