WMC - Earnings call transcript Q3 2021 | Western Asset Mortgage Capital Corp

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Operator

Welcome to Western Asset Mortgage Capital Corporation's Third Quarter of 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 the floor will be open for questions following the presentation.

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

Larry Clark

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

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

With harbor now to safe reports forward-looking due will the statements any the with be to to statements statements to Bonnie 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 Bonnie? 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 Wongtrakool. 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

Bonnie Wongtrakool

be I'm company. months joining of I appointed its WMC public forward I'm as the you and as pleased to and the Larry, stranger look meeting welcome, and to to management ahead. CEO recently no years a at part portfolio early weeks team during you, Thank everyone. was company, its the in

portfolio portfolio. not the taken years, thought sheet. to However, want I some we on company's has contributor we balance strategy, financial at a so member Western you income more than it of on U.S. me, ESG I the dedicated as Asset's partnering Asset mortgage and XX being fixed enjoyed I an experience. At then She of time, this for Strategy review more have pandemic to congratulate and XXXX since again to senior address know Johnson to of Greg and part manager appropriate months want CFO a Meyer Strategic and my and investment firm's With her John I back experience background provide member brings have as the the consumer served in first, has have team. to Western Committee. Western to Steering over My WMC, with XX managing Lisa may Broad look steps the many as a over mortgage years both Asset. credit our at continue you forward joined to I as as President more years more working Western the the respect XX XX principal proactive a of step and the as the management XXXX I of to role of as both take tenure of was strengthen WMC. as to impact and Handler well years committee includes analyst, funds. them last roles and team firm's with recent a Asset in role. than Treasurer expanded the management CFO closely the Lisa operating been our of also and financial particularly chairing

resulting Following income the impacted of volatility of the markets in the the the to of reduce the led protect sheet strengthen spring our our to adversely risk. equity portfolio, onset swift last and fixed year, portions pandemic us portfolio, and in which action balance take overall

fixed by shares increasing leverage, value. Our early a reducing attractive our our premium at repurchase our agreements, to on liquidity actions levels, equity reducing at significantly and involved short-term selling longer-term securing new rate reliance our bolstering book financing common

residential and reflect loan large the including approximately issued further or earnings of convertible reduced combination book. commercial And notes profile our in a securitization million to our million leverage, a $XXX agreements, balance of of at course $XX better XXXX. residential driven of our the our $XXX and our rates, new non-QM our These our specific, the for the strategy. our existing includes debt on improving recalibrated whole throughout during focused new million shareholder the enabled note [indiscernible] To secured ability funding of repurchase lowering improving by every earnings #X, portfolio. extending value earnings portion and investment resource refinancing $XX holdings average X.X%. dividend #X, to notes protecting our million, quarter our by #X, notes financing to portfolio; us execute XXXX quarter convertible of repurchased power. of senior discount be retired our The the and year, of #X, an were our our our we commitment actions reduce which of convertible we sheet, issuance XXXX mature and this and at to on longer-term strengthening Over have we have power of that

area record. year, have investing originations, we experienced residential a any has since we time focused on cumulative and non-QM WMC whole this solid frame. Turning to where activity. not deep in over our and an Western have been experience has investment This losses Asset XXXX, sector track the

million value have attractive as of And non-QM as proposition. residential XXXX, XX, loans. September $XXX view an more to We than of non-QM continue acquired

portfolio the Our year this as strong. consumer and well balance has remains residential sheet housing market performed

remain While disciplined we we and expect supported appreciation lender market favorable housing and well will given to that standards. supply underwriting dynamics housing price moderate, demand believe

also commercial a market. the sales is economic from more Our vibrant recovery refinance and portfolio benefiting and

whole from in amounting Aside past from perform million $XXX diligently pay loans we to million with payoffs commercial had line including situations off, In approximately year, non-Agency investments received economic X $XXX third and and portfolio, quarter fully have both the special these nearly the have our of investments. in CMBS of in in proceeds in proceeds. to we discussed expectations alone, through, been continued commercial for X we've continued the most working recovery. This that our investments our

of backed and earnings to are sponsors. generating solid to this discuss shareholders. relatively return those and enable non-QM overall make going forward, of portfolio Greg to our pay will more that an loans that have down protecting we focus high-quality believe detail. select improving properties our will will new and expect say non-QM with We us used to that portfolio proceeds residential core investments, Both I seasoned investments sustainable Sean investments will debt. the to We attractive benefit that dividend market our maintain enhance and strategy support in ability our mix investments But for by current commercial that in on the low under value conditions, goal by and leverage our current complemented

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

Sean Johnson

Bonnie. Thanks,

and from Our income. favorable rates, residential to supply, investments housing benefiting by tight in historically rising well third mortgage the sentiment market consumer continue perform quarter, the fueled strong low

CPR mortgage national swings withstand at of the of for mortgage them meaningful homes. equity originators fundamental as market, portfolio on that credit. period. non-QM strong fluctuations to quarter see payments remain year. where X.X% a it borrowers current rose are quarter. performed our in to Third and focus The more creates somewhat to credit with high-quality underwriting, loans when double-digit home All declined, now We but remains in from quarter X% forbearance we We a burdened And XX production. part price less occur. indices their the beginning in home, mortgage their housing as a confirmation of on much prioritize underwriting loans to incentive slowed in they Prepayments on Mortgage equity today XX.X payment grow has forbearance the third end Non-QM cushion volumes prior rates. periods. and price in this from than continue in the that have more today's was are annual to of effectiveness responsibly percentage the at focus in in constructive strength economic that plan one CPR our but of with the again believe a consumers second provides we non-QM their conditions combined on quarter's repayment the have U.S. were of it at when remain dropping hold generally in as elevated, This origination obligation. and their

engage to with $XXX new whole originators and non-QM of the during existing third quarter. and loans million continue acquired residential We

will a return the core mentioned, As favorable for focus in now, us, track our risk remain its given and Bonnie we space that profile. expect this for solid record

criteria. we and discussed to have mortgage have us to who our with disciplined well attractive relationships understand provide loan the our with opportunities originators we past, developed able in As strategic are residential specifications meet

to high-quality grow lower repay. Our strong to a to continue to LCVs approach desire ability to We borrowers demonstrate call on are to residential whole the goal holdings. been of loans who securitization. With able has always Greg? focus the turn investments with our and Handler our through portion over that, discuss with commercial near-term in portfolio to I'll to Greg this another the these of financing plan

Greg Handler

this $XXX full our you, commercial to commercial of regards received In Thank payoffs loans, quarter, we on our representing X portfolio, loan million. Sean.

$XXX for encouraged with and will this the remaining fixed we cash stabilized flows. particularly are financing believe post-COVID loan commercial favorable by We loans, trends activity, million, more benefit representing environment in our improving properties

portfolio no will be saw also Similarly, the securities significant this commercial be there case. paydown. a However, can assurances, the

non-Agency discount valued an million loss on on that we During unrealized a CMBS full was to reversing X% par, at quarter, a investment. our books of payoff an investment the $XX that received on approximate

million the We was from repayment REEL interest also XXXX received our off securitization, which our of subordinated in the paid during quarter. $XX.X fully

across of originally consisted were recall North of the located of in may securitization combined by retail redeposit. sold was bond by $XXX America, power backed which that last years and You over million most portfolio X over tranches centers a diverse primarily the this

provide on special X Let situations. our a me update now brief

Marketing junior indication, there preliminary outstanding a delayed reasonable and continuing principal begun, it. property the that the of full future, selling but that guarantee to regarding With resolution. on hope loan is potential of continue interest payments resolution litigation backed We based the the discussed, hotel bankruptcy believe realize closed have $XX be a loan has the $XX with of a recovery previously to had complex balance and final mezzanine As the to other that We the million recovered. to for in certain borrower after the lenders by and asset. is we we respect the loan and the borrower's holders we of on the to discussions no on purpose be in in were dismissal the of Northeast, other have we will that property million the there retail proceedings, located a entertainment situation. near alternatives address although likelihood will

of million ongoing $X.X uncertainty loan $XX.X an on at marked during and is impairment additional currently a this we write-down recorded outcomes. loan value The the the a quarter. risk possible under of certain Given outcome, further regarding million

these as appreciation. portfolio strategies. market, Outside the our of CMBS We the to well of challenged remainder on some diligently for issue as attractive CRE, of commercial continue investments, nonqualified proceeds with reinvest for where from positive are new new we particularly X select to Within other holdings into mortgages, in positioning commercial post-COVID properties. potential resolutions our our core seeing reaching we CMBS stabilized looking are opportunities payoffs and in commercial our work the residential may high-quality supplement future in we lender non-Agency investments

as loans us that early We because credit on lenders. in are fundamentals transactions we and key of that aspects get often the are collaborate to We involved targeting like covenants can have able strong protect these and the solid deals structure.

year. momentum of The estate in higher spending and sales, continued retail We of been signs encouraged the resurgence strong which to real in the by has the many beginning of commercial at economy the improvement U.S. consumer has markets. the the led are of

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

we segments a limited seen healthy on In remain service hotel to particularly also have focused which positioning in risk-adjusted operating our existing Lisa? to leisure over has and resort in President I'll and new offer call appreciation attractive rebound We across turn metrics in Meyer, now the the Lisa market. our in improved travel, summary, the country, growing led returns. investments manner potential future portfolio the with that CFO. disciplined a and with

Lisa Meyer

Greg. you, Thank

Before to improve want to I review quarter results, improvements our arrangements sheet. our third we discuss financing proactively made our have I further to balance

we cash transactions only XXXX, discount existing due value in senior amount the our These average September, at years $XX of not This and As enabled August, our million. new XXXX Bonnie convertible of notes net million on convertible used debt, in additional X, on of X.XX% principal remaining with also repurchased the lowered $XX but million hand aggregate In $XX.X $XX to par senior by together mentioned, convertible for our issued have October repurchase to we notes XXXX us a quarter notes. of X/X an $XX of at maturity resulted approximately balance due extend million only end. weighted overall proceeds of X.X%. a of notes in million of remaining in to convertible September the million XXXX our debt $XXX X.XX X

liquidity and maturities our We execute on to note address XXXX to our investment have ample both strategy.

on improving We to focus sources continue recourse of other diversifying and our financing.

financial Now, our results. to turning

as the our quarter, commercial number portfolio perform residential of to investments. did continued During well, our a

the $X.X our the impacted an per from of during the quarter. Our quarter. distributable were as decrease share, million further share from in holdings. $X This fair net improvement nonperforming At same negatively the per value or per well GAAP non-Agency X.X% GAAP the earnings widening as in resulted time, to of of decline and down value quarter quarter results $X.X our loan, on by second for in second $X.XX commercial million financial spread a were or certain CMBS $X.XX a book the loss $X.XX a million share,

quarter consistent $X.XX prepayment our our the book evaluate and amortization. of $X.XX return retained power for that portfolio for every was premium $X.X securitization non-QM addition, in in dividend the in on X.X% gross dividend a the during the quarter In on quarter to of has reflects share which number of to value share we've our and rather the the income. experienced and liabilities, loan $X.XX the our GAAP our X of value Economic negative value, book a last A levels elevated decreased per million a of including included by of trust, interest We per the factors, per been based led assets outlook quarter X.X% dividend. for Economic consolidated the than the for portfolio quarters. taxable earnings level sustainable share.

to economy most real our With please now pandemic. benefit portfolio to go ahead. estate Holdings, and commercial any through focus by impacted to increase WMC September positioning that recovery our the sectors Operator, by call continue recourse we certain of XX, we maintain assets while XX. we structure that, made the questions. results financial actions with at quarters a from due solidify from the of summary, will longer ahead. of In With ongoing at on up Our our are and well was modest we to attractive feel financed that we X.Xx were will significant the The liquidity to X.Xx select capital positioned June your quarter. growing in opportunities financing, grow our was term primarily non-QM in our objective occurred later to the improved open the up leverage additions investment portion which the

Operator

Instructions]. [Operator

from Securities. Cranston Trevor question will with first come JMP Our

Trevor Cranston

had able third commercial and quarter, payoffs you the new question capital for portfolio, some of new investments. A significant loans. acquire amount from were Obviously, to in available a the on residential

have towards available it Looking like the couple at XXXX. sort loan payoffs going particular? commercial at the somewhat you forward, look feel skewed to the the capital you going the portfolio, I were in remaining are XQ? payoffs looks in of as you guess pace enough back Or like quarters, from of portfolio, of commercial loan continue new you to continued do loans kind on half roughly dependent is of that' over going next the acquiring be

Greg Handler

through the strongly down And additional new to very in financing we're and pay additional but we question. our feel capital the a We for continued acquire assets, that balance continue now. position turning We've as existing to about we'll feel position to Thanks the also right grow securitization debt. capital create sheet. well. And out to potentially look

So I down redeploy pay well to a as think we're both good to debt. as in capital position

a commercial anything terms ahead a little that payoff XXXX, bit the see portfolio, as may has although you're for of paydowns In you right, Sean, that the of schedule, well. comment? into we have

Sean Johnson

Yes.

pretty to then will think We've accurate. improved things some I also warehouse that's financing do on and with. rates, interesting haircuts our our small projected generate got securitization advance cash free some

constrained So we're we like in here. time don't near the really term feel any capital

Trevor Cranston

quarter. And you MBS couple those of continued portfolio? within portfolio mentioned of a for sort that maturity projection payoffs can through or on Is your this any you about in think particular, refinancings us way payoffs loans. whether of And help there the it's non-Agency

Greg Handler

to in of half, pretty [indiscernible] the has the The starting tremendous second last in much of activity seen second Yes. Sure. the bastion recover. been amount this We've year. market half

volume origination New issue of of been months. in spectacular non-agency, couple the nothing has commercial mortgage sort last

issuance post month think was record GST. strongest I October on the

COVID re-underwrite cash ability the COVID obviously So that confidence the of we to keep to think do lenders positive, levels trend, of and to through loans flows. and is just and very even

and and But have properties, related been offices So have and industrial quality of a overall opportunities. COVID, been raised there's investors seeing still COVID things. transaction just the distribution high market, distressed hotels like first getting the things best parts do refinancing encouraged been then the looking of during pointing financed the clearly, things amount even recover. think retail, questions, to of money lot capitalize to logistics, And we the we've to powder. volume. They on and We've the and like apartments dry by and

have transaction as transaction picked of to also post levels quarter, volumes pace up highest So CRE the in significantly CRE well. being volume GSE the third well on

our COVID, that the more towards that, breaking they're positions. legacy like feel trend outlook think generally. up liquidity like some shore that do the dressed with of questionable in under we positive these non-agency So resolutions the help And feel do assets we of on some is resolutions it does should

So should as we think that that holdings our benefit well.

Trevor Cranston

non-QM And helpful. the a new you where where of us you're securitization on today new loan doing then is on That's so roughly where side, given sense can are? And prices a execution on securitizations? give the projecting kind returns

Greg Handler

Sure.

that the securitizations, been say, X have or have ones than wider were, in week the September. New last printed they in

mid-teens it low yield returns I'd it if So it a teens makes handicapping bit before, But was now. little might tough. the say be

Trevor Cranston

And then last question.

a Or you over of -- sort down? the was which there the where of of small me led mezz it without the change the write the that any is deteriorates situation alone, was On loan, status understand, value help to a this a is that positive just sort sort on loan write-down in which there just more of time that quarter. time? the Can progresses resolution,

Greg Handler

outcomes we're third-party to evaluating So any of that are discussions a the up service obviously, may the And that. who's negotiations, communicating we down final those -- material ongoing with yes, potential of quarter, valuation. say what the getting mark the the somewhat led the be. wouldn't event sense coming there pricing I with ongoing in The was

over this. assets the to and would tremendous think capitalize stabilize takes, we're in ability it ways, So and recover the to say, as property to much has some value. value the is in the I the see in long-term, longer friend over We our that The time of longer and working I actually position time.

of we're think we're a outcomes rate discount of the there. So And the think uncertainty. diligently given and different range I protect position high level several factoring high there. the just potentials -- the to very very working clearly, also is just still I broad, still in And

So the that's main really drivers.

Operator

from next with come Our Jason will Trading. Stewart question Jones

Jason Stewart

mezz participation sort event an of Just of look the a a the more you distribution? that does adverse In on follow-up it equity tail of the instead think in about like do loan Northeast. of loan? outcome, How an

Greg Handler

part That's analysis. certainly the of

to as I of split converted sort be think have to well. some and to to there's a equity, preferred preferred between potential be loan a equitized,

property, So and capital fully again, full see recognize I think structure value. to the we to capital stack to give a stabilized cash want the in the -- the REIT, allows that everyone time open

obviously, scenarios, adverse goal. that's adverse there's beyond there's we're So our end even which -- really also But factoring more that.

Okay.

Jason Stewart

less it. now, the your the you just repurchasing assumption something value How you worth with and marked it at level then repurchase way do comfortable new take And versus than you that assume comfort allocate let's have stock with you're investments the stock look capital it's at today? of though for fair a like

Lisa Meyer

It's Lisa.

X, review have to we we small. want we to and the stock investments, repurchase we to or We're whether allocate want scenarios. to So both balance whether that

actually so will us one buying is our really investments. grow will And goals And order stock of company, to to to better back smaller. in allocated company. to capital grow try think new we And the actually be the our make

Jason Stewart

generate higher stock some investments discount at the a And those ROE than repurchasing book think you value? to

Lisa Meyer

Yes.

Jason Stewart

about do factor And as think that into the cost company of you the you the equation? how structure

Lisa Meyer

think are of I structure company. with cost comfortable the we the

note with to also debt. convertible we're continue And the do convertible and to reducing that. think I overall refinancing our to of further our look notes going

Bonnie Wongtrakool

just add this cost recognize structure, important do business. that is would I very the scale on in that we certainly,

that We strategy. to, disciplined very be and to opportunities, going as that. are manner we said, the is in good we to So grow accretive We through organically to priority see our we'll shareholders. we do Lisa portfolio think That's do believe it can our grow. looking investment first a

Operator

Instructions]. [Operator

closing for to Chief turn no would are more remarks. the As there Bonnie to Officer, I conference any over this concludes like Executive questions, Wongtrakool, session. our back question-and-answer

Bonnie Wongtrakool

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

Operator

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

may now You disconnect.

Western Asset Mortgage Capital (WMC) 5 Nov 212021 Q3 Earnings call transcript