Attached files
| file | filename |
|---|---|
| 8-K - 8-K - Western Asset Mortgage Capital Corp | wmc-20210303.htm |
| EX-99.2 - EX-99.2 - Western Asset Mortgage Capital Corp | wmc4qfy20ex992.htm |
Exhibit 99.1
WESTERN ASSET MORTGAGE CAPITAL CORPORATION
ANNOUNCES FOURTH QUARTER AND FULL YEAR 2020 RESULTS
Conference Call and Webcast Scheduled for Tomorrow, Thursday, March 4, 2021 at
11:00 a.m. Eastern Time/8:00 a.m. Pacific Time
Pasadena, CA, March 3, 2021 – Western Asset Mortgage Capital Corporation (the “Company” or "WMC") (NYSE: WMC) today reported its results for the fourth quarter and the year ended December 31, 2020.
FOURTH QUARTER 2020 FINANCIAL HIGHLIGHTS
▪GAAP book value per share of $4.20, increased $0.13 from $4.07 in the third quarter
▪GAAP net income of $10.8 million, or $0.18 per basic and diluted share.
▪Core earnings of $7.2 million, or $0.12 per basic and diluted share.1
▪Economic return on book value was 4.7%1,2 for the quarter.
▪Economic book value per share of $4.19 increased 1.9% from $4.11 in the third quarter.1
▪2.11% annualized net interest margin on our investment portfolio. 1,3,4
▪2.1x recourse leverage as of December 31, 2020.
▪On December 17, 2020, we declared a fourth quarter common dividend of $0.06 per share.
FULL YEAR 2020 HIGHLIGHTS
Our full year financial results reflect the extremely challenging market conditions resulting from the onset of the pandemic in March 2020. During these challenging times, the Company focused on improving its balance sheet by reducing debt and leverage, increasing liquidity and shareholder equity, and completing new financing arrangements that significantly reduce the Company’s exposure to short term repurchase agreements. The following includes our full year financial results and the measures taken to strengthen our balance sheet:
▪GAAP net loss of $328.3 million, or $5.72 per basic and diluted share.
▪Core earnings of $32.6 million, or $0.57 per basic and diluted share.1
▪Economic return on book value was negative 59.1%1,2 for the year.
▪1.93% annualized net interest margin on our investment portfolio. 1,3,4
▪In April, we closed an 18 month term financing arrangement without margin requirements for the entire unsecuritized Residential Whole Loan portfolio. This financing reduced our exposure to repurchase agreement financing and eliminated associated margin calls. In October 2020, we amended the facility to a limited mark to market facility with a 12 month term bearing an interest rate of one month LIBOR plus 2.75%.
▪In May, we closed a 12 month term financing arrangement, with a 12 month extension at the counterparty’s option, for Non-Agency RMBS and Non-Agency CMBS, significantly mitigating exposure to margin volatility.
▪Our Manager waived the management fees for March, April and May 2020.
▪In June, we completed a securitization of $355.8 million of our Residential Whole Loan investments, enabling the Company to secure $341.7 million of long-term financing at a weighted average interest rate of 2.0%.
▪In June, we raised $22.0 million of equity capital through the sale of 6.0 million shares at a premium to book value through our At-The-Market Program.
▪In July, the Company retired $5.0 million of its 6.75% Convertible Senior Notes at a 25% discount to par value, in exchange for the issuance of 1.4 million shares of our common stock.
▪Resumed our quarterly dividend in the third quarter for a total 2020 annual common dividend of $0.11 per share.
▪In the fourth quarter of 2020, we repurchased $25.0 million in aggregate principal amount of our convertible senior unsecured notes at an average discount of 13% to par value.
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.
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MANAGEMENT COMMENTARY
“The Company finished the year with positive momentum, delivering a fourth quarter economic return on book value of 4.7%, sequentially improved core earnings and a dividend increase to $0.06 per share,” said Jennifer Murphy, Chief Executive Officer of the Company. "We have continued to focus on strengthening our balance sheet, lowering leverage, reducing our exposure to mark-to-market funding, and improving the earnings power of the portfolio. We took important actions on these fronts in the fourth quarter, including extending some of our longer-term financing at attractive levels and repurchasing $25.0 million of our outstanding notes at an average discount of 13% to par value. We believe we are well positioned to benefit from what we anticipate will be the continued recovery of asset values and improved earnings sustainability of our portfolio.
Ms. Murphy continued, “We recorded GAAP net income of $10.8 million, or $0.18 per share, and core earnings of $0.12 per share during the fourth quarter. Core earnings improved from $0.10 per share in the third quarter, reflecting lower operating expenses, partially offset by slightly lower portfolio leverage and net interest margin. Our GAAP book value per share increased 3.2% during the quarter to $4.20 per share and has increased by 32.5% since June 30, 2020, when it reached its low, after the onset of the pandemic. Our commitment to shareholders remains protecting and growing the value of the portfolio, which will position us to deliver on our long-term objectives of generating sustainable core earnings that support an attractive dividend and enhancing value for our shareholders,” Ms. Murphy concluded.
Greg Handler, Interim Co-Chief Investment Officer of the Company, commented, “The equity and credit markets continued to rebound in the fourth quarter, driven by improved liquidity conditions across financial markets, the optimism resulting from the roll-out of vaccines and the potential for a new government stimulus package. This translated into higher valuations on a number of our portfolio holdings and an improvement in our book value. Our view remains that the economy will continue to gradually improve, although the timing and strength of that recovery remain dependent on the future course of the pandemic as well as fiscal and monetary stimulus. We have invested in assets we believe are high quality and with borrowers who have resources to be more resilient in a protracted downturn. In the meantime, we remain focused on maintaining sufficient liquidity and positioning our portfolio for potential future appreciation, which we believe will occur as the economy continues to reopen.”
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2020 Quarterly Results
The below table reflects a summary of our operating results (dollars in thousands, except per share data):
| For the Three Months Ended | |||||||||||||||||||||||
| GAAP Results | December 31, 2020 | September 30, 2020 | June 30, 2020(5) | March 31, 2020 | |||||||||||||||||||
| Net Interest Income | $ | 9,503 | $ | 10,117 | $ | 7,076 | $ | 18,741 | |||||||||||||||
| Other Income (Loss): | |||||||||||||||||||||||
| Realized gain (loss), net | 1,327 | 718 | (6,960) | 89,186 | |||||||||||||||||||
| Unrealized gain (loss), net | 3,994 | 54,690 | 16,040 | (296,111) | |||||||||||||||||||
| Gain (loss) on derivative instruments, net | 219 | (88) | (8,143) | (189,691) | |||||||||||||||||||
| Other, net | (46) | (31) | (45) | 461 | |||||||||||||||||||
| Other Income (loss) | 5,494 | 55,289 | 892 | (396,155) | |||||||||||||||||||
| Total Expenses | 4,176 | 5,392 | 24,805 | 4,534 | |||||||||||||||||||
| Income (loss) before income taxes | 10,821 | 60,014 | (16,837) | (381,948) | |||||||||||||||||||
| Income tax provision (benefit) | 29 | 205 | 255 | (93) | |||||||||||||||||||
| Net income (loss) | 10,792 | 59,809 | (17,092) | (381,855) | |||||||||||||||||||
| Net income attributable to non-controlling interest | 2 | 2 | 2 | 2 | |||||||||||||||||||
| Net income (loss) attributable to common stockholders and participating securities | $ | 10,790 | $ | 59,807 | $ | (17,094) | $ | (381,857) | |||||||||||||||
| Net income (loss) per Common Share – Basic/Diluted | $ | 0.18 | $ | 0.98 | $ | (0.31) | $ | (7.15) | |||||||||||||||
| Non-GAAP Results | |||||||||||||||||||||||
Core earnings (1) | $ | 7,208 | $ | 6,391 | $ | 4,343 | $ | 15,779 | |||||||||||||||
| Core earnings per Common Share – Basic/Diluted | $ | 0.12 | $ | 0.10 | $ | 0.08 | $ | 0.29 | |||||||||||||||
Weighted average yield(2)(4) | 5.50 | % | 5.51 | % | 5.40 | % | 4.90 | % | |||||||||||||||
Effective cost of funds(3)(4) | 4.10 | % | 3.94 | % | 3.98 | % | 3.28 | % | |||||||||||||||
Annualized net interest margin(2)(3)(4) | 2.11 | % | 2.27 | % | 1.63 | % | 1.84 | % | |||||||||||||||
(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.
(5) The consolidated statements of operations for the three months ended June 30, 2020 was revised during the three months ended September 30, 2020 to reflect the under accrual of interest expense in the amount of $1.5 million.
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Portfolio Composition
As of December 31, 2020, the Company owned an aggregate investment portfolio with a fair market value totaling $3.2 billion. The following tables set forth additional information regarding the Company’s investment portfolio as of December 31, 2020:
Portfolio Characteristics
Credit Sensitive Portfolio
The Company's Non-QM residential portfolio, in our view, is performing well, given the challenging economic background. The loans in a forbearance plan at the end of December 2020, excluding loans that were in forbearance that are now in repayment period, represented approximately 0.24% of the total outstanding loans. We see this as a strong indication that borrowers with meaningful equity in their homes will prioritize their mortgage payment in order to remain current on that obligation.
The Company's Commercial Loans and Non-Agency CMBS portfolios are performing in line with expectations under the current pandemic conditions. The Non-Agency CMBS portfolios have an original LTV of 64.4%, The Company believes there is a reasonable likelihood that the majority of the delinquent loans that serve as collateral for the Non-Agency CMBS will return to performing status in the coming months although there is no assurance that this will be the case. The Commercial Loan portfolio carries a 65.1% original LTV and all but one of the loans remains current.
The Company's CRE mezzanine loan with an outstanding principal balance of $90 million is receiving interest payments from a reserve that will become exhausted in June 2021. The Company expects this mezzanine loan will become non performing upon depletion of such reserve.
The Company commenced foreclosure proceedings for its delinquent commercial loan with an outstanding principal balance of $30.0 million, secured by a hotel. However, on February 24, 2021, the borrower filed for bankruptcy protection. The Company expects to move forward with the foreclosure subject to the bankruptcy process and believes there is a reasonable likelihood that the outstanding principal balance of $30 million will be recovered, although there is no assurance.
The following table summarizes certain characteristics of our credit sensitive portfolio by investment category as of December 31, 2020 (dollars in thousands):
| Principal Balance | Amortized Cost | Fair Value | Weighted Average Coupon(1) | ||||||||||||||||||||
| Non-Agency RMBS | $ | 38,112 | $ | 23,463 | $ | 21,416 | 1.6 | % | |||||||||||||||
| Non-Agency RMBS IOs and IIOs | N/A | 6,271 | 3,965 | 0.4 | % | ||||||||||||||||||
| Non-Agency CMBS | 235,497 | 210,239 | 164,081 | 5.0 | % | ||||||||||||||||||
| Residential Whole Loans | 984,555 | 1,007,004 | 1,008,782 | 5.1 | % | ||||||||||||||||||
| Residential Bridge Loans | 15,247 | 15,250 | 13,916 | 9.4 | % | ||||||||||||||||||
Securitized Commercial Loans(1) | 1,739,793 | 1,604,320 | 1,605,335 | 4.3 | % | ||||||||||||||||||
| Commercial Loans | 325,444 | 325,297 | 310,523 | 6.4 | % | ||||||||||||||||||
| Other Securities | 51,537 | 49,420 | 48,754 | 4.4 | % | ||||||||||||||||||
| $ | 3,390,185 | $ | 3,241,264 | $ | 3,176,772 | 4.8 | % | ||||||||||||||||
(1) Includes Residential Bridge Loans carried at amortized cost of $1.1 million as of December 31, 2020. The fair value of these loans was $1.1 million as of December 31, 2020.
(2) As of December 31, 2020, the Company had real estate owned ("REO") properties with an aggregate carrying value of $1.1 million related to foreclosed Bridge Loans. The REO properties are classified in "Other assets" in the Consolidated Balance Sheets.
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Agency Portfolio
The following table summarizes certain characteristics of our Agency portfolio by investment category as of December 31, 2020 (dollars in thousands):
| Principal Balance | Amortized Cost | Fair Value | Net Weighted Average Coupon | ||||||||||||||||||||
| Agency RMBS Interest-Only Strips | N/A | $ | 89 | $ | 143 | 2.1 | % | ||||||||||||||||
| Agency RMBS Interest-Only Strips, accounted for as derivatives | N/A | N/A | 1,565 | 2.6 | % | ||||||||||||||||||
| Total Agency RMBS | — | 89 | 1,708 | 2.5 | % | ||||||||||||||||||
| Total | $ | — | $ | 89 | $ | 1,708 | 2.5 | % | |||||||||||||||
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Portfolio Financing and Hedging
Financing
Repurchase Agreements
The Company continued to improve its balance sheet by reducing debt and leverage, increasing liquidity and shareholder equity.
Residential Whole Loan Facility
On April 21, 2020, the Company entered into amendments with respect to certain of its residential whole loan 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 target advance rate under the amended and restated facility was approximately 84% of the aggregate unpaid principal balance of the loans. The facility's scheduled maturity was October 5, 2021. All principal payments and income generated by the loans during the term of the facility were used to pay principal and interest on the facility. Upon the securitization or sale by the Company of any whole loan subject to this amended and restated facility, the counterparty was entitled to receive a 30% premium recapture fee of all realized value on any whole loans above such counterparty’s amortized basis as well as an exit fee of 0.50% of the loan amount in circumstances where the counterparty was not involved in the disposition of the loans.
As a result of refinancing the Residential Whole Loans through a securitization, the Company accrued a premium recapture fee of approximately $20.5 million, which was payable at the maturity of the facility, and was recorded in "Financing fees" in the Consolidated Statements of Operations.
On October 6, 2020 the Company entered into an amendment with respect to this residential whole loan facility. The amendment converted the existing residential loan facility to a limited mark to market margin facility that bears an interest rate of LIBOR plus 2.75%, with a LIBOR floor of 0.25%. The target advance rate under the amended facility is 84% and the facility matures on October 5, 2021. In connection with the amendment to the facility, the Company paid $12.0 million of the premium recapture fee and the balance of $8.5 million is payable at the maturity of the amended facility on October 5, 2021.The premium recapture fee was eliminated for investments financed under the amended facility.
As of December 31, 2020 approximately $67.1 million in non QM loans remained in the facility with a borrowing amount of $30.2 million.
Non-Agency CMBS and Non-Agency RMBS Facility
On May 4, 2020, the Company supplemented one of its existing securities repurchase facilities to consolidate most of its CMBS and RMBS assets, which were financed by multiple counterparties, into a single term facility with limited mark to market margin requirements. Pursuant to the agreement, 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 12 month 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. Interest on the facility is due from the Company at a rate of three-month LIBOR plus 5.0% payable quarterly in arrears. Half of all 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. As of December 31, 2020, the outstanding balance under this facility was $95.1 million.
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The following table sets forth additional information regarding the Company’s portfolio financing arrangements as of December 31, 2020 (dollars in thousands):
| Repurchase Agreements | Balance | Weighted Average Interest Rate (end of period) | Weighted Average Remaining Maturity (days) | |||||||||||||||||
| Short Term Borrowings: | ||||||||||||||||||||
| Agency RMBS | $ | 1,418 | 1.34 | % | 59 | |||||||||||||||
| Non-Agency CMBS | 10,313 | 2.25 | % | 14 | ||||||||||||||||
Residential Whole Loans(1) | 29,800 | 3.71 | % | 15 | ||||||||||||||||
Residential Bridge Loans(1) | 11,254 | 2.73 | % | 36 | ||||||||||||||||
Commercial Loans(1) | 34,375 | 3.32 | % | 75 | ||||||||||||||||
| Membership Interest | 18,844 | 2.90 | % | 29 | ||||||||||||||||
| Other Securities | 2,594 | 4.51 | % | 19 | ||||||||||||||||
| Subtotal | 108,598 | 3.19 | % | 39 | ||||||||||||||||
| Long Term Borrowings | ||||||||||||||||||||
Non-Agency CMBS(3) | 66,767 | 5.23 | % | 126 | ||||||||||||||||
| Non-Agency RMBS | 14,643 | 5.23 | % | 126 | ||||||||||||||||
Residential Whole Loans(1) (2) | 30,224 | 3.00 | % | 278 | ||||||||||||||||
Commercial Loans (2) | 124,937 | 2.17 | % | 287 | ||||||||||||||||
| Other Securities | 13,677 | 5.24 | % | 126 | ||||||||||||||||
| Subtotal | 250,248 | 3.74 | % | 225 | ||||||||||||||||
| Repurchase agreements borrowings | 358,846 | 3.57 | % | 169 | ||||||||||||||||
| Less unamortized debt issuance costs | 1,923 | N/A | N/A | |||||||||||||||||
| Repurchase agreements borrowings, net | $ | 356,923 | 3.57 | % | 169 | |||||||||||||||
(1)Repurchase agreement borrowings on loans owned are through trust certificates. The trust certificates are eliminated in consolidation.
(2)Certain Residential Whole Loans and Commercial Loans were financed under two longer term repurchase agreements. The Residential Whole facility is 18 months and the Commercial Loan facility automatically rolls 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.
(3)Includes repurchase agreement borrowings on securities eliminated upon VIE consolidation.
Certain of the financing arrangements provide the counterparty with the right to terminate the agreement if the Company does not maintain certain equity, liquidity and leverage metrics. With the exception of one repurchase agreement for which the Company received a waiver, the Company was in compliance with the terms of such financial tests as of December 31, 2020.
Convertible Senior Unsecured Notes
At December 31, 2020, the Company had $175.0 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.
On July 1, 2020, the Company issued an aggregate of 1,354,084 shares of its common stock, par value $0.01 per share (the “Common Stock”), in exchange for $5.0 million aggregate principal amount of the 2022 Notes pursuant to separate privately negotiated exchange agreements entered into on July 1, 2020 soliciting such exchange.
In the fourth quarter of 2020, the Company repurchased $25 million aggregate principal amount of the 2022 Notes at an approximate 13% discount to par value, plus accrued and unpaid interest.
Residential Mortgage-Backed Notes
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The Company has completed two Residential Whole Loan securitizations. The mortgage-backed notes issued are non-recourse to the Company and effectively finance $939.2 million of Residential Whole Loans as of December 31, 2020.
Arroyo 2019-2
The following table summarizes the residential mortgage-backed notes issued by the Company's Arroyo 2019-2 securitization trust at December 31, 2020 (dollars in thousands):
| Classes | Principal Balance | Coupon | Carrying Value | Contractual Maturity | ||||||||||
| Offered Notes: | ||||||||||||||
| Class A-1 | $ | 511,623 | 3.3% | $ | 511,620 | 4/25/2049 | ||||||||
| Class A-2 | 27,414 | 3.5% | 27,414 | 4/25/2049 | ||||||||||
| Class A-3 | 43,433 | 3.8% | 43,430 | 4/25/2049 | ||||||||||
| Class M-1 | 25,055 | 4.8% | 25,055 | 4/25/2049 | ||||||||||
| Subtotal | $ | 607,525 | $ | 607,519 | ||||||||||
| Less: Unamortized Deferred Financing Costs | N/A | 4,398 | ||||||||||||
| Total | $ | 607,525 | $ | 603,121 | ||||||||||
The Company retained the subordinate bonds and these bonds had a fair market value of $43.2 million at December 31, 2020. The retained Arroyo 2019-2 subordinate bonds are eliminated in consolidation. The securitized debt of the Arroyo 2019-2 Trust can only be settled with the residential loans that serve as collateral for the securitized debt and is non-recourse to the Company.
Arroyo 2020-1
The following table summarizes the residential mortgage-backed notes issued by the Company's Arroyo 2020-1 securitization trust at December 31, 2020 (dollars in thousands):
| Classes | Principal Balance | Coupon | Carrying Value | Contractual Maturity | ||||||||||
| Offered Notes: | ||||||||||||||
| Class A-1A | $ | 222,117 | 1.7% | $ | 222,112 | 3/25/2055 | ||||||||
| Class A-1B | 26,357 | 2.1% | 26,357 | 3/25/2055 | ||||||||||
| Class A-2 | 13,518 | 2.9% | 13,517 | 3/25/2055 | ||||||||||
| Class A-3 | 17,963 | 3.3% | 17,963 | 3/25/2055 | ||||||||||
| Class M-1 | 11,739 | 4.3% | 11,739 | 3/25/2055 | ||||||||||
| Subtotal | 291,694 | 291,688 | ||||||||||||
| Less: Unamortized Deferred Financing Costs | N/A | 2,519 | ||||||||||||
| Total | $ | 291,694 | $ | 289,169 | ||||||||||
The Company retained the subordinate bonds and these bonds had a fair market value of $27.7 million at December 31, 2020. The retained Arroyo 2020-1 subordinate bonds are eliminated in consolidation. The securitized debt of the Arroyo 2020-1 Trust can only be settled with the residential loans that serve as collateral for the securitized debt and is non-recourse to the Company.
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Commercial Mortgage-Backed Notes
RETL 2019 Trust
The following table summarizes RETL 2019 Trust's commercial mortgage pass-through certificates, at December 31, 2020 (dollars in thousands), which is non-recourse to the Company:
| Classes | Principal Balance | Coupon | Fair Value | Contractual Maturity | ||||||||||
| Class B | $ | 502 | 1.7% | $ | 492 | 3/15/2021 | ||||||||
| Class C | 308,400 | 2.3% | 296,933 | 3/15/2021 | ||||||||||
Class X-EXT(1) | N/A | 1.1% | 31 | 3/15/2021 | ||||||||||
| $ | 308,902 | $ | 297,456 | |||||||||||
(1) Class X-EXT is an interest-only class with an initial notional balance of $308.4 million.
The above table does not reflect the class HRR bond held by the Company because the bond is eliminated in consolidation. The bond had a fair market value of $41.9 million at December 31, 2020. The securitized debt of the RETL 2019 Trust can only be settled with the commercial loan, with an outstanding principal balance of approximately $354.2 million at December 31, 2020, that serves as collateral for the securitized debt and is non-recourse to the Company.
CSMC 2014 USA
The following table summarizes CSMC 2014 USA's commercial mortgage pass-through certificates at December 31, 2020 (dollars in thousands), which is non-recourse to the Company:
| Classes | Principal Balance | Coupon | Fair Value | Contractual Maturity | ||||||||||
| Class A-1 | $ | 120,391 | 3.3% | $ | 120,443 | 9/11/2025 | ||||||||
| Class A-2 | 531,700 | 4.0% | 538,469 | 9/11/2025 | ||||||||||
| Class B | 136,400 | 4.2% | 137,970 | 9/11/2025 | ||||||||||
| Class C | 94,500 | 4.3% | 85,140 | 9/11/2025 | ||||||||||
| Class D | 153,950 | 4.4% | 127,092 | 9/11/2025 | ||||||||||
| Class E | 180,150 | 4.4% | 131,906 | 9/11/2025 | ||||||||||
| Class F | 153,600 | 4.4% | 99,859 | 9/11/2025 | ||||||||||
Class X-1(1) | n/a | 0.5% | 12,794 | 9/11/2025 | ||||||||||
Class X-2(1) | n/a | 0.4% | 2,593 | 9/11/2025 | ||||||||||
| $ | 1,370,691 | $ | 1,256,266 | |||||||||||
(1) Class X-1 and X-2 are interest-only classes with notional balances of $652.1 million and $733.5 million as of December 31, 2020, respectively.
The above table does not reflect the portion of the class F bond held by the Company because the bond is eliminated in consolidation. The Company's ownership interest in the F bonds represents a controlling financial interest, which resulted in consolidation of the trust, during the quarter. The bond had a fair market value of $9.7 million at December 31, 2020. The securitized debt of the CSMC USA can only be settled with the commercial loan with an outstanding principal balance of approximately $1.4 billion at December 31, 2020, that serves as collateral for the securitized debt and is non-recourse to the Company.
Derivatives Activity
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The following table summarizes the Company’s other derivative instruments at December 31, 2020 (dollars in thousands):
| Other Derivative Instruments | Notional Amount | Fair Value | ||||||||||||
| Credit default swaps, asset | $ | 2,030 | $ | 161 | ||||||||||
| Other derivative instruments, assets | 161 | |||||||||||||
| Credit default swaps, liability | $ | 4,140 | $ | (656) | ||||||||||
| Total other derivative instruments, liabilities | (656) | |||||||||||||
| Total other derivative instruments, net | $ | (495) | ||||||||||||
Dividend
To preserve liquidity, we suspended our first and second quarter of 2020 common stock dividends in light of extraordinary market volatility driven by uncertainty surrounding the COVID-19 pandemic.
In the third quarter of 2020, we resumed our quarterly dividend after making progress strengthening our balance sheet and improving liquidity and earnings power of our investment portfolio. For the quarters ended September 30, 2020 and December 31, 2020, we declared a $0.05 and $0.06 dividend per share, respectively, generating a dividend yield of approximately 6.7% based on the stock closing price of $3.26 at December 31, 2020.
Conference Call
The Company will host a conference call with a live webcast tomorrow, March 4, 2021, at 11:00 a.m. Eastern Time/8:00 a.m. Pacific Time, to discuss financial results for the fourth quarter and year ended December 31, 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 https://dpregister.com/sreg/10151900/e1a85456ac 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 March 18, 2021 by dialing (877) 344-7529 from the United States, or (412) 317-0088 from outside the United States, and entering conference ID 10151900. 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 Residential Whole Loans, Commercial Loans, Non-Agency CMBS, Non-Agency RMBS, GSE Risk Transfer Securities and to a lesser extent Agency RMBS, Agency CMBS and ABS. 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
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Securities and Exchange Commission and a wholly-owned subsidiary of Franklin Resources, Inc. Please visit the Company’s website at www.westernassetmcc.com.
Forward-Looking Statements
This press release contains statements that 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.
Operating results are subject to numerous conditions, many of which are beyond the control of the Company, including, without limitation, changes in interest rates; changes in the yield curve; changes in prepayment rates; the availability and terms of financing; general economic conditions; market conditions; conditions in the market for mortgage related investments; and legislative and regulatory changes that could adversely affect the business of the Company. The Company undertakes 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, economic book value 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 Clark | Tricia Ross | ||||
| Financial Profiles, Inc. | Financial Profiles, Inc. | ||||
| (310) 622-8223 | (310) 622-8226 | ||||
| lclark@finprofiles.com | tross@finprofiles.com | ||||
-Financial Tables to Follow-
11
Western Asset Mortgage Capital Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands—except share and per share data)
| December 31, 2020 | December 31, 2019 | |||||||||||||
| Assets: | ||||||||||||||
| Cash and cash equivalents | $ | 31,613 | $ | 31,331 | ||||||||||
| Restricted cash | 76,132 | 52,948 | ||||||||||||
| Agency mortgage-backed securities, at fair value ($1,708 and $1,756,917 pledged as collateral, at fair value, respectively) | 1,708 | 1,795,255 | ||||||||||||
| Non-Agency mortgage-backed securities, at fair value ($167,970 and $292,613 pledged as collateral, at fair value, respectively) | 189,462 | 361,833 | ||||||||||||
| Other securities, at fair value ($48,754 and $80,031 pledged as collateral, at fair value, respectively) | 48,754 | 80,161 | ||||||||||||
| Residential Whole-Loans, at fair value ($1,008,782 and $1,375,860 pledged as collateral, at fair value, respectively) | 1,008,782 | 1,375,860 | ||||||||||||
| Residential Bridge Loans ($12,813 and $33,269 at fair value and $12,960 and $34,897 pledged as collateral, respectively) | 13,916 | 36,419 | ||||||||||||
| Securitized commercial loan, at fair value | 1,605,335 | 909,040 | ||||||||||||
| Commercial Loans, at fair value ($310,523 and $350,213 pledged as collateral, at fair value, respectively) | 310,523 | 370,213 | ||||||||||||
| Investment related receivable | 30,576 | 19,931 | ||||||||||||
| Interest receivable | 13,568 | 19,413 | ||||||||||||
| Due from counterparties | 2,327 | 98,947 | ||||||||||||
| Derivative assets, at fair value | 161 | 5,111 | ||||||||||||
| Other assets | 3,152 | 4,509 | ||||||||||||
Total Assets (1) | $ | 3,336,009 | $ | 5,160,971 | ||||||||||
| Liabilities and Stockholders’ Equity: | ||||||||||||||
| Liabilities: | ||||||||||||||
| Repurchase agreements, net | $ | 356,923 | $ | 2,824,801 | ||||||||||
| Convertible senior unsecured notes, net | 170,797 | 197,299 | ||||||||||||
| Securitized debt, net ($1,553,722 and $681,643 at fair value and $215,753 and $142,905 held by affiliates, respectively) | 2,446,012 | 1,477,454 | ||||||||||||
| Interest payable (includes $784 and $647 on securitized debt held by affiliates, respectively) | 12,006 | 15,001 | ||||||||||||
| Due to counterparties | 321 | 709 | ||||||||||||
| Derivative liability, at fair value | 656 | 6,370 | ||||||||||||
| Accounts payable and accrued expenses | 2,686 | 3,188 | ||||||||||||
| Payable to affiliate | 3,171 | 2,148 | ||||||||||||
| Dividend payable | 3,649 | 16,592 | ||||||||||||
| Other liabilities | 84,674 | 52,948 | ||||||||||||
Total Liabilities (2) | 3,080,895 | 4,596,510 | ||||||||||||
| Commitments and contingencies | ||||||||||||||
| Stockholders’ Equity: | ||||||||||||||
| Common stock, $0.01 par value, 500,000,000 shares authorized, and 60,812,701 and 53,523,876 outstanding, respectively | 609 | 535 | ||||||||||||
| Preferred stock, $0.01 par value, 100,000,000 shares authorized and no shares outstanding | — | — | ||||||||||||
| Treasury stock, at cost 0,100 and 0 shares held, respectively | (578) | — | ||||||||||||
| Additional paid-in capital | 915,458 | 889,227 | ||||||||||||
| Retained earnings (accumulated deficit) | (660,377) | (325,301) | ||||||||||||
| Total Stockholders’ Equity | 255,112 | 564,461 | ||||||||||||
| Total Liabilities and Stockholders’ Equity | $ | 3,336,009 | $ | 5,160,971 | ||||||||||
12
Western Asset Mortgage Capital Corporation and Subsidiaries
Consolidated Balance Sheets (Continued)
(in thousands—except share and per share data)
| December 31, 2020 | December 31, 2019 | |||||||||||||
(1) Assets of consolidated VIEs included in the total assets above: | ||||||||||||||
| Cash and cash equivalents | $ | — | $ | 7,589 | ||||||||||
| Restricted cash | 76,132 | 52,948 | ||||||||||||
| Residential Whole-Loans, at fair value ($1,008,782 and $1,375,860 pledged as collateral, at fair value, respectively) | 1,008,782 | 1,375,860 | ||||||||||||
| Residential Bridge Loans ($11,858 and $31,748 at fair value and $12,960 and $34,897 pledged as collateral, respectively) | 12,960 | 34,897 | ||||||||||||
| Securitized commercial loan, at fair value | 1,605,335 | 909,040 | ||||||||||||
| Commercial Loans, at fair value ($68,466 and $90,788 pledged as collateral, respectively) | 68,466 | 90,788 | ||||||||||||
| Investment related receivable | 27,987 | 19,138 | ||||||||||||
| Interest receivable | 10,936 | 10,829 | ||||||||||||
| Other assets | 80 | 90 | ||||||||||||
| Total assets of consolidated VIEs | $ | 2,810,678 | $ | 2,501,179 | ||||||||||
(2) Liabilities of consolidated VIEs included in the total liabilities above: | ||||||||||||||
| Securitized debt, net ($1,553,722 and $681,643 at fair value and $215,753 and $142,905 held by affiliates, respectively) | $ | 2,446,012 | $ | 1,477,454 | ||||||||||
| Interest payable (includes $784 and $647 on securitized debt held by affiliates, respectively) | 7,882 | 3,886 | ||||||||||||
| Accounts payable and accrued expenses | 89 | 185 | ||||||||||||
| Other liabilities | 76,132 | $ | 52,948 | |||||||||||
| Total liabilities of consolidated VIEs | $ | 2,530,115 | $ | 1,534,473 | ||||||||||
13
Western Asset Mortgage Capital Corporation and Subsidiaries
Consolidated Statements of Operations
(in thousands—except share and per share data)
Three Months Ended(2) | The Year Ended | |||||||||||||||||||||||||||||||
| December 31, 2020 | September 30, 2020 | June 30, 2020(1) | March 31, 2020 | December 31, 2020 | ||||||||||||||||||||||||||||
| Net Interest Income | ||||||||||||||||||||||||||||||||
| Interest income | $ | 47,718 | $ | 43,970 | $ | 31,494 | $ | 54,846 | $ | 178,028 | ||||||||||||||||||||||
| Interest expense | 38,215 | 33,853 | 24,418 | 36,105 | 132,591 | |||||||||||||||||||||||||||
| Net Interest Income | 9,503 | 10,117 | 7,076 | 18,741 | 45,437 | |||||||||||||||||||||||||||
| Other Income (Loss) | ||||||||||||||||||||||||||||||||
| Realized gain (loss) on sale of investments, net | 1,327 | 718 | (6,960) | 89,186 | 84,271 | |||||||||||||||||||||||||||
| Unrealized gain (loss), net | 3,994 | 54,690 | 16,040 | (296,111) | (221,387) | |||||||||||||||||||||||||||
| Gain (loss) on derivative instruments, net | 219 | (88) | (8,143) | (189,691) | (197,703) | |||||||||||||||||||||||||||
| Other, net | (46) | (31) | (45) | 461 | 339 | |||||||||||||||||||||||||||
| Other Income (Loss) | 5,494 | 55,289 | 892 | (396,155) | (334,480) | |||||||||||||||||||||||||||
| Expenses | ||||||||||||||||||||||||||||||||
| Management fee to affiliate | 1,528 | 1,513 | 464 | 1,039 | 4,544 | |||||||||||||||||||||||||||
| Financing fee | — | — | 20,540 | — | 20,540 | |||||||||||||||||||||||||||
| Other operating expenses | (139) | 1,198 | 796 | 1,000 | 2,855 | |||||||||||||||||||||||||||
| General and administrative expenses: | ||||||||||||||||||||||||||||||||
| Compensation expense | 717 | 716 | 692 | 662 | 2,787 | |||||||||||||||||||||||||||
| Professional fees | 1,030 | 827 | 1,541 | 1,480 | 4,878 | |||||||||||||||||||||||||||
| Other general and administrative expenses | 1,040 | 1,138 | 772 | 353 | 3,303 | |||||||||||||||||||||||||||
| Total general and administrative expenses | 2,787 | 2,681 | 3,005 | 2,495 | 10,968 | |||||||||||||||||||||||||||
| Total Expenses | 4,176 | 5,392 | 24,805 | 4,534 | 38,907 | |||||||||||||||||||||||||||
| Income (loss) before income taxes | 10,821 | 60,014 | (16,837) | (381,948) | (327,950) | |||||||||||||||||||||||||||
| Income tax provision (benefit) | 29 | 205 | 255 | (93) | 396 | |||||||||||||||||||||||||||
| Net income (loss) | 10,792 | $ | 59,809 | $ | (17,092) | $ | (381,855) | $ | (328,346) | |||||||||||||||||||||||
| Net income attributable to non-controlling interest | 2 | 2 | 2 | 2 | 8 | |||||||||||||||||||||||||||
| Net income (loss) attributable to common stockholders and participating securities | $ | 10,790 | $ | 59,807 | $ | (17,094) | $ | (381,857) | $ | (328,354) | ||||||||||||||||||||||
| Net income (loss) per Common Share – Basic | $ | 0.18 | $ | 0.98 | $ | (0.31) | $ | (7.15) | $ | (5.72) | ||||||||||||||||||||||
| Net income (loss) per Common Share – Diluted | $ | 0.18 | $ | 0.98 | $ | (0.31) | $ | (7.15) | $ | (5.72) | ||||||||||||||||||||||
| Dividends Declared per Share of Common Stock | $ | 0.06 | $ | 0.05 | $ | — | $ | — | $ | 0.11 | ||||||||||||||||||||||
(1) The consolidated statements of operations for the three months ended June 30, 2020 was revised during the three months ended September 30, 2020 to reflect the under accrual of interest expense in the amount of $1.5 million..
(2) Consolidated Statements of Operations for each of the three months ended March 31, 2020, June 30, 2020 September 30, 2020 and December 31, 2020 are unaudited.
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Reconciliation of GAAP Net Income to Non-GAAP Core Earnings
(Unaudited)
(in thousands—except share and per share data)
The table below reconciles Net Income (Loss) to Core Earnings for each of the three months ended March 31, 2020, June 30, 2020, September 30, 2020 and December 31, 2020 and the year ended December 31, 2020:
| Three Months Ended | The Year Ended | |||||||||||||||||||||||||||||||
| (dollars in thousands) | December 31, 2020 | September 30, 2020 | June 30, 2020(1) | March 31, 2020 | December 31, 2020 | |||||||||||||||||||||||||||
| Net Income (loss) attributable to common stock holders and participating securities | $ | 10,790 | $ | 59,807 | $ | (17,094) | $ | (381,857) | $ | (328,354) | ||||||||||||||||||||||
| Income tax provision (benefit) | 29 | 205 | 255 | (93) | 396 | |||||||||||||||||||||||||||
| Net income (loss) before income tax | 10,819 | 60,012 | (16,839) | (381,950) | (327,958) | |||||||||||||||||||||||||||
| Adjustments: | ||||||||||||||||||||||||||||||||
| Investments: | ||||||||||||||||||||||||||||||||
| Unrealized (gain) loss on investments, securitized debt and other liabilities | (3,994) | (54,690) | (16,040) | 296,111 | 221,387 | |||||||||||||||||||||||||||
| Realized (gain) loss on sale of investments | 1,059 | 540 | 6,960 | (89,186) | (80,627) | |||||||||||||||||||||||||||
| One-time transaction costs | 243 | 57 | 20,652 | 280 | 21,232 | |||||||||||||||||||||||||||
| Derivative Instruments: | ||||||||||||||||||||||||||||||||
| Net realized (gain) loss on derivatives | 1 | (154) | 13,152 | 180,156 | 193,155 | |||||||||||||||||||||||||||
| Unrealized (gain) loss on derivatives | (169) | 288 | (4,973) | 8,807 | 3,953 | |||||||||||||||||||||||||||
| Other: | ||||||||||||||||||||||||||||||||
| Realized gain on extinguishment of convertible senior unsecured notes | (2,386) | (1,258) | — | — | (3,644) | |||||||||||||||||||||||||||
| Amortization of discount on convertible senior note | 267 | 284 | 273 | 273 | 1,097 | |||||||||||||||||||||||||||
| Other non-cash adjustments | 1,186 | 1,130 | 988 | — | 3,304 | |||||||||||||||||||||||||||
| Non-cash stock-based compensation expense | 182 | 182 | 170 | 165 | 699 | |||||||||||||||||||||||||||
| Total adjustments | (3,611) | (53,621) | 21,182 | 396,606 | 360,556 | |||||||||||||||||||||||||||
| Core Earnings – Non-GAAP | $ | 7,208 | $ | 6,391 | $ | 4,343 | $ | 14,656 | $ | 32,598 | ||||||||||||||||||||||
| Basic and Diluted Core Earnings per Common Share and Participating Securities | $ | 0.12 | $ | 0.10 | $ | 0.08 | $ | 0.27 | $ | 0.57 | ||||||||||||||||||||||
| Basic and Diluted Core Earnings plus Drop Income per Common Share and Participating Securities | $ | 0.12 | $ | 0.10 | $ | 0.08 | $ | 0.29 | $ | 0.59 | ||||||||||||||||||||||
| Basic weighted average common shares and participating securities | 61,101,485 | 61,101,485 | 54,921,847 | 53,670,550 | 57,723,544 | |||||||||||||||||||||||||||
| Diluted weighted average common shares and participating securities | 61,101,485 | 61,101,485 | 54,921,847 | 53,670,550 | 57,723,544 | |||||||||||||||||||||||||||
(1) The consolidated statements of operations for the three months ended June 30, 2020 was revised during the three months ended September 30, 2020 to reflect the under accrual of interest expense in the amount of $1.5 million.
15
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:
| Three months ended | ||||||||||||||||||||||||||
| (dollars in thousands) | December 31, 2020 | September 30, 2020 | June 30, 2020(1) | March 31, 2020 | ||||||||||||||||||||||
Net interest income | $ | 9,503 | $ | 10,117 | $ | 7,076 | $ | 18,741 | ||||||||||||||||||
| Interest income from IOs and IIOs accounted for as derivatives | 33 | 34 | 69 | 91 | ||||||||||||||||||||||
Net interest income from interest rate swaps | — | — | — | (1,133) | ||||||||||||||||||||||
Adjusted net interest income | 9,536 | 10,151 | 7,145 | 17,699 | ||||||||||||||||||||||
| Total expenses | (4,174) | (5,392) | (24,805) | (4,534) | ||||||||||||||||||||||
| Non-cash stock-based compensation | 182 | 182 | 170 | 165 | ||||||||||||||||||||||
| Other non-cash adjustments | 1,186 | 1,130 | 988 | — | ||||||||||||||||||||||
| One-time transaction costs | 243 | 57 | 20,652 | 280 | ||||||||||||||||||||||
| Amortization of discount on convertible unsecured senior notes | 267 | 284 | 273 | 273 | ||||||||||||||||||||||
Interest income on cash balances and other income (loss), net | (30) | (19) | (78) | 775 | ||||||||||||||||||||||
| (2) | (2) | (2) | (2) | |||||||||||||||||||||||
| Core Earnings | $ | 7,208 | $ | 6,391 | $ | 4,343 | $ | 14,656 | ||||||||||||||||||
(1) The consolidated statements of operations for the three months ended June 30, 2020 was revised during the three months ended September 30, 2020 to reflect the under accrual of interest expense in the amount of $1.5 million.
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Reconciliation of GAAP Book Value to Non-GAAP Economic Book Value
(dollars in thousands)
(Unaudited)
| December 31, 2020 | September 30, 2020 | |||||||||||||||||||||||||
| $ Amount | Per Share | $ Amount | Per Share | |||||||||||||||||||||||
| GAAP Book Value at September 30, 2020 and June 30, 2020 | $ | 247,789 | $ | 4.07 | $ | 187,253 | $ | 3.15 | ||||||||||||||||||
| Debt to equity exchange of the convertible senior notes | — | — | 3,588 | (0.01) | ||||||||||||||||||||||
| Common dividend | (3,649) | (0.06) | (3,041) | (0.05) | ||||||||||||||||||||||
| 244,140 | 4.01 | 187,800 | 3.09 | |||||||||||||||||||||||
| Portfolio Income | ||||||||||||||||||||||||||
| Net Interest Margin | 9,491 | 0.16 | 10,120 | 0.16 | ||||||||||||||||||||||
| Realized gain (loss), net | (1,041) | (0.02) | (374) | (0.01) | ||||||||||||||||||||||
| Unrealized gain (loss), net | 4,162 | 0.07 | 54,399 | 0.89 | ||||||||||||||||||||||
| Net portfolio income | 12,612 | 0.21 | 64,145 | 1.04 | ||||||||||||||||||||||
| Net realized gain (loss) on debt extinguishment | 2,384 | 0.04 | 1,258 | 0.02 | ||||||||||||||||||||||
| Operating expenses | (1,390) | (0.02) | (2,711) | (0.04) | ||||||||||||||||||||||
| General and administrative expenses, excluding equity based compensation | (2,605) | (0.04) | (2,498) | (0.04) | ||||||||||||||||||||||
| Provision for taxes | (29) | — | (205) | — | ||||||||||||||||||||||
| GAAP Book Value at December 30, 2020 and September 30, 2020 | $ | 255,112 | $ | 4.20 | $ | 247,789 | $ | 4.07 | ||||||||||||||||||
| Adjustments to deconsolidate VIEs and reflect the Company's interest in the securities owned | ||||||||||||||||||||||||||
| Deconsolidation of VIEs assets | (2,651,627) | (43.60) | (2,827,360) | (46.48) | ||||||||||||||||||||||
| Deconsolidation VIEs liabilities | 2,528,536 | 41.58 | 2,705,246 | 44.48 | ||||||||||||||||||||||
| Interest in securities of VIEs owned, at fair value | 122,533 | 2.01 | 124,309 | 2.04 | ||||||||||||||||||||||
| Economic Book Value at December 31, 2020 and September 30, 2020 | $ | 254,554 | $ | 4.19 | $ | 249,984 | $ | 4.11 | ||||||||||||||||||
"Economic Book value" is a non-GAAP financial measure of our financial position on an unconsolidated basis. The Company owns certain securities that represent a controlling variable interest, which under GAAP requires consolidation; however, the Company's economic exposure to these variable interests is limited to the fair value of the individual investments. Economic book value is calculated by adjusting the GAAP book value by 1) adding the fair value of the retained interest or acquired security of the VIEs (RETL 2019, CSMC USA, Arroyo 2019-2 and Arroyo 2020-1) held by the Company, which were priced by independent third party pricing services and 2) removing the asset and liabilities associated with each of consolidated trusts (RETL 2019, CSMC 2020, Arroyo 2019-2 and Arroyo 2020-1). Management believes that economic book value provides investors with a useful supplemental measure to evaluate our financial position as it reflects the actual financial interest of these investments irrespective of the variable interest consolidation model applied for GAAP reporting purposes. Economic book value does not represent and should not be considered as a substitute for Stockholders' Equity, as determined in accordance with GAAP, and our calculation of this measure may not be comparable to similarly titled measures reported by other companies.
Reconciliation of Interest Income and Effective Cost of Funds
(Unaudited, in thousands)
17
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 December 31, 2020, September 30, 2020, June 30, 2020 and March 31, 2020:
| Three Months Ended | The Year Ended | |||||||||||||||||||||||||||||||
| (dollars in thousands) | December 31, 2020 | September 30, 2020 | June 30, 2020 | March 31, 2020 | December 31, 2020 | |||||||||||||||||||||||||||
| Coupon interest income | $ | 43,545 | $ | 40,039 | $ | 33,007 | $ | 57,761 | $ | 174,352 | ||||||||||||||||||||||
| Premium amortization, discount accretion and amortization of basis, net | 4,173 | 3,931 | (1,513) | (2,915) | 3,676 | |||||||||||||||||||||||||||
| Interest income | $ | 47,718 | $ | 43,970 | $ | 31,494 | $ | 54,846 | $ | 178,028 | ||||||||||||||||||||||
Contractual interest income, net of amortization of basis on Agency and Non-Agency Interest-Only Strips, classified as derivatives(1): | ||||||||||||||||||||||||||||||||
| Coupon interest income | 148 | 200 | 340 | 636 | 1,324 | |||||||||||||||||||||||||||
| Amortization of basis (Non-GAAP Financial Measure) | (114) | (166) | (271) | (545) | (1,096) | |||||||||||||||||||||||||||
| Subtotal | 34 | 34 | 69 | 91 | 228 | |||||||||||||||||||||||||||
| Total interest income, including interest income on Agency and Non-Agency Interest-Only Strips, classified as derivatives and other derivative instruments - Non-GAAP Financial Measure | $ | 47,752 | $ | 44,004 | $ | 31,563 | $ | 54,937 | $ | 178,256 | ||||||||||||||||||||||
(1) Reported in gain (loss) on derivative instruments in the Consolidated Statement of Operations.
The following table reconciles the Effective Cost of Funds (Non-GAAP financial measure) with interest expense for each of the three months ended December 31, 2020, September 30, 2020, June 30, 2020 and March 31, 2020:
| Three Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2020 | September 30, 2020 | 6/30/2020(1) | March 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | Interest | Effective Borrowing Costs | Interest | Effective Borrowing Costs | Interest | Effective Borrowing Costs | Interest | Effective Borrowing Costs | ||||||||||||||||||||||||||||||||||||||||||
| Interest expense | $ | 38,215 | 4.98 | % | $ | 33,853 | 4.80 | % | $ | 24,418 | 3.97 | % | $ | 36,105 | 3.34 | % | ||||||||||||||||||||||||||||||||||
| Adjustments: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest expense on Securitized debt from consolidated VIEs | (23,106) | (5.80) | % | (18,597) | (5.83) | % | (4,661) | (3.92) | % | (6,754) | (4.42) | % | ||||||||||||||||||||||||||||||||||||||
| Net interest (received) paid - interest rate swaps | — | — | % | — | — | % | — | — | % | 1,133 | 0.10 | % | ||||||||||||||||||||||||||||||||||||||
| Effective Borrowing Costs | $ | 15,109 | 4.10 | % | $ | 15,256 | 3.94 | % | $ | 19,757 | 3.98 | % | $ | 30,484 | 3.28 | % | ||||||||||||||||||||||||||||||||||
| Weighted average borrowings | $ | 1,465,456 | $ | 1,538,970 | $ | 1,994,405 | $ | 3,733,045 | ||||||||||||||||||||||||||||||||||||||||||
(1) The consolidated statements of operations for the three months ended June 30, 2020 was revised during the three months ended September 30, 2020 to reflect the under accrual of interest expense in the amount of $1.5 million.
The following table reconciles the Effective Cost of Funds (Non-GAAP financial measure) with interest expense for the years ended December 31, 2020 and 2019:
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| The Year Ended | ||||||||||||||||||||||||||
| December 31, 2020 | December 31, 2019 | |||||||||||||||||||||||||
(dollars in thousands) | Interest | Effective Borrowing Costs | Interest | Effective Borrowing Costs | ||||||||||||||||||||||
| Interest expense | $ | 132,591 | 4.19 | % | $ | 150,274 | 3.48 | % | ||||||||||||||||||
| Adjustments: | ||||||||||||||||||||||||||
| Interest expense on Securitized debt from consolidated VIEs | (53,118) | (5.38) | % | (30,312) | (4.15) | % | ||||||||||||||||||||
| Net interest (received) paid - interest rate swaps | 1,133 | 0.04 | % | (9,501) | (0.22) | % | ||||||||||||||||||||
| Effective Borrowing Costs | $ | 80,606 | 3.70 | % | $ | 110,461 | 3.07 | % | ||||||||||||||||||
| Weighted average borrowings | $ | 2,180,532 | $ | 3,594,020 | ||||||||||||||||||||||
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