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

August 6, 2020

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

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

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




Item 2.02.       Results of Operations and Financial Condition
 
On August 5, 2020, Western Asset Mortgage Capital Corporation (the “Company”) issued a press release announcing its financial results for the fiscal quarter ended June 30, 2020. The text of the press release is furnished as exhibit 99.1 to this Form 8-K.

Item 7.01.        Regulation FD Disclosure
 
On August 6, 2020, the Company will be holding its quarterly conference call in which it will discuss its financial results.  The presentation for such call is furnished herewith as Exhibit 99.2 to this Form 8-K.
 
Pursuant to the rules and regulations of the Securities and Exchange Commission, Exhibits 99.1 and 99.2 and the information set forth therein and herein are being furnished and shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), nor shall they be deemed to be incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing.
 
Item 9.01.       Financial Statements and Exhibits
 
(d)  Exhibits
 
Exhibit No.Description
99.1
99.2




SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
 WESTERN ASSET MORTGAGE CAPITAL CORPORATION
   
   
 By:/s/ Lisa Meyer 
  Name:Lisa Meyer 
  Title:Chief Financial Officer and Treasurer 
 
 
 
Date:  August 6, 2020


Document

Exhibit 99.1

WESTERN ASSET MORTGAGE CAPITAL CORPORATION
ANNOUNCES SECOND QUARTER 2020 RESULTS
 
Conference Call and Webcast Scheduled for Tomorrow, Thursday, August 6, 2020 at
11:00 a.m. Eastern Time/8:00 a.m. Pacific Time
 
Pasadena, CA, August 5, 2020 – Western Asset Mortgage Capital Corporation (the “Company” or "WMC") (NYSE: WMC) today reported its results for the second quarter ended June 30, 2020.

CORPORATE UPDATE

The Company significantly improved its balance sheet in the second quarter 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. For the quarter ended June 30, 2020, these measures included, but were not limited to, the following:

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 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.
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.
Reduced repurchase agreement financings in the second quarter by 76.2% to $369.1 million.
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.
Sold approximately $423.2 million of Agency MBS, $42.6 million of Non-Agency MBS, $144.3 million in conforming whole loans, and $18.2 million other securities and repaid associated repurchase agreement financing to significantly reduce margin call exposure.
Our Manager waived management fees for April 2020 and May 2020.

SECOND QUARTER 2020 FINANCIAL RESULTS

GAAP book value per share of $3.17.
GAAP net loss of $15.6 million, or $0.29 per basic and diluted share.
Included in GAAP net loss is an accrual for a premium recapture fee which is payable to the counterparty of our Residential Whole Loan Facility of $20.5 million upon termination or maturity of the facility. This fee was incurred as a result of refinancing $355.8 million of Residential Whole Loans financed on the facility through the securitization.
Economic book(2) value per share of $4.04
Core earnings of $5.8 million, or $0.11 per basic and diluted share.1
Economic return on GAAP book value was negative 7.0% for the quarter.1,3
1.91% annualized net interest margin on our investment portfolio. 1,4,5
Reduced recourse leverage to 3.0x leverage down from 9.5x at March 31, 2020.
1  Non – GAAP measure.
2 Economic book value is a non-GAAP financial measure. See page 16 for the reconciliation of GAAP book value to non-GAAP economic book value.
3  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.
4   Includes interest-only securities accounted for as derivatives and the cost of interest rate swaps.
5 Excludes the consolidation of VIE trusts required under GAAP.
1


MANAGEMENT COMMENTARY
“The second quarter of 2020 stood in sharp contrast to the first as global risk sentiment, equity and credit markets rebounded from their lows in March,” said Jennifer Murphy, Chief Executive Officer of the Company. “However, the recovery in asset prices has been uneven, with sectors that have received direct government support, like Agency RMBS and CMBS, generally seeing more recovery than credit-oriented residential and commercial mortgage loans and securities. In this still challenging environment for credit-oriented mortgage assets, we have taken actions to fortify the Company’s balance sheet and improve the future earnings power of the portfolio, including reducing our portfolio leverage to 3.0x recourse debt (down from 9.5x as of the first quarter), securing longer-term fixed rate financing at attractive levels, significantly reducing our reliance on short term repurchase agreement financing arrangements, issuing common equity at a premium to book value, and converting some of our outstanding notes to equity at a significant discount to par value. We believe that these actions position WMC’s shareholders to benefit from what we anticipate to be the eventual recovery of asset values and improved earnings sustainability of the portfolio. Our priority is to put the Company in a position to resume paying an attractive dividend supported by sustainable core earnings.”

“For the past several years, our investment strategy has focused on high quality borrowers and assets, as well as a diversified investment approach. We believe there continues to be the potential for meaningful improvement in the prices of our assets, as well as the Company’s book value, if as we expect the pandemic subsides and economic activity resumes. To assist investors in assessing one aspect of this potential, this quarter we are including a calculation of WMC’s “Economic Book Value.” Economic Book Value removes the consolidated assets and liabilities of three securitizations from our balance sheet (including the two sponsored by the Company) and adds back the fair market value of the retained and acquired interest in these securitizations. This calculation results in an Economic Book Value of $4.04 per share as of June 30, 2020.

Ms. Murphy continued, “We recorded a GAAP net loss of $15.6 million, or $0.29 per share, and a sequential decline in book value per share of 7.0%. This included $20.5 million of expense related to a profit participation fee incurred on the securitization of $355.8 million of Non-QM Residential Whole Loans. This fee was fully expensed in the second quarter and represented more than 100% of the quarter’s loss and book value decline, but the benefits of the securitization are expected be realized by the Company for years to come. Through the securitization, we financed these $355.8 million of Non-QM Whole Loans for 35 years at an attractive weighted average rate of 2.0%. This was an important milestone that enabled us to strengthen our capital structure and positions us for improved cash flows from these assets for a long period of time.”

“Our core earnings were $0.11 per share during the second quarter, reflecting a smaller asset base and lower portfolio leverage. We made the decision to retain those earnings and not pay a second quarter dividend to build additional liquidity and equity, which we believe will benefit shareholders over the long term. Our commitment to shareholders continues to be to protect and grow the value of the portfolio and position the Company to resume delivering on our long term objectives of generating sustainable core earnings that support an attractive dividend, with the overall goal of enhancing value for the benefit of our shareholders,” Ms. Murphy concluded.

Harris Trifon, Chief Investment Officer of the Company, commented, “The equity and credit markets rallied in the second quarter, driven by improved liquidity conditions across financial markets and the reopening of the economy, which translated into higher valuations on a number of our portfolio holdings. However, the pace of the recovery in asset prices has been uneven across the residential and commercial mortgage credit markets and current valuations appear to indicate broad and significant real estate price declines and permanent impairments that we don’t expect to materialize. Our view remains that the current recession will eventually pass and give way to an economic recovery, although the timing and strength of that recovery remain dependent on the future trajectory of COVID-19 and fiscal and monetary stimulus. In the meantime, we have positioned our portfolio to benefit from a recovery by investing in high quality assets where our borrowers have resources to withstand a protracted downturn.”

“Although we believe valuations in mortgage credit assets are favorable relative to the fundamental outlook for residential and commercial real estate despite the uncertainty in the near term, our primary focus is on maintaining sufficient liquidity and positioning the portfolio for potential future appreciation. We consider our current stance is the best way to put us back on course towards achieving our long-term objectives and enhancing shareholder value,” concluded Mr. Trifon.
2


OPERATING RESULTS
 
The below table reflects a summary of our operating results:
 
 For the Three Months Ended
GAAP ResultsJune 30, 2020March 31, 2020
(in thousands-except share and per share data)
Net Interest Income$8,535  $18,741  
Other Income (Loss): 
Realized gain (loss) on investments, net(6,960) 89,186  
Unrealized gain (loss), net16,040  (296,111) 
Gain (loss) on derivative instruments, net(8,143) (189,691) 
Other, net(45) 461  
Other Income (Loss)892  (396,155) 
Total Expenses24,805  4,534  
Income (loss) before income taxes(15,378) (381,948) 
Income tax provision (benefit)255  (93) 
Net income (loss) $(15,633) $(381,855) 
Net income attributable to non-controlling interest  
Net income (loss) attributable to common stockholders and participating securities$(15,635) $(381,857) 
Net income (loss) per Common Share – Basic/Diluted$(0.29) $(7.15) 
Non-GAAP Results 
Core earnings plus drop income (1)
$5,802  $15,779  
Core earnings plus drop income per Common Share – Basic/Diluted(1)
$0.11  $0.29  
Weighted average yield(2)(4)
5.40 %4.90 %
Effective cost of funds(3)(4)
3.69 %3.28 %
Annualized net interest margin(2)(3)(4)
1.91 %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.



3


Portfolio Composition
 
As of June 30, 2020, the Company owned an aggregate investment portfolio with a fair market value totaling $2.2 billion. The following tables sets forth additional information regarding the Company’s investment portfolio as of June 30, 2020:
 
Portfolio Characteristics

Credit Sensitive Portfolio

The Company's Non-QM residential portfolio, in our Manager's view, is performing well, given the severe economic background. The loans in a forbearance plan at the end of June 2020 represented less than 16% of the total outstanding. 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 large loan Non-Agency CMBS portfolio has an original LTV of 62.5% and despite being concentrated in retail and hotel assets, over 70.0% of the loans by principal balance remain current. All the borrowers of the delinquent loans in the Non-Agency CMBS portfolio are in negotiations for forbearance and modifications. The Company believes there is a reasonable likelihood that the majority of the delinquent loans 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 65.4% original LTV and all but one of the loans remains current. The delinquent loan has a principal balance of $30.0 million, which is secured by a hotel and the Company has been unable to come to terms with the borrower on a loan modification. The Company is currently exploring various workout strategies and believes there is a reasonable likelihood that the majority of the principal and missed interest payments will be recovered, although there is no assurance.

The following table summarizes certain characteristics of our credit sensitive portfolio by investment category as of June 30, 2020 (dollars in thousands): 

 Principal BalanceAmortized CostFair Value
 Weighted Average Coupon(1)
Non-Agency RMBS$38,863  $23,648  $21,693  4.6 %
Non-Agency RMBS IOs and IIOsN/A6,847  5,278  0.5 %
Non-Agency CMBS274,267  245,884  189,317  5.2 %
Residential Whole Loans1,147,860  1,173,259  1,124,051  5.2 %
Residential Bridge Loans(1),(2)
28,028  28,044  26,505  9.5 %
Securitized Commercial Loans
519,735  520,509  465,694  3.3 %
Commercial Loans332,576  332,378  323,474  6.6 %
Other Securities51,668  51,489  40,466  4.4 %
$2,392,997  $2,382,058  $2,196,478  3.8 %

(1) Includes Residential Bridge Loans carried at amortized cost of $2.3 million as of June 30, 2020. The fair value of these loans was $2.2 million as of June 30, 2020.
(2) As of June 30, 2020, the Company had real estate owned ("REO") properties with an aggregate carrying value of $2.2 million related to foreclosed Bridge Loans. The REO properties are classified in "Other assets" in the Consolidated Balance Sheets.





Agency Portfolio
4



The following table summarizes certain characteristics of our Agency portfolio by investment category as of June 30, 2020 (dollars in thousands): 

 Principal BalanceAmortized CostFair ValueNet Weighted Average Coupon
Agency RMBS Interest-Only StripsN/A$142  $180  2.6 %
Agency RMBS Interest-Only Strips, accounted for as derivativesN/AN/A1,795  2.6 %
Total Agency RMBS—  142  1,975  2.6 %
Total$—  $142  $1,975  2.6 %

5


PORTFOLIO FINANCING AND HEDGING
 
Financing Activity

Repurchase Agreements

The market disruptions surrounding COVID-19 resulted in the decline of the Company's asset values making it challenging to obtain repurchase agreement financing with favorable terms or at all. The Company's repurchase agreement counterparties have increased borrowing rates and increased haircuts. In the second quarter in order to manage the severe market conditions and the resulting large margin demands from lenders and pressure on the Company’s liquidity, the Company entered into two longer term financing arrangements as it sought to reduce its exposure to short-term financings with daily mark to market exposure. Below is a summary of each of the these financing arrangements;

Residential Whole Loan Facility

On April 21, 2020, the Company entered into amendments with respect to certain of its loan warehouse facilities. These amendments mainly served to convert an existing residential whole loan facility into a term facility by removing any mark to market margin requirements, and to consolidate the Company’s Non-Qualified Mortgage loans, which were previously financed by three separate, unaffiliated counterparties, into a single facility.

The target advance rate under the amended and restated facility is approximately 84% of the aggregate unpaid principal balance of the loans. The facility matures on October 20, 2021. All principal payments and income generated by the loans during the term of the facility are 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 will be 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 is not involved in the disposition of the loans.

Initially, the Company’s aggregate borrowings under this facility with respect to its Residential Whole Loans were approximately $385.0 million and the market value of such loans was approximately $430.0 million. On June 29, 2020, the Company securitized approximately $355.8 million of the Residential Whole Loans and paid down the facility by approximately $339.4 million (see "Securitized Debt" below for additional details). As noted above part of the financing arrangements the Company agreed to pay the lender a fee of 30% of all realized value on the Residential Whole Loans above the counterparty's amortized basis upon securitization or sale. As a result of refinancing the Residential Whole Loans through a securitization, the Company accrued the premium recapture fee of approximately $20.5 million, which is payable at the maturity of the facility, and is recorded in "Financing transaction costs" in the Consolidated Statements of Operations. Approximately $74.4 million in non QM loans remain in the facility which are also subject to the recapture premium at sale or securitization and the amount of such liability is contingent on the realizable value at time of sale or securitization.

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 5.00% 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
6


to the Company, unless the LTV Trigger has occurred, in which case all principal payments will be applied to repay the obligations.
 
As of June 30, 2020, the Company had borrowings under 6 master repurchase agreements. The following table sets forth additional information regarding the Company’s portfolio financing under the master repurchase agreements as of June 30, 2020 (dollars in thousands):
 
Outstanding BorrowingsWeighted Average Interest Rate Weighted Average Remaining Days to Maturity
Short Term Borrowings:
Agency RMBS$1,491  1.41 %60
Non-Agency CMBS9,118  3.69 %10
Residential Whole-Loans 16,075  5.18 %11
Residential Bridge Loans21,159  3.04 %36
Commercial Loans36,575  3.42 %78
Other Securities2,496  5.49 %7
Subtotal86,914  3.71 %46
Long Term Borrowings
Non-Agency CMBS78,033  5.50 %280
Non-Agency RMBS15,515  5.50 %219
Residential Whole-Loans (1)
23,627  5.50 %478
Commercial Loans (1)
150,581  2.32 %456
Other securities14,491  5.50 %310
Subtotal282,247  3.80 %389
Repurchase agreements borrowings$369,161  3.78 %308
Less unamortized debt issuance costs65  N/AN/A
Repurchase agreements borrowings, net$369,096  3.79 %308

(1) 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.

Certain of the repurchase agreements provide the counterparty with the right to terminate the agreement if the Company does not maintain certain equity and leverage metrics, the most restrictive of which include a limit on leverage based on the composition of the Company’s portfolio. For all the repurchase agreements with outstanding borrowings, the Company was in compliance with the terms of such financial tests as of June 30, 2020.

Convertible Senior Unsecured Notes

At June 30, 2020, the Company had $205 million aggregate principal amount of 6.75% convertible senior unsecured notes outstanding. The notes mature on October 1, 2022, unless earlier converted, redeemed or repurchased by the holders pursuant to their terms, and are not redeemable by the Company except during the final three months prior to maturity. The initial conversion rate was 83.1947 shares of common stock per $1,000 principal amount of notes and represented a conversion price of $12.02 per share of common stock.

On July 1, 2020, the Company issued an aggregate of 1,354,084 shares of its common stock, in exchange for $5,000,000 aggregate principal amount of its 6.75% Convertible Senior Notes pursuant to separate privately negotiated exchange agreement.

Mortgage-Backed Notes

7


The Company has completed two Residential Whole Loan securitizations. The mortgage-backs notes issued are non-recourse to the Company and effectively finance $1.0 billion of Residential Whole Loans.

Arroyo 2019-2

The following table summarizes the residential mortgage-backed notes issued by the Company's Arroyo 2019-2 securitization trust at June 30, 2020 (dollars in thousands):
 
ClassesPrincipal BalanceCouponCarrying ValueContractual Maturity
Offered Notes:(1)
Class A-1$592,742  3.3%$592,740  4/25/2049
Class A-231,760  3.5%31,759  4/25/2049
Class A-350,317  3.8%50,315  4/25/2049
Class M-125,055  4.8%25,055  4/25/2049
699,874  699,869  
Less: Unamortized Deferred Financing CostN/A4,851  
Total$699,874  $695,018  

The Company retained the subordinate bonds and these bonds had a fair market value of $51.7 million at June 30, 2020. The retained Arroyo 2019-2 subordinate bonds are eliminated in consolidation.

Arroyo 2020-1

The following table summarizes the residential mortgage-backed notes issued by the Company's Arroyo 2020-1 securitization trust at June 30, 2020 (dollars in thousands):
 
ClassesPrincipal BalanceCouponCarrying ValueContractual Maturity
Offered Notes:(1)
Class A-1A$266,790  1.7%$266,843  3/25/2055
Class A-1B31,658  2.1%31,658  3/25/2055
Class A-213,518  2.9%13,521  3/25/2055
Class A-317,963  3.3%17,967  3/25/2055
Class M-111,739  4.3%11,739  3/25/2055
Subtotal341,668  341,728  
Less: Unamortized Deferred Financing CostsN/A2,727  
Total$341,668  $339,001  

The Company retained the subordinate bonds and these bonds had a fair market value of $28.1 million at June 30, 2020. The retained Arroyo 2020-1 subordinate bonds are eliminated in consolidation.

RETL 2019 Trust

The following table summarizes RETL 2019 Trust's commercial mortgage pass-through certificates at June 30, 2020 (dollars in thousands):

8


ClassesPrincipal BalanceCoupon Fair Value Contractual Maturity
Class A$64,835  1.3%$61,678  3/15/2021
Class B101,200  1.7%91,382  3/15/2021
Class C308,400  2.3%271,126  3/15/2021
Class HRR45,300  8.7%41,477  3/15/2021
Class X-EXT(1)
N/A1.2%31  3/15/2021
$519,735  $465,694  

(1) Class X-EXT is an interest-only class with an initial notional balance of $308.4 million.
The Company acquired the HRR bond and the bond had a fair market value of $41.5 million at June 30, 2020. The HRR bond is eliminated in consolidation.

Derivatives Activity
        The following table summarizes the Company’s derivative instruments at June 30, 2020 (dollars in thousands):

Other Derivative InstrumentsNotional AmountFair Value
Credit default swaps, asset$3,520  $714  
Total derivative instruments, assets714  
Credit default swaps, liability4,140  (943) 
Total derivative instruments, liabilities(943) 
Total derivative instruments, net$(229) 


DIVIDEND
 
As previously announced, due to the turmoil in the financial markets resulting from the COVID-19 pandemic, we suspended the first and second quarter dividend to preserve liquidity.
 
CONFERENCE CALL
 
The Company will host a conference call with a live webcast tomorrow, August 6, 2020 at 11:00 a.m. Eastern Time/8:00 a.m. Pacific Time, to discuss financial results for the second quarter 2020.
 
Individuals interested in participating in the conference call may do so by dialing (866) 235-9914 from the United States, or (412) 902-4115 from outside the United States and referencing “Western Asset Mortgage Capital Corporation.” Those interested in listening to the conference call live via the Internet may do so by visiting the Investor Relations section of the Company’s website at www.westernassetmcc.com.
 
The Company is enabling investors to pre-register for the earnings conference call so that they can expedite their entry into the call and avoid the need to wait for a live operator. In order to pre-register for the call, investors can visit http://dpregister.com/10146563 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 August 20, 2020 by dialing (877) 344-7529 from the United States, or (412) 317-0088 from outside the United States, and entering conference ID 10146563. A webcast replay will be available for 90 days.
9



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 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
 
The press release contains statements that may constitute "forward-looking statements" For these statements, the Company claims the protections of the safe harbor for forward-looking statements contained in such sections. Forward-looking statements are subject to substantial risks and uncertainties, many of which are difficult to predict and are generally beyond the Company’s control. In particular, it is difficult to fully assess the impact of COVID-19 at this time due to, among other factors, uncertainty regarding the severity and duration of the outbreak domestically and internationally and the effectiveness of federal, state and local governments’ efforts to contain the spread of COVID-19 and respond to its direct and indirect impact on the U.S. economy and economic activity. Other factors are described in Risk Factors section of the Company’s annual report on Form 10-K for the period ended December 31, 2019 filed with the Securities and Exchange Commission (“SEC”). The Company undertakes 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 ClarkTricia Ross
Financial Profiles, Inc.Financial Profiles, Inc.
(310) 622-8223(310) 622-8226
lclark@finprofiles.comtross@finprofiles.com
 
-Financial Tables to Follow-
10


Western Asset Mortgage Capital Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands—except share and per share data)
(Unaudited)
 June 30, 2020March 31, 2020
Assets: 
Cash and cash equivalents$19,363  $10,342  
Restricted cash26,430  33,229  
Agency mortgage-backed securities, at fair value ($1,975 and $430,628 pledged as collateral, at fair value, respectively)1,975  430,628  
Non-Agency mortgage-backed securities, at fair value ($197,326 and $265,647 pledged as collateral, at fair value, respectively)216,288  276,606  
Other securities, at fair value ($40,466 and $47,307 pledged as collateral, at fair value, respectively)40,466  47,411  
Residential Whole Loans, at fair value ($1,124,051 and $1,309,795 pledged as collateral, at fair value, respectively)1,124,051  1,309,795  
Residential Bridge Loans ($24,171 and $26,050 at fair value and $25,371 and $27,571 pledged as collateral, respectively)26,505  28,634  
Securitized commercial loans, at fair value465,694  477,131  
Commercial Loans, at fair value ($323,474 and $320,308 pledged as collateral, at fair value, respectively)323,474  320,308  
Receivable under reverse repurchase agreements—  24,826  
Investment related receivable12,029  72,826  
Interest receivable11,595  14,805  
Due from counterparties5,177  117,670  
Derivative assets, at fair value714  33,675  
Other assets6,262  5,697  
Total Assets (1)
$2,280,023  $3,203,583  
Liabilities and Stockholders’ Equity: 
Liabilities: 
Repurchase agreements, net$369,096  $1,553,715  
Convertible senior unsecured notes, net198,669  197,984  
Securitized debt, net ($424,217 and $396,824 at fair value and $43,904 and $53,527 held by affiliates, respectively)1,458,236  1,139,121  
Interest payable (includes $49 and $536 on securitized debt held by affiliates, respectively)7,710  6,429  
Due to counterparties16  24,811  
Derivative liability, at fair value943  43,967  
Accounts payable and accrued expenses4,082  6,307  
Payable to affiliate4,701  3,237  
Dividend payable—  —  
  Other liabilities 47,856  45,779  
Total Liabilities (2)
2,091,309  3,021,350  
Commitments and contingencies 
Stockholders’ Equity: 
Common stock: $0.01 par value, 500,000,000 shares authorized, 59,458,617 and 53,423,876 outstanding, respectively595  535  
Preferred stock, $0.01 par value, 100,000,000 shares authorized and no shares outstanding—  —  
Treasury stock, at cost, 100,000 and 0 shares held, respectively(578) (578) 
Additional paid-in capital911,488  889,392  
Retained earnings (accumulated deficit)(722,793) (707,158) 
Total Stockholders’ Equity188,712  182,191  
Non-controlling interest 42  
Total Equity188,714  182,233  
Total Liabilities and Equity$2,280,023  $3,203,583  



11


Western Asset Mortgage Capital Corporation and Subsidiaries
Consolidated Balance Sheets (Continued)
(in thousands—except share and per share data)
(Unaudited)
 
 June 30, 2020March 31, 2020
(1) Assets of consolidated VIEs included in the total assets above:
 
Cash and cash equivalents$—  $4,542  
Restricted Cash26,430  33,229  
Residential Whole Loans, at fair value ($1,124,051 and $1,309,795 pledged as collateral, at fair value, respectively)1,124,051  1,309,795  
Residential Bridge Loans ($23,037 and $24,987 at fair value and $25,371 and $27,571 pledged as collateral, respectively)25,371  27,571  
Securitized commercial loans, at fair value465,694  477,131  
Commercial Loans, at fair value ($72,335 and $71,684 pledged as collateral, at fair value, respectively)72,335  71,684  
Investment related receivable12,029  24,738  
Interest receivable8,640  10,226  
Other assets92  101  
Total assets of consolidated VIEs$1,734,642  $1,959,017  
(2) Liabilities of consolidated VIEs included in the total liabilities above:
 
Securitized debt, net ($765,945 and $681,643 at fair value and $43,904 and $142,905 held by affiliates, respectively)$1,458,236  $1,139,121  
Interest payable (includes $49 and $647 on securitized debt held by affiliates, respectively)3,144  3,215  
Accounts payable and accrued expenses118  128  
Other liabilities26,430  33,229  
Total liabilities of consolidated VIEs$1,487,928  $1,175,693  
 


12


Western Asset Mortgage Capital Corporation and Subsidiaries
Consolidated Statements of Operations
(in thousands—except share and per share data)
 (Unaudited)
Three months ended
 June 30, 2020March 31, 2020
Net Interest Income  
Interest income$31,494  $54,846  
Interest expense22,959  36,105  
Net Interest Income8,535  18,741  
Other Income (Loss)  
Realized gain (loss) on sale of investments, net(6,960) 89,186  
Unrealized gain (loss), net16,040  (296,111) 
Gain (loss) on derivative instruments, net(8,143) (189,691) 
Other, net(45) 461  
Other Income (Loss)892  (396,155) 
Expenses  
Management fee to affiliate464  1,039  
Financing fee20,540  —  
Other operating expenses796  1,000  
General and administrative expenses:
  Compensation expense 692  662  
  Professional fees1,541  1,480  
  Other general and administrative expenses772  353  
Total general and administrative expenses3,005  2,495  
Total Expenses24,805  4,534  
Income before income taxes(15,378) (381,948) 
Income tax provision (benefit)255  (93) 
Net income (loss)(15,633) (381,855) 
Net income attributable to non-controlling interest  
Net income (loss) attributable to common stockholders and participating securities$(15,635) $(381,857) 
Net income (loss) per Common Share – Basic$(0.29) $(7.15) 
Net income (loss) per Common Share – Diluted$(0.29) $(7.15) 

13


Reconciliation of GAAP Net Income to Non-GAAP Core Earnings
(in thousands—except share and per share data)
(Unaudited)
 
The table below reconciles Net Income to Core Earnings for the three months ended June 30, 2020 and March 30, 2020:
Three months ended
(dollars in thousands)June 30, 2020March 31, 2020
Net Income (loss) attributable to common stockholders and participating securities$(15,635) $(381,857) 
Income tax provision (benefit)255  (93) 
Net Income before income taxes(15,380) (381,950) 
Adjustments:  
Investments:  
Unrealized (gain) loss on investments, securitized debt and other liabilities(16,040) 296,111  
Realized (gain) loss on sale of investments6,960  (89,186) 
One-time transaction costs20,652  280  
Derivative Instruments:  
Net realized (gain) loss on derivatives13,152  180,156  
Net unrealized (gain) loss on derivatives(4,973) 8,807  
Amortization of discount on convertible senior unsecured notes273  273  
Other non-cash adjustments988  —  
Non-cash stock-based compensation170  165  
Total adjustments21,182  396,606  
Core Earnings$5,802  $14,656  
Basic and Diluted Core Earnings per Common Share and Participating Securities$0.11  $0.27  
Basic and Diluted Core Earnings plus Drop Income per Common Share and Participating Securities$0.11  $0.29  
Basic weighted average common shares and participating securities54,921,847  53,670,550  
Diluted weighted average common shares and participating securities54,921,847  53,670,550  















14


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)June 30, 2020March 31, 2020
Net interest income
$8,535  $18,741  
Interest income from IOs and IIOs accounted for as derivatives69  91  
Net interest income from interest rate swaps
—  (1,133) 
Adjusted net interest income
8,604  17,699  
Total expenses(24,805) (4,534) 
Other non-cash adjustments988  —  
Non-cash stock-based compensation170  165  
One-time transaction costs20,652  280  
Amortization of discount on convertible unsecured senior notes273  273  
Interest income on cash balances and other income (loss), net
(78) 775  
Income attributable to non-controlling interest(2) (2) 
Core Earnings$5,802  $14,656  



































15




Reconciliation of GAAP Book Value to Non-GAAP Economic Book Value
(dollars in thousands)
(Unaudited)


June 30, 2020March 31, 2020
$ AmountPer Share$ AmountPer Share
GAAP Book Value at March 31, 2020 and December 31, 2019$182,191  $3.41  $564,461  $10.55  
Proceeds from At-the-Market program, net21,986  0.02  —  —  
Stock repurchase—  —  (578) N/A
204,177  3.43  563,883  10.55  
Portfolio Income0
Net Interest Margin8,557  0.14  18,870  0.35  
Realized gain (loss), net(20,147) (0.34) (127,011) (2.38) 
Unrealized gain (loss), net21,016  0.36  (269,275) (5.03) 
Net portfolio income9,426  0.16  (377,416) (7.06) 
Financing fee(20,540) (0.35) —  —  
Operating expenses(1,260) (0.02) (2,039) (0.04) 
General and administrative expenses, excluding equity based compensation(2,836) (0.05) (2,330) (0.04) 
Provision for taxes(255) —  93  —  
GAAP Book Value at June 30, 2020 and March 31, 2020$188,712  $3.17  $182,191  $3.41  
Adjustments to deconsolidate VIEs and reflect the Company's interest in the securities owned
Deconsolidation of VIEs assets(1,555,962) (26.17) (1,263,407) (23.65) 
Deconsolidation VIEs liabilities1,486,107  25.00  1,174,422  21.98  
Interest in securities of VIEs owned, at fair value121,315  2.04  133,885  2.51  
Economic Book Value at June 30, 2020 and March 31, 2020$240,172  $4.04  $227,091  $4.25  

"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, 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, 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.







16



Reconciliation of Interest Income and Effective Cost of Funds
(dollars in thousands)
(Unaudited)
 
The following table reconciles total interest income to adjusted interest income which includes interest income on Agency and Non-Agency Interest-Only Strips classified as derivatives (Non-GAAP financial measure) for the three months ended June 30, 2020 and March 30, 2020:
 
Three months ended
(dollars in thousands)June 30, 2020March 31, 2020
Coupon interest income$33,007  $57,761  
Premium amortization, discount accretion and amortization of basis, net(1,513) (2,915) 
Interest income31,494  54,846  
Contractual interest income, net of amortization of basis on Agency and Non-Agency Interest-Only Strips, classified as derivatives(1):
  
Coupon interest income340  636  
Amortization of basis (271) (545) 
Subtotal
69  91  
Total adjusted interest income$31,563  $54,937  
 
(1)                Reported in "Gain (loss) on derivative instruments, net" in the Consolidated Statements of Operations.
 
The following table reconciles the Effective Cost of Funds (Non-GAAP financial measure) with interest expense for three months ended June 30, 2020 and March 30, 2020:
 
Three months ended
 June 30, 2020March 31, 2020
 (dollars in thousands)
ReconciliationCost of Funds/Effective Borrowing CostsReconciliationCost of Funds/Effective Borrowing Costs
Interest expense$22,959  3.73 %$36,105  3.34 %
Adjustments:
Interest expense on Securitized debt from consolidated VIEs1
(4,661) (3.92)%(6,754) (4.42)%
Net interest (received) paid - interest rate swaps
—  — %1,133  0.10 %
Effective Borrowing Costs$18,298  3.69 %$30,484  3.28 %
Weighted average borrowings$1,994,405   $3,733,045   
(1) Excludes third-party sponsored securitized debt interest expense.


17
a2q20ex992ng
Second Quarter 2020 Investor Presentation August 5, 2020


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


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


 
Overview of Western Asset Mortgage Capital Corporation Western Asset Mortgage Capital Corporation (“WMC”) is a public REIT that benefits from the leading fixed income management capabilities of Western Asset Management Company, LLC ("Western Asset") • One of the world’s leading global fixed income managers, known for team management, proprietary research, robust risk management and a long-term fundamental value approach. • AUM of 468.5 billion(1) ◦ AUM of the Mortgage and Consumer Credit Group is $62.6 billion(1) ◦ Extensive mortgage and consumer credit investing track record ∙ Publicly traded diversified mortgage REIT positioned to capture attractive current and long-term investment opportunities in the residential and commercial mortgage markets ∙ Completed Initial Public Offering in May 2012 Please refer to page 18 for footnote disclosures. 3


 
Corporate Update The Company significantly improved its balance sheet in the second quarter 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. For the quarter ended June 30, 2020, these measures included, but were not limited to, the following: • 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 daily margin requirements. • 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. • 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 of long-term financing at a weighted average interest rate of 2.0%. • 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. • Reduced repurchase agreement financings in the second quarter by 76.2% to $369.1 million. • 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. • Sold approximately $423.2 million of Agency MBS, $42.6 million of Non-Agency MBS, $144.3 million in conforming whole loans, and $18.2 million other securities and repaid associated repurchase agreement financing to significantly reduce margin call exposure. • Our Manager waived management fees for April 2020 and May 2020. 4


 
Second Quarter Financial Update Second Quarter 2020 Financial Results ▪ GAAP book value per share of $3.17. ▪ GAAP net loss of $15.6 million, or $0.29 per basic and diluted common share ▪ Included in GAAP net loss is an accrual for a premium recapture fee which is payable to the counterparty of our Residential Whole Loan Facility of $20.5 million upon the termination or maturity of the facility. This fee was incurred as a result of refinancing $355.8 million of Residential Whole Loans financed on the facility through the securitization. ▪ Economic book value per share of $4.04(2). ▪ Core earnings of $5.8 million, or $0.11 per basic and diluted common share.(3) ▪ Economic return on GAAP book value was negative 7.0% for the quarter.(4) ▪ 1.91% annualized net interest margin on our investment portfolio.(5) ▪ Reduced recourse leverage to 3.0x leverage down from 9.5x at March 31, 2020. Please refer to page 18 for footnote disclosures. 5


 
Portfolio Composition Total Investment Portfolio ($ in millions) June 30, 2020 Agency RMBS $ 2 51.1% Non-Agency CMBS 189 1.2% Agency RMBS Non-Agency RMBS 27 Non-Agency RMBS Residential Whole-Loans 1,124 Non-Agency CMBS Residential Whole-Loans (6) Residential Bridge Loans 27 Residential Bridge Loans (7) 21.2% Securitized Commercial Loans Securitized Commercial Loan 466 Commercial Loans Commercial Loans 323 Other Securities Other Securities(8) 40 8.6% Total $ 2,198 1.2% 0.1% 14.7% 1.8% Select Sector Categories Non-Agency MBS and Other Securities Loan Portfolio 1.4% 73.7% 24.0% 57.9% 15.8% 16.7% 2.1% 8.5% RMBS Residential Whole Loans RMBS IO Residential Bridge Loans CMBS Securitized Commercial Loans ABS and GSE CRT Securities Commercial Loan Please refer to page 18 for footnote disclosures. 6


 
Residential Whole Loans The Company's Non-QM portfolio is performing well, given the economic background. Approximately 86% of the Company's Non-QM loans were current as of June 30, 2020. We see this number as a strong indication that borrowers with meaningful equity in their homes will prioritize their mortgage payment to seek to remain current. Residential Whole Loan Portfolio ($ in thousands) As of June 30, 2020 Percentage of # of Loans Principal Fair Value Original LTV Loans In Forbearance (1) Current 2,571 $ 992.0 $ 975.5 62.8 % 6.0 % 1-30 days 58 25.2 24.6 65.9 % 44.0 % 31-60 days 157 83.2 79.4 66.3 % 91.0 % 61-90 days 63 34.0 31.9 65.2 % 92.9 % 90+ days 18 13.4 12.6 62.0 % 16.4 % Total 2,867 $1,147.9 $1,124.1 63.2 % 15.7 % (1) Reflects the percentage of loans in forbearance in each aging category. Please refer to page 18 for footnote disclosures. 7


 
Commercial Loans as of June 30, 2020 ($ in millions) The Company's Commercial Loan portfolio is performing in line with expectations. The Commercial Loan portfolio carries a weighted average 65.5% original LTV. Acquisition Principal Fair Fully Extended Loan Date Loan Type Balance Value LTV Interest Rate Maturity Collateral State Interest-Only First 1-Month LIBOR plus CRE 1 June 2018 Mortgage $ 30.0 $ 28.9 65.0% 4.5% 6/9/2021 Hotel CA Principal & Interest 1-Month LIBOR plus Nursing CRE 2 June 2019 First Mortgage 50.0 49.3 75.0% 4.75% 1/11/2024 Facilities SC, GA Interest-Only 1-Month LIBOR plus Entertainment CRE 3 August 2019 Mezzanine loan 90.0 86.7 57.9% 9.25% 6/29/2024 and Retail NJ Interest-Only First 1-Month LIBOR plus CRE 4 September 2019 Mortgage 40.0 38.7 63.0% 3.02% 8/6/2023 Retail CT Interest-Only First 1-Month LIBOR plus CRE 5 December 2019 Mortgage 24.5 23.5 61.8% 3.75% 11/6/2024 Hotel NY Interest-Only First 1-Month LIBOR plus CRE 6 December 2019 Mortgage 13.2 12.7 61.8% 3.75% 11/6/2024 Hotel CA Interest-Only First 1-Month LIBOR plus CRE 7 December 2019 Mortgage 7.3 7.0 61.8% 3.75% 11/6/2024 Hotel IL, FL Interest-Only First 1-Month LIBOR plus CRE 8 December 2019 Mortgage 4.4 4.4 79.0% 4.85% 12/6/2022 Assisted Living FL Interest-Only First 1-Month LIBOR plus Nursing SBC 1 July 2018 Mortgage 45.2 44.7 74.0% 4.25% (1) 7/1/2022 Facilities MI Interest-Only 1-Month LIBOR plus Apartment SBC 2 January 2019 First Mortgage 13.6 13.4 84.0% 4.0% (2) 12/1/2022 Complex MO Interest-Only 1-Month LIBOR plus Nursing SBC 3 January 2019 First Mortgage 14.4 14.2 49.0% 4.1% 7/1/2021 Facilities CT $ 332.6 $ 323.5 Footnotes (1) Subject to LIBOR floor of 1.25%. (2) Subject to LIBOR floor of 2.0%. 8


 
Non-Agency CMBS WMC’s Non-Agency CMBS portfolio is performing in line with our expectations under the current pandemic conditions. Non-Agency CMBS Portfolio ($ in thousands) As of June 30, 2020 Weighted Average Principal Type Vintage Balance Fair Value Life (Years) Original LTV Conduit: 2006-2009 $ 16,687 $ 7,972 2.5 72.7 % 2010-2020 94,107 47,848 3.8 61.6 % 110,794 55,820 3.6 63.2 % Single Asset: 2014-2020 163,473 133,497 2.9 65.4 % Total $ 274,267 $ 189,317 3.1 64.8 % 9


 
Financing New Financing Facilities Residential Whole Loan Financing Facility ▪ On April 21, 2020, the Company entered into amendments with respect to certain of its loan warehouse facilities. These amendments mainly served to convert an existing residential whole loan facility into a term facility by removing any mark to market margin requirements, and to consolidate the Company’s Non-Qualified Mortgage loans, which were previously financed by three separate, unaffiliated counterparties, into a single facility. ▪ The target advance rate under the amended and restated facility is approximately 84% of the aggregate unpaid principal balance of the loans. The facility matures on October 20, 2021. All principal payments and income generated by the loans during the term of the facility are 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 will be 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 is not involved in the disposition of the loans. ▪ Initially, the Company’s aggregate borrowings under this facility with respect to its Residential Whole Loans were approximately $385.0 million and the market value of such loans was approximately $430.0 million. On June 29, 2020, the Company securitized approximately $355.8 million of the Residential Whole Loans and paid down the facility by approximately $339.4 million (see "Securitized Debt" below for additional details). As noted above part of the financing arrangements the Company agreed to pay the lender a fee of 30% of all realized value on the Residential Whole Loans above the counterparty's amortized basis upon securitization or sale. As a result of refinancing the Residential Whole Loans through a securitization, the Company accrued the premium recapture fee of approximately $20.5 million, which is payable at the maturity of the facility, and is recorded in "Financing transaction costs" in the Consolidated Statements of Operations. Approximately $74.4 million in non QM loans remain in the facility which are also subject to the recapture premium at sale or securitization and the amount of such liability is contingent on the realizable value at time of sale or securitization. ▪ At June 30, 2020 the total borrowing from this facility was $23.6 million and the fair market value of the collateral was $72.3 million. Non-Agency CMBS and Non-Agency RMBS Facility • On May 4, 2020, WMC supplemented one of its existing securities repurchase facilities to confirm terms pursuant to which it consolidated most of its Non-Agency MBS and Other Securities(8) assets, which were financed by multiple counterparties, into a single term facility with limited mark to market margin requirements. Pursuant to this confirmation, a margin deficit will not occur until such time as the loan to value ratio surpasses a certain threshold (the “LTV Trigger”), on a weighted average basis per asset type, calculated on a portfolio level. If this threshold is reached, the Company may elect to provide cash margin or sell certain assets to the extent necessary to lower the ratio. The term of this facility is 12 months, subject to extensions at the counterparty’s option. All interest income generated by the assets during the term of the facility is paid to the Company 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 income generated by principal repayments on the underlying assets is 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 is applied to repay the obligations.. • The June 30, 2020 is total borrowings from this facility was $108.0 million and the fair market value of the collateral was approximately $216.7 million. 10 Please refer to page 18 for footnote disclosures.


 
Financing (Continued) At June 30, 2020, the company had borrowings under 6 master repurchase agreements. Of the $369.1 million borrowings outstanding $282.2 million of the borrowings are in long term facilities with limited mark to market margin call exposure. Repurchase Agreement Financing June 30, 2020 ($ in thousands) Outstanding Weighted Average Interest Weighted Average Borrowings Rate Interest Rate Remaining Days to Maturity Short Term Borrowings Agency RMBS $ 1,491 1.41% 60 Non-Agency CMBS 9,118 3.69% 10 Residential Whole-Loans 16,075 5.18% 11 Residential Bridge Loan 21,159 3.04% 36 Commercial loans 36,575 3.42% 78 Other securities(8) 2,496 5.49% 7 Subtotal 86,914 3.71% 46 Long Term Borrowings Non-Agency CMBS 78,033 5.50% 280 Non-Agency RMBS 15,515 5.50% 219 Residential Whole-Loans(16) 23,627 5.50% 478 Commercial Loans(16) 150,581 2.32% 456 Other securities(8) 14,491 5.50% 310 Subtotal 282,247 3.80% 389 Repurchase agreements borrowings 369,161 3.78% 308 Less unamortized debt issuance costs 65 N/A N/A Repurchase agreements borrowings, net $ 369,096 3.79% 308 11 Please refer to page 18 for footnote disclosures.


 
Financing (Continued) Mortgage-Backed Notes ▪ The residential mortgage backed notes issued by Company for the Arroyo Trust 2019-2 and the Arroyo Trust 2020-1 securitizations can only be settled with the residential loans that serve as collateral for the securitized debt and are non-recourse to the Company. These notes are carried at amortized cost on the Company's Consolidated Balance Sheet. The Company retained the subordinate bonds and these bonds had a fair market value of $51.7 million and $28.1 million, respectively, at June 30, 2020. The retained subordinate bonds for both securitizations are eliminated in consolidation. ▪ The following table summarizes the residential mortgage-backed notes issued by the Company's Arroyo Trust 2019 securitization at June 30, 2020 ($ in thousands): Classes Principal Balance Coupon Carrying Value Contractual Maturity Offered Notes:(17) Class A-1 $ 592,742 3.3% $ 592,740 4/25/2049 Class A-2 31,760 3.5% 31,759 4/25/2049 Class A-3 50,317 3.8% 50,315 4/25/2049 Class M-1 25,055 4.8% 25,055 4/25/2049 699,874 699,869 Less: Unamortized Deferred Financing Cost N/A 4,851 Total $ 699,874 $ 695,018 ▪ The following table summarizes the residential mortgage-backed notes issued by the Company's Arroyo Trust 2020 securitization at June 30, 2020 (dollars in thousands): Classes Principal Balance Coupon Carrying Value Contractual Maturity Offered Notes:(17) Class A-1A $ 266,790 1.7% $ 266,843 3/25/2055 Class A-1B 31,658 2.1% 31,658 3/25/2055 Class A-2 13,518 2.9% 13,521 3/25/2055 Class A-3 17,963 3.3% 17,967 3/25/2055 Class M-1 11,739 4.3% 11,739 3/25/2055 Subtotal 341,668 2.0% 341,728 Less: Unamortized Deferred Financing Costs N/A 2,727 Total $ 341,668 $ 339,001 ▪ As of June 30, 2020, the Company had one consolidated commercial mortgage-backed variable interest entity that had an aggregate securitized debt balance of $424.2 million. The securitized debt of the trusts can only be settled with the collateral held by the trusts and is non-recourse to the Company. Please refer to page 18 for footnote disclosures. 12


 
Financing (Continued) Convertible Senior Unsecured Notes • At June 30, 2020, the Company had $205.0 million aggregate principal amount of 6.75% convertible senior unsecured notes. The notes mature on October 1, 2022, unless earlier converted, redeemed or repurchased by the holders pursuant to their terms, and are not redeemable by the Company except during the final three months prior to maturity. The initial conversion rate was 83.1947 shares of common stock per $1,000 principal amount of notes and represented a conversion price of $12.02 per share of common stock. • In July 2020, the Company retired $5.0 million of the convertible Senior Unsecured Notes at a 25% discount to par value, in exchange for the issuance of 1.4 million shares of our common stock. 13


 
Income Attribution(9) For the Three Months Ended June 30, 2020 (in thousands except per share data) Non- Non- Residential Residential Other Securitized Agency Agency Agency Agency Whole- Bride Investments Commercial Commercial Other CMBS RMBS CMBS RMBS Loans Loans(6) (8) Loans Loans(15) Derivatives Total Interest Income(10) $ 400 $ 93 $ 5,731 $ 216 $ 13,891 $ 332 $ 704 $ 5,710 $ 4,483 $ — $ 31,560 Interest expense(11) (982) (116) (1,832) (225) (12,276) (258) (385) (1,986) (4,899) — (22,959) Miscellaneous income (expense)(12) — — — — — — (44) — — — (44) Net Interest Income (582) (23) 3,899 (9) 1,615 74 275 3,724 (416) — 8,557 Realized gain/(loss) on investments 21,687 1,161 (13,901) — (10,511) (113) (6,224) — — — (7,901) Unrealized gain/(loss) on investments(13) (26,029) (1,755) (2,744) 1,207 22,096 (609) 18,825 3,049 12,920 — 26,960 Securitized debt unrealized gain/ (loss) — — — — (67) — — — (10,595) — (10,662) Gain/(loss) on derivative instruments, net(14) — — — — — — (7,426) — — (102) (7,528) Portfolio Income (loss) $ (4,924) $ (617) $ (12,746) $ 1,198 $ 13,133 $ (648) $ 5,450 $ 6,773 $ 1,909 $ (102) $ 9,426 BV Per Share Increase (Decrease) $ (0.08) $ (0.01) $ (0.21) $ 0.02 $ 0.22 $ (0.01) $ 0.09 $ 0.11 $ 0.03 $ — $ 0.16 Please refer to page 18 for footnote disclosures. 14


 
(18) Hedging Summary The following tables provide information on other derivative instruments as of June 30, 2020 ($ in thousands): Other Derivative Instruments Notional Amount Fair Value Credit default swaps, asset $ 3,520 $ 714 Total derivative instruments, assets 714 Credit default swaps, liability 4,140 (943) Total derivative instruments, liabilities (943) Total other derivative instruments, net $ (229) 15 Please refer to page 18 for footnote disclosures.


 
Outlook - Second Half 2020 ▪ COVID-19 related growth setbacks have meaningfully reduced global and US growth ▪ The medical battle will take time with prolonged efforts; recent developments are encouraging ▪ US and global inflation rates will remain very subdued ▪ Central banks will remain extraordinarily accommodative ▪ Even after recovery begins, central banks are expected to keep rates ultra low ▪ Spread products ultimately should be primary beneficiaries of recovery ▪ The timing and scope of the eventual recovery remains the largest uncertainty 16


 
Mortgage Spreads Recovery Path Recovery in asset prices has been uneven, with sectors that have received direct Fed intervention, like Agency RMBS and CMBS, generally seeing more recovery than credit- oriented residential and commercial mortgage loans and securities. 17


 
Footnotes (1) As of June 30, 2020. (2) 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 taking the GAAP book value and 1) adding the fair value of the retained interest or acquired security of the VIEs held by the Company and 2) the removing the asset and liabilities associated with each of consolidated trusts (RETL 2019, Arroyo 2019-2 and Arroyo 2020-1). Management considers 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. (3) Core Earnings is a non-GAAP financial measure that is used by us to approximate cash yield or income associated with our portfolio and is defined as GAAP net income (loss) as adjusted, excluding, net realized gain (loss) on investments and termination of derivative contracts, net unrealized gain (loss) on investments and debt, net unrealized gain (loss) resulting from mark-to- market adjustments on derivative contracts, provision for income taxes, non-cash stock-based compensation expense, non-cash amortization of the convertible senior unsecured notes discount, one-time charges such as acquisition costs and impairment on loans and one-time events pursuant to changes in GAAP and certain other non-cash charges after discussions between us, our Manager and our Independent Directors and after approval by a majority of our independent directors. (4) Economic return, for any period, is calculated by taking the sum of (i) the total dividends declared and (ii) the change in net book value during the period and dividing by the beginning book value. (5) Non-GAAP measures which include interest income, interest expense, and interest income on IOs and IIOs classified as derivatives, and are weighted averages for the quarter ended June 30, 2020. Excludes the net income from the consolidation of VIE Trusts required under GAAP. (6) The bridge loans acquired prior to October 25, 2017 are carried at amortized costs, since we did not elect the fair value option for these loans. For the bridge loans acquired subsequent to October, 25, 2017, we elected the fair value option to be consistent with the accounting of other investments. Accordingly, the carrying amount of the bridge loans as of June 30, 2020 includes $24.2 million of residential bridge loans carried at fair value and $2.3 million of residential bridge loans carried at amortized costs. (7) At June 30, 2020, the Company held a $41.5 million Non-Agency CMBS security which resulted in the consolidation of a variable interest entity. The Securitized Commercial Loan value represents the estimate fair market value of the single loan within the variable interest entity. (8) Other investments include ABS and GSE Credit Risk Transfer securities. (9) Non-GAAP measure which includes net interest margin (as defined in footnote 4) and realized and unrealized gains or losses in the portfolio. (10) Non-GAAP measure which includes interest income on IO's and IIO's accounted for as derivatives and other income. (11) Convertible senior notes interest expense has been allocated based on fair value of investments at June 30, 2020. (12) Includes miscellaneous fees and interest on cash investments. (13) Non-GAAP measure which includes net unrealized losses on IO's and IIO's accounted for as derivatives. (14) Gain (loss) on derivative instruments, net, has been allocated based average duration contribution (excluding cost of hedging and gains or losses on IO's and IIO's accounted for as derivatives). (15) The portfolio income attribution for securitized commercial loan is presented on a consolidated basis (16) Certain Residential Whole Loans and Commercial Loans were financed under two longer term repurchase agreements. These facilities automatically renew until such time as they are terminated or until certain conditions of default. The weighted average remaining maturity days was calculated using expected weighted life of the underlying collateral. (17) The subordinate notes were retained by the Company. (18) While we use hedging strategies as part of our overall portfolio management, these strategies are not designed to eliminate all risks in the portfolio. There can be no assurance as to the level or effectiveness of these strategies. 18


 
Supplemental Information 19


 
Book Value Roll Forward June 30, 2020 March 31, 2020 Amounts in 000's Per Share Amounts in 000's Per Share GAAP Book Value at March 31, 2020 and December 31, 2019 $ 182,191 $ 3.41 $ 564,461 $ 10.55 Proceeds from At-the-Market(ATM) program, net 21,986 0.02 — — Stock repurchase — — (578) N/A 204,177 3.43 563,883 10.55 Portfolio Income Net Interest Margin 8,557 0.14 18,870 0.35 Realized gain (loss), net (20,147) (0.34) (127,011) (2.38) Unrealized gain (loss), net 21,016 0.36 (269,275) (5.03) Net portfolio income 9,426 0.16 (377,416) (7.06) Financing transaction cost (20,540) (0.35) — — Operating expenses (1,260) (0.02) (2,039) (0.04) General and administrative expenses, excluding equity based compensation (2,836) (0.05) (2,330) (0.04) Provision for taxes (255) — 93 — GAAP Book Value at June 30, 2020 and March 31, 2020 $ 188,712 $ 3.17 $ 182,191 $ 3.41 Adjustments to deconsolidate VIEs and reflect the Company's interest in the securities owned Deconsolidation of VIEs assets (1,555,962) (26.17) (1,263,407) (23.65) Deconsolidation VIEs liabilities 1,486,107 25.00 1,174,422 21.98 Interest in securities of VIEs owned, at fair value 121,315 2.04 133,885 2.51 Economic Book Value at June 30, 2020 and March 31, 2020 $ 240,172 $ 4.04 $ 227,091 $ 4.25 20 Please refer to page 18 for footnote disclosures.


 
Adjusted* Portfolio Composition Total Investment Portfolio ($ in millions) June 30, 2020 Consolidated Third Party Company Sponsored Unconsolidated (As Reported) Consolidated Trust Securitization (Non GAAP) Agency RMBS $ 2 $ — $ — $ 2 Non-Agency CMBS 189 41 — 230 Non-Agency RMBS 27 — 80 107 Residential Whole-Loans 1,124 — (1,049) 75 Residential Bridge Loans 27 — — 27 Securitized Commercial Loans 466 (466) — — Commercial Loans 323 — — 323 Other Securities(8) 40 — — 40 Total $ 2,198 $ (425) $ (969) $ 804 *Excludes consolidation of VIE Trusts required under GAAP 9.3% 3.4% Agency RMBS 28.6% Agency CMBS Non-Agency RMBS Non-Agency CMBS Residential Whole-Loans Residential Bridge Loans 40.2% Commercial Loans Other Securities 13.3% 0.2% 5.0% Please refer to page 18 for footnote disclosures. 21


 
Adjusted* Portfolio Income Attribution(9) For the Three Months Ended June 30, 2020 (in thousands except per share data) Non- Non- Residential Residential Other Agency Agency Agency Agency Whole- Bride Investments Commercial Other CMBS RMBS CMBS RMBS Loans Loans(6) (8) Loans Derivatives Total Interest Income(10) $ 400 $ 93 $ 7,001 $ 216 $ 13,891 $ 332 $ 704 $ 5,710 $ — $ 28,347 Interest expense(11) (982) (116) (2,070) (225) (12,276) (258) (385) (1,986) — (18,298) Miscellaneous income (expense)(12) — — — — — — (44) — — (44) Net Interest Income (582) (23) 4,931 (9) 1,615 74 275 3,724 — 10,005 Investment realized gain/(loss) 21,687 1,161 (18,184) — (10,511) (113) (6,224) — — (12,184) Investment unrealized gain/(loss)(13) (26,029) (1,755) 2,416 1,207 22,096 (609) 18,825 3,049 — 19,200 Securitized debt unrealized gain/(loss) — — — — (67) — — — — (67) Gain (loss) on derivatives(14) — — — — — — (7,426) — (102) (7,528) Portfolio Income (loss) $ (4,924) $ (617) $ (10,837) $ 1,198 $ 13,133 $ (648) $ 5,450 $ 6,773 $ (102) $ 9,426 BV Per Share Increase (Decrease) $ (0.08) $ (0.01) $ (0.18) $ 0.02 $ 0.22 $ (0.01) $ 0.09 $ 0.11 $ — $ 0.16 *Excludes the securitized commercial loan and debt from the consolidation of VIE trusts required under GAAP. Reflects only our interest in the Non-Agency CMBS security that was acquired. 22 Please refer to page 18 for footnote disclosures.


 
Adjusted Credit Sensitive Portfolio as of June 30, 2020 Adjusted Credit Sensitive Portfolio* ($ in thousands) Principal Amortized Net Weighted Net Weighted Balance Costs Fair Value Average Coupon Average Yield Non-Agency RMBS $ 38,863 $ 23,648 $ 21,693 4.6% 3.0% Non-Agency RMBS IOs and IIOs N/A 6,847 5,278 0.5% 5.9% Non-Agency CMBS 319,567 291,184 230,794 5.7% 9.4% Residential Whole Loans 1,147,860 1,173,259 1,124,051 5.2% 5.7% Residential Bridge Loans 28,028 28,044 26,505 9.5% 7.7% Commercial Loans 332,576 332,378 323,474 6.6% 6.8% Other Securities(8) 51,668 51,489 40,466 4.4% 9.2% $ 1,918,562 $ 1,906,849 $ 1,772,261 4.0% 6.5% *Excludes consolidation of third-party sponsored VIE Trusts required under GAAP Commercial Loans: 18.3% Other Securities: 2.3% Residential Bridge Loans: 1.5% Non-Agency RMBS: 1.2% Non-Agency RMBS IO and IIOs: 0.3% Non-Agency CMBS: 13.0% Residential Whole Loans: 63.4% Please refer to page 18 for footnote disclosures. 23


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