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):
 

November 5, 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 November 5, 2020, Western Asset Mortgage Capital Corporation (the “Company”) issued a press release announcing its financial results for the fiscal quarter ended September 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 November 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:  November 5, 2020


Document

Exhibit 99.1

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

THIRD QUARTER 2020 FINANCIAL RESULTS

We made further progress towards strengthening our balance sheet in the third quarter by reducing debt and leverage, while improving liquidity, shareholders equity and the earnings power of the portfolio. We had improved financial results during the third quarter, which included significant recovery in asset valuations, increasing book value by 29.2%. Third quarter financial results included the following:

GAAP book value per share was $4.07, increased $0.92 from $3.156 in the second quarter.
GAAP net income of $59.8 million, or $0.98 per basic and diluted share.
Economic return on GAAP book value was 30.8% for the quarter.1,3
Economic book value per share of $4.112 increased 2.2% from $4.026 in the second quarter
Core earnings of $6.4 million, or $0.10 per basic and diluted share.1
2.27% annualized net interest margin on our investment portfolio. 1,4,5
Reduced recourse leverage to 2.2x down from 3.0x at June 30, 2020.
Resumed our quarterly dividend, declaring a $0.05 per share cash dividend.

CORPORATE UPDATE

The measures taken to strengthen our balance sheet included, but were not limited to, the following:

In July 2020, 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 leverage on our commercial loan portfolio, financed under the commercial whole loan facility by 21.9%.
In October 2020, we amended our existing residential loan facility. The amended facility has a 12 month term bearing an interest rate of one month LIBOR plus 2.75%.

1  Non – GAAP measure.
2 Economic book value is a non-GAAP financial measure. See 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.
5 Excludes the consolidation of VIE trusts required under GAAP.
6. GAAP book value and Economic book value at June 30, 2020 was revised to reflect the under accrual of interest expense in the amount of $1.5 million.
1


MANAGEMENT COMMENTARY

“The Company delivered a very strong economic return on book value of 30.8% for the third quarter of 2020, reflecting a significant recovery in asset prices across our portfolio,” said Jennifer Murphy, Chief Executive Officer of the Company. “During the last two quarters, we have taken actions to fortify our balance sheet and improve the future earnings power of the portfolio. These measures include reducing our portfolio leverage to 2.2x recourse debt (down from 9.5x in March), securing longer-term financing at attractive levels, significantly reducing our reliance on short term repurchase agreements, 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 positioned us to benefit from the recovery in asset values that occurred this quarter, while improving the sustainable earnings power of the portfolio. As a result, we are pleased to have resumed payment of our quarterly dividend, which was an important milestone for our shareholders and the Company.”

Ms. Murphy continued, “We recorded GAAP net income of $59.8 million, or $0.98 per share, and core earnings of $0.10 per share during the third quarter, reflecting lower portfolio leverage and a slightly higher net interest margin. Our GAAP Book Value increased 29.2% during the quarter to $4.07 per share, and our Economic Book Value improved to $4.11 per share as of September 30, 2020. Our commitment to shareholders continues to be to protect and grow 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, with the overall goal of protecting and 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 continued to rebound in the third quarter, driven by improved liquidity conditions across financial markets and the ongoing reopening of the economy, which translated into higher valuations on a number of our portfolio holdings. The improved recovery in asset prices is reflected in the significant improvement in GAAP Book Value. Our view remains that the economy will continue to gradually improve, although the timing and strength of that recovery remains dependent on the future trajectory of COVID-19 and fiscal and monetary stimulus. In the meantime, our focus on maintaining sufficient liquidity and positioning of our portfolio for potential future appreciation should continue to enable us to benefit from a recovery as we have invested in assets we believe are high quality with borrowers who have resources to be more resilient in a protracted downturn.”

2


OPERATING RESULTS
 
The below table reflects a summary of our operating results:
 
 For the Three Months Ended
GAAP ResultsSeptember 30, 2020
June 30, 2020
(Revised)(5)
March 31, 2020
(in thousands-except share and per share data)
Net Interest Income$10,117 $7,076 $18,741 
Other Income (Loss): 
Realized gain (loss) on investments, net718 (6,960)89,186 
Unrealized gain (loss), net54,690 16,040 (296,111)
Gain (loss) on derivative instruments, net(88)(8,143)(189,691)
Other, net(31)(45)461 
Other Income (Loss)55,289 892 (396,155)
Total Expenses5,392 24,805 4,534 
Income (loss) before income taxes60,014 (16,837)(381,948)
Income tax provision (benefit)205 255 (93)
Net income (loss) $59,809 $(17,092)$(381,855)
Net income attributable to non-controlling interest
Net income (loss) attributable to common stockholders and participating securities$59,807 $(17,094)$(381,857)
Net income (loss) per Common Share – Basic/Diluted$0.98 $(0.31)$(7.15)
Non-GAAP Results 
Core earnings plus drop income (1)
$6,391 $4,343 $15,779 
Core earnings plus drop income per Common Share – Basic/Diluted(1)
$0.10 $0.08 $0.29 
Weighted average yield(2)(4)
5.51 %5.40 %4.90 %
Effective cost of funds(3)(4)
3.94 %3.98 %3.28 %
Annualized net interest margin(2)(3)(4)
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 summary of operating results for the three months ended June 30, 2020 was revised to reflect the under accrual of interest expense in the amount of $1.5 million.





3


Portfolio Composition
 
As of September 30, 2020, the Company owned an aggregate investment portfolio with a fair market value totaling $3.4 billion. The following tables sets forth additional information regarding the Company’s investment portfolio as of September 30, 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 September 2020 represented approximately 10.2% 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 large loan Non-Agency CMBS portfolio has an original LTV of 60.1% and despite being concentrated in retail and hotel assets, over 82.1% 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 65.5% 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 September 30, 2020 (dollars in thousands): 

 Principal BalanceAmortized CostFair Value
 Weighted Average Coupon(1)
Non-Agency RMBS$38,447 $23,429 $21,568 4.5 %
Non-Agency RMBS IOs and IIOsN/A6,530 4,248 0.5 %
Non-Agency CMBS256,450 230,392 181,321 5.2 %
Residential Whole Loans1,073,648 1,097,897 1,096,997 5.1 %
Residential Bridge Loans(1),(2)
18,973 18,967 17,841 9.4 %
Securitized Commercial Loans
1,878,198 1,737,792 1,687,545 4.1 %
Commercial Loans332,518 332,362 325,651 6.3 %
Other Securities51,586 50,417 41,055 4.4 %
$3,649,820 $3,497,786 $3,376,226 4.3 %

(1) Includes Residential Bridge Loans carried at amortized cost of $1.5 million as of September 30, 2020. The fair value of these loans was $1.5 million as of September 30, 2020.
(2) As of September 30, 2020, the Company had real estate owned ("REO") properties with an aggregate carrying value of $1.3 million related to foreclosed Bridge Loans. The REO properties are classified in "Other assets" in the Consolidated Balance Sheets.






4


Agency Portfolio

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

 Principal BalanceAmortized CostFair ValueNet Weighted Average Coupon
Agency RMBS Interest-Only StripsN/A$105 $153 2.4 %
Agency RMBS Interest-Only Strips, accounted for as derivativesN/AN/A1,700 3.0 %
Total Agency RMBS— 105 1,853 2.9 %
Total$— $105 $1,853 2.9 %

5


PORTFOLIO FINANCING AND HEDGING
 
Financing Activity

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 20, 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 of September 30, 2020 approximately $72.7 million in non QM loans remained in the facility with a borrowing amount of $20.8 million. As of that date the Company owed the counterparty $20.5 million as a premium recapture fee.

On October 6, 2020 the Company entered into an amendment with respect to its residential whole loan facility. The amendment serves to convert 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 85% and the facility matures on October 5, 2021. The premium recapture fee was eliminated for holdings that had not yet been sold or otherwise disposed of.

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 September 30, 2020 the Company had borrowed $102.7 million under this facility.

The following table sets forth additional information regarding the Company’s portfolio financing arrangements as of September 30, 2020 (dollars in thousands):
 
6


Outstanding BorrowingsWeighted Average Interest RateWeighted Average Remaining Days to Maturity
Short Term Borrowings:
Agency RMBS$1,438 1.46 %59
Non-Agency CMBS9,119 3.28 %13
Residential Whole-Loans 19,215 4.72 %23
Residential Bridge Loans15,763 2.75 %36
Commercial Loans36,575 3.34 %77
Membership Interest18,845 2.90 %29
Other Securities2,599 4.50 %21
Subtotal103,554 3.42 %45
Long Term Borrowings
Non-Agency CMBS74,145 5.25 %218
Non-Agency RMBS14,742 5.25 %218
Residential Whole-Loans (1)
20,846 5.22 %386
Commercial Loans (1)
131,822 2.20 %377
Other Securities13,769 5.25 %218
Subtotal255,324 3.67 %314
Repurchase Agreements Borrowings$358,878 3.60 %236
Less Unamortized Debt Issuance Costs353 N/AN/A
Repurchase Agreements Borrowings, net$358,525 3.60 %236

(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 financing arrangements 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 September 30, 2020.

Convertible Senior Unsecured Notes

At September 30, 2020, the Company had $200 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.

Residential Mortgage-Backed Notes

The Company has completed two Residential Whole Loan securitizations. The mortgage-backed 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 September 30, 2020 (dollars in thousands):
 
7


ClassesPrincipal BalanceCouponCarrying ValueContractual Maturity
Offered Notes:
Class A-1$552,779 3.3%$552,777 4/25/2049
Class A-229,619 3.5%29,618 4/25/2049
Class A-346,925 3.8%46,924 4/25/2049
Class M-125,055 4.8%25,055 4/25/2049
654,378 654,374 
Less: Unamortized Deferred Financing CostN/A4,625 
Total$654,378 $649,749 

The Company retained the subordinate bonds and these bonds had a fair market value of $43.7 million at September 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 September 30, 2020 (dollars in thousands):

 
ClassesPrincipal BalanceCouponCarrying ValueContractual Maturity
Offered Notes:
Class A-1A$246,807 1.7%$246,801 3/25/2055
Class A-1B29,287 2.1%29,286 3/25/2055
Class A-213,518 2.9%13,517 3/25/2055
Class A-317,963 3.3%17,963 3/25/2055
Class M-111,739 4.3%11,739 3/25/2055
Subtotal319,314 319,306 
Less: Unamortized Deferred Financing CostsN/A2,606 
Total$319,314 $316,700 

The Company retained the subordinate bonds and these bonds had a fair market value of $29.5 million at September 30, 2020. The retained Arroyo 2020-1 subordinate bonds are eliminated in consolidation.

Commercial Mortgage-Backed Notes

RETL 2019 Trust

The following table summarizes RETL 2019 Trust's commercial mortgage pass-through certificates, at September 30, 2020 (dollars in thousands), which is non-recourse to the Company:

8


ClassesPrincipal BalanceCoupon Fair Value Contractual Maturity
Class A$34,022 1.3%$34,024 3/15/2021
Class B101,200 1.7%96,085 3/15/2021
Class C308,400 2.3%282,831 3/15/2021
Class X-EXT(1)
N/A1.2%31 3/15/2021
$443,622 $412,971 

(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 $41.7 million at September 30, 2020.

CSMC 2014 USA

The following table summarizes CSMC 2014 USA's commercial mortgage pass-through certificates at September 30, 2020 (dollars in thousands), which is non-recourse to the Company:

ClassesPrincipal BalanceCoupon Fair Value Contractual Maturity
Class A-1$124,076 3.3%$124,648 9/11/2025
Class A-2531,700 4.0%541,905 3/15/2021
Class B136,400 4.2%122,802 9/11/2025
Class C94,500 4.3%80,348 9/11/2025
Class D153,950 4.4%117,058 9/11/2025
Class E180,150 4.4%122,585 9/11/2025
Class F153,600 4.4%96,808 9/11/2025
Class X-1(1)
 n/a 0.5%14,638 9/11/2025
Class X-2(1)
 n/a 0.4%2,697 9/11/2025
$1,374,376 $1,223,489 

(1) Class X-1 and X-2 are interest-only classes with notional balances of $655.8 million and $733.5 million as of September 30, 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 $9.4 million at September 30, 2020.

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

Other Derivative InstrumentsNotional AmountFair Value
Credit default swaps, asset$2,030 $481 
Total derivative instruments, assets481 
Credit default swaps, liability4,140 (1,166)
Total derivative instruments, liabilities(1,166)
Total derivative instruments, net$(685)
9




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. In the third quarter of 2020, we resumed our quarterly dividend after making progress strengthening our balance sheet and improving liquidity and the earnings power of our investment portfolio. For the quarter ended September 30, 2020, we declared a cash dividend of $0.05 per share generating a dividend yield of approximately 9.8% based on the stock closing price of $2.04 at September 30, 2020.
 
CONFERENCE CALL
 
The Company will host a conference call with a live webcast tomorrow, November 6, 2020 at 11:00 a.m. Eastern Time/8:00 a.m. Pacific Time, to discuss financial results for the third 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/10148851 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 November 20, 2020 by dialing (877) 344-7529 from the United States, or (412) 317-0088 from outside the United States, and entering conference ID 10148851. 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 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
10


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-
11


Western Asset Mortgage Capital Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands—except share and per share data)
(Unaudited)
 September 30, 2020
June 30, 2020 (Revised)(1)
Assets: 
Cash and cash equivalents$27,459 $19,363 
Restricted cash95,579 26,430 
Agency mortgage-backed securities, at fair value ($1,853 and $1,975 pledged as collateral, at fair value, respectively)1,853 1,975 
Non-Agency mortgage-backed securities, at fair value ($182,125 and $197,326 pledged as collateral, at fair value, respectively)207,137 216,288 
Other securities, at fair value ($41,055 and $40,466 pledged as collateral, at fair value, respectively)41,055 40,466 
Residential Whole Loans, at fair value ($1,096,997 and $1,124,051 pledged as collateral, at fair value, respectively)1,096,997 1,124,051 
Residential Bridge Loans ($16,333 and $24,171 at fair value and $17,653 and $25,371 pledged as collateral, respectively)17,841 26,505 
Securitized commercial loans, at fair value1,687,545 465,694 
Commercial Loans, at fair value (325,651 and $323,474 pledged as collateral, at fair value, respectively)325,651 323,474 
Receivable under reverse repurchase agreements— — 
Investment related receivable18,861 12,029 
Interest receivable14,101 11,595 
Due from counterparties1,192 5,177 
Derivative assets, at fair value481 714 
Other assets4,418 6,262 
Total Assets (1)
$3,540,170 $2,280,023 
Liabilities and Stockholders’ Equity: 
Liabilities: 
Repurchase agreements, net$358,525 $369,096 
Convertible senior unsecured notes, net194,510 198,669 
Securitized debt, net ($1,636,460 and $424,217 at fair value and $207,852 and $43,904 held by affiliates, respectively)2,602,909 1,458,236 
Interest payable (includes $660 and $49 on securitized debt held by affiliates, respectively)8,840 9,169 
Due to counterparties17 16 
Derivative liability, at fair value1,166 943 
Accounts payable and accrued expenses3,992 4,082 
Payable to affiliate3,255 4,701 
Dividend payable3,041 — 
  Other liabilities 116,124 47,856 
Total Liabilities (2)
3,292,379 2,092,768 
Commitments and contingencies 
Stockholders’ Equity: 
Common stock: $0.01 par value, 500,000,000 shares authorized, 60,812,701 and 59,458,617 outstanding, respectively609 595 
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 capital915,258 911,488 
Retained earnings (accumulated deficit)(667,500)(724,252)
Total Stockholders’ Equity247,789 187,253 
Non-controlling interest
Total Equity247,791 187,255 
Total Liabilities and Equity$3,540,170 $2,280,023 


12




Western Asset Mortgage Capital Corporation and Subsidiaries
Consolidated Balance Sheets (Continued)
(in thousands—except share and per share data)
(Unaudited)
 
 September 30, 2020
June 30, 2020
(Revised)(1)
(1) Assets of consolidated VIEs included in the total assets above:
 
Cash and cash equivalents$— $— 
Restricted Cash95,579 26,430 
Residential Whole Loans, at fair value ($1,096,997 and $1,124,051 pledged as collateral, at fair value, respectively)1,096,997 1,124,051 
Residential Bridge Loans ($15,319 and $23,307 at fair value and $16,828 and $25,371 pledged as collateral, respectively)16,828 25,371 
Securitized commercial loans, at fair value1,687,545 465,694 
Commercial Loans, at fair value ($72,699 and $72,335 pledged as collateral, at fair value, respectively)72,699 72,335 
Investment related receivable18,817 12,029 
Interest receivable11,287 8,640 
Other assets92 92 
Total assets of consolidated VIEs$2,999,844 $1,734,642 
(2) Liabilities of consolidated VIEs included in the total liabilities above:
 
Securitized debt, net ($1,636,460 and $765,945 at fair value and $207,852 and $43,904 held by affiliates, respectively)$2,602,909 $1,458,236 
Interest payable (includes $660 and $49 on securitized debt held by affiliates, respectively)7,681 4,603 
Accounts payable and accrued expenses410 118 
Other liabilities95,579 26,430 
Total liabilities of consolidated VIEs$2,706,579 $1,489,387 
 
(1) The consolidated balance sheet as June 30, 2020 was revised to reflect the under accrual of interest expense in the amount of $1.5 million.
13


Western Asset Mortgage Capital Corporation and Subsidiaries
Consolidated Statements of Operations
(in thousands—except share and per share data)
 (Unaudited)
Three months ended
 September 30, 2020
June 30, 2020 (Revised)(1)
March 31, 2020
Net Interest Income  
Interest income$43,970 $31,494 $54,846 
Interest expense (includes $2,647, $392 and $2,164 on securitized debt held by affiliates, respectively)33,853 24,418 36,105 
Net Interest Income10,117 7,076 18,741 
Other Income (Loss) 
Realized gain (loss) on sale of investments, net718 (6,960)89,186 
Unrealized gain (loss), net54,690 16,040 (296,111)
Gain (loss) on derivative instruments, net(88)(8,143)(189,691)
Other, net(31)(45)461 
Other Income (Loss)55,289 892 (396,155)
Expenses 
Management fee to affiliate1,513 464 1,039 
Financing fee— 20,540 — 
Other operating expenses1,198 796 1,000 
General and administrative expenses:
  Compensation expense 716 692 662 
  Professional fees827 1,541 1,480 
  Other general and administrative expenses1,138 772 353 
Total general and administrative expenses2,681 3,005 2,495 
Total Expenses5,392 24,805 4,534 
Income before income taxes60,014 (16,837)(381,948)
Income tax provision (benefit)205 255 (93)
Net income (loss)59,809 (17,092)(381,855)
Net income attributable to non-controlling interest
Net income (loss) attributable to common stockholders and participating securities$59,807 $(17,094)$(381,857)
Net income (loss) per Common Share – Basic$0.98 $(0.31)$(7.15)
Net income (loss) per Common Share – Diluted$0.98 $(0.31)$(7.15)


(1)          The consolidated statements of operations for the three months ended June 30, 2020 was revised to reflect the under accrual of interest expense in the amount of $1.5 million.

14


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 September 30, 2020, June 30, 2020 and March 30, 2020:
Three months ended
(dollars in thousands)September 30, 2020
June 30, 2020 (Revised)(1)
March 31, 2020
Net Income (loss) attributable to common stockholders and participating securities$59,807 $(17,094)$(381,857)
Income tax provision (benefit)205 255 (93)
Net Income before income taxes60,012 (16,839)(381,950)
Adjustments: 
Investments: 
Unrealized (gain) loss on investments, securitized debt and other liabilities(54,690)(16,040)296,111 
Realized (gain) loss on sale of investments(718)6,960 (89,186)
One-time transaction costs57 20,652 280 
Derivative Instruments: 
Net realized (gain) loss on derivatives(154)13,152 180,156 
Net unrealized (gain) loss on derivatives288 (4,973)8,807 
Amortization of discount on convertible senior unsecured notes284 273 273 
Other non-cash adjustments1,130 988 — 
Non-cash stock-based compensation182 170 165 
Total adjustments(53,621)21,182 396,606 
Core Earnings$6,391 $4,343 $14,656 
Basic and Diluted Core Earnings per Common Share and Participating Securities$0.10 $0.08 $0.27 
Basic and Diluted Core Earnings plus Drop Income per Common Share and Participating Securities$0.10 $0.08 $0.29 
Basic weighted average common shares and participating securities61,101,485 54,921,847 53,670,550 
Diluted weighted average common shares and participating securities61,101,485 54,921,847 53,670,550 

(1)          The reconciliation of GAAP Net Income to Non-GAAP Core Earnings for the three months ended June 30, 2020 was revised 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)September 30, 2020
June 30, 2020 (Revised)(1)
March 31, 2020
Net interest income
$10,117 $7,076 $18,741 
Interest income from IOs and IIOs accounted for as derivatives34 69 91 
Net interest income from interest rate swaps
— — (1,133)
Adjusted net interest income
10,151 7,145 17,699 
Total expenses(5,392)(24,805)(4,534)
Other non-cash adjustments1,130 988 — 
Non-cash stock-based compensation182 170 165 
One-time transaction costs57 20,652 280 
Amortization of discount on convertible unsecured senior notes284 273 273 
Interest income on cash balances and other income (loss), net
(19)(78)775 
Income attributable to non-controlling interest(2)(2)(2)
Core Earnings$6,391 $4,343 $14,656 


(1)          The reconciliation of GAAP Net Income to Non-GAAP Core Earnings for the three months ended June 30, 2020 was revised to reflect the under accrual of interest expense in the amount of $1.5 million.































16





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


September 30, 2020
June 30, 2020
(Revised)(1)
$ AmountPer Share$ AmountPer Share
GAAP Book Value at June 30, 2020 and March 31, 2020$187,253 $3.15 $182,191 $3.41 
Debt to equity exchange of the convertible senior notes3,588 (0.01)— 
Proceeds from At-the-Market program, net— — 21,986 0.02 
Common dividend(3,041)(0.05)— — 
187,800 3.09 204,177 3.43 
Portfolio Income
Net Interest Margin10,120 0.16 7,098 0.12 
Realized gain (loss), net(374)(0.01)(20,147)(0.34)
Net realized gain (loss) on debt extinguishment1,258 0.02 — — 
Unrealized gain (loss), net54,399 0.89 21,016 0.36 
Net portfolio income65,403 1.06 7,967 0.14 
Financing fee— — (20,540)(0.35)
Operating expenses(2,711)(0.04)(1,260)(0.02)
General and administrative expenses, excluding equity based compensation(2,498)(0.04)(2,836)(0.05)
Provision for taxes(205)— (255)— 
GAAP Book Value at September 30, 2020 and June 30, 2020$247,789 $4.07 $187,253 $3.15 
Adjustments to deconsolidate VIEs and reflect the Company's interest in the securities owned
Deconsolidation of VIEs assets(2,827,360)(46.48)(1,555,962)(26.17)
Deconsolidation VIEs liabilities2,705,246 44.48 1,486,107 25.00 
Interest in securities of VIEs owned, at fair value124,309 2.04 121,315 2.04 
Economic Book Value at September 30, 2020 and June 30, 2020$249,984 $4.11 $238,713 $4.02 

(1)          The reconciliation of GAAP Book Value to Non-GAAP Economic Book Value for the three months ended June 30, 2020 was revised to reflect the under accrual of interest expense in the amount of $1.5 million.

"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
17


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
(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 September 30, 2020, June 30, 2020 and March 30, 2020:
 
Three months ended
(dollars in thousands)September 30, 2020June 30, 2020March 30, 2020
Coupon interest income$40,039 $33,007 $57,761 
Premium amortization, discount accretion and amortization of basis, net3,931 (1,513)(2,915)
Interest income43,970 31,494 54,846 
Contractual interest income, net of amortization of basis on Agency and Non-Agency Interest-Only Strips, classified as derivatives(1):
 
Coupon interest income200 340 636 
Amortization of basis (166)(271)(545)
Subtotal
34 69 91 
Total adjusted interest income$44,004 $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 September 30, 2020, June 30, 2020 and March 30, 2020:
 
Three months ended
 September 30, 2020
June 30, 2020 (Revised)(2)
March 31, 2020
 (dollars in thousands)
ReconciliationCost of Funds/Effective Borrowing CostsReconciliationCost of Funds/Effective Borrowing CostsReconciliationCost of Funds/Effective Borrowing Costs
Interest expense$33,853 4.80 %$24,418 3.97 %$36,105 3.34 %
Adjustments:
Interest expense on Securitized debt from consolidated VIEs1
(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$15,256 3.94 %$19,757 3.98 %$30,484 3.28 %
Weighted average borrowings$1,538,970  $1,994,405  $3,733,045 

(1)    Excludes third-party sponsored securitized debt interest expense.
(2)            The reconciliation of the Effective Cost of Funds for the three months ended June 30, 2020 was revised to reflect the under accrual of interest expense in the amount of $1.5 million.


18
a3q20ex992ng
Third Quarter 2020 Investor Presentation November 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


 
Third 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 $479.8 billion(1) ◦ AUM of the Mortgage and Consumer Credit Group is $66.3 billion(1) ◦ Extensive mortgage and consumer credit investing track record ∙ Publicly traded 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 22 for footnote disclosures. 3


 
Corporate Update The Company continued to improve its balance sheet in the third quarter by reducing leverage, increasing liquidity and shareholder equity. These measures included, but were not limited to, the following: • In July 2020, 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 leverage on our commercial loan portfolio, financed under the commercial whole loan facility by 21.9%. • In October 2020, we amended our existing residential loan facility. The amended facility has a 12 month term bearing an interest rate of one month LIBOR plus 2.75%. 4


 
Third Quarter Financial Update Third Quarter 2020 Financial Results ▪ GAAP book value per share was $4.07, increased $0.92 from $3.15 (18) in the second quarter. ▪ GAAP net income of $59.8 million, or $0.98 per basic and diluted share. ▪ Economic return(4) on GAAP book value was 30.8% for the quarter. • Economic book(2) value per share of $4.11 increased 2.2% from $4.02(18) in the second quarter ▪ Core earnings(3) of $6.4 million, or $0.10 per basic and diluted share. ▪ 2.27% annualized net interest margin(5) on our investment portfolio. ▪ Reduced recourse leverage to 2.2x, down from 3.0x at June 30, 2020. ▪ Resumed our quarterly dividend, declaring a $0.05 per share cash dividend. Please refer to page 22 for footnote disclosures. 5


 
WMC Key Metrics The following are the Company's key metrics as of September 30, 2020; GAAP Book 6/30/20 Q3 Book 9/30/20 6/30/20 Q3 Share Price Market Cap Value Per GAAP Book Value Economic Economic Economic (in MMs) Value Per (2) (2) Book Value Share Share Change Book Value Book Value Change $ 2.04 $ 124.1 $ 4.07 $ 3.15 29.2 % $ 4.11 $ 4.02 2.2 % Price to GAAP Q3 Economic Dividend Recourse Net Interest Book Value Q3 Dividend Return(4) Yield Leverage Margin(5) 50.1 % $ 0.05 30.8% 9.8 % 2.2x 2.27 % Please refer to page 22 for footnote disclosures. 6


 
Portfolio Composition Total Investment Portfolio ($ in millions) September 30, 2020 0.5% Agency RMBS $ 2 Non-Agency CMBS 181 50.0% Agency RMBS Non-Agency RMBS 26 Non-Agency RMBS Residential Whole-Loans 1,097 Non-Agency CMBS Residential Whole-Loans (6) 32.4% Residential Bridge Loans 18 Residential Bridge Loans (7) Securitized Commercial Loans Securitized Commercial Loan 1,688 Commercial Loans Commercial Loans 326 Other Securities Other Securities(8) 41 5.4% Total $ 3,379 0.8% 0.1% 9.7% 1.2% Select Sector Categories Non-Agency MBS and Other Securities Loan Portfolio 73.0% 53.9% 0.6% 3.2% 13.4% 35.1% 1.7% 8.7% 10.4% RMBS Residential Whole Loans RMBS IO Residential Bridge Loans CMBS Securitized Commercial Loans ABS Securities Commercial Loan GSE CRT Securities Please refer to page 22 for footnote disclosures. 7


 
Portfolio Composition (Continued) The following tables present certain information about the Company’s investment portfolio for the three months ended September 30, 2020: Investment Portfolio ($ in millions) Yield on Average Weighted Asset Principal Amortized Average Coupon Three Months Balance Costs Fair Value as of 9/30/20 Ended 9/30/20 Agency RMBS IOs N/A $ — $ 2 2.9% 23.4% Non-Agency CMBS, including IOs 256 230 181 5.2% 8.5% Non-Agency RMBS, including IOs 38 30 26 0.9% 6.1% Residential Whole Loans 1,074 1,098 1,097 5.1% 4.4% Residential Bridge Loans 19 19 18 9.4% 5.3% Securitized Commercial Loan(7) 1,878 1,738 1,688 4.1% 5.7% Commercial Loans 333 332 326 6.3% 6.5% Other Securities(8) 52 50 41 4.4% 5.5% $ 3,650 $ 3,497 $ 3,379 4.4% 5.6% Please refer to page 22 for footnote disclosures. 8


 
Residential Whole Loans The Company's Residential Whole Loans portfolio is performing well, given the economic background. We see this as a strong indication that borrowers with meaningful equity in their homes will prioritize their mortgage payment to seek to remain current. As of September 30, 2020, approximately $109.6 million in unpaid principal balance or 10.2% of Residential Whole Loans were in forbearance. Loans in forbearance are reported as "Current" in the aging table below. Residential Whole Loan Portfolio ($ in millions) As of September 30, 2020 Fair Value as a No of Loans Principal Fair Value Percentage of Original LTV Total Current(2) 2,655 $ 1,038.8 $ 1,063.0 96.9 % 63.1 % 1-30 days 24 10.3 10.5 1.0 % 65.2 % 31-60 days 3 1.3 1.3 0.1 % 61.9 % 61-90 days 7 7.3 7.0 0.6 % 64.1 % 90+ days 21 15.9 15.2 1.4 % 61.5 % Total 2,710 $1,073.6 $1,097.0 100.0 % 63.1 % 9


 
Commercial Loans as of September 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 $ 29.2 65.0% 4.5% 6/9/2021 Hotel CA Principal & Interest 1-Month LIBOR plus Nursing CRE 2 June 2019 First Mortgage 49.9 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 87.5 58.0% 9.25% 6/29/2024 and Retail NJ Interest-Only First 1-Month LIBOR plus CRE 4 September 2019 Mortgage 40.0 39.0 63.0% 3.02% 8/6/2023 Retail CT Interest-Only First 1-Month LIBOR plus CRE 5 December 2019 Mortgage 24.5 23.7 62.0% 3.75% 11/6/2024 Hotel NY Interest-Only First 1-Month LIBOR plus CRE 6 December 2019 Mortgage 13.2 12.8 62.0% 3.75% 11/6/2024 Hotel CA Interest-Only First 1-Month LIBOR plus CRE 7 December 2019 Mortgage 7.3 7.0 62.0% 3.75% 11/6/2024 Hotel IL, FL Interest-Only First 1-Month LIBOR plus CRE 8 December 2019 Mortgage 4.5 4.5 79.0% 4.85% 12/6/2022 Assisted Living FL 1-Month LIBOR plus 4.25% Interest-Only First (Subject to LIBOR Nursing SBC 1 July 2018 Mortgage 45.2 44.9 74.0% floor of 1.25%) 7/1/2022 Facilities MI 1-Month LIBOR plus 4.0% Interest-Only (Subject to LIBOR Apartment SBC 2 January 2019 First Mortgage 13.6 13.6 84.0% floor of 2.0%) 12/1/2022 Complex MO Interest-Only 1-Month LIBOR plus Nursing SBC 3 January 2019 First Mortgage 14.4 14.3 49.0% 4.1% 7/1/2021 Facilities CT $ 332.6 $ 325.8 As of September 30, 2020, the Company had one delinquent borrower, CRE 1, with a total loan principal balance of $30.0 million. This loan is over 90 days past due. The Company has filed a notice of default with respect to this loan and is currently exploring various workout strategies. 10


 
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 September 30, 2020 Weighted Average Principal Type Vintage Balance Fair Value Life (Years) Original LTV Conduit: 2006-2009 $ 14,126 $ 6,735 1.1 72.5 % 2010-2020 94,107 52,252 3.7 61.6 % 108,233 58,987 3.4 62.9 % Single Asset: 2010-2020 148,217 122,334 2.2 66.2 % Total $ 256,450 $ 181,321 2.6 65.1 % 11


 
Income Attribution(11) For the Three Months Ended September 30, 2020 ($ in thousands except per share data) Non- Non- Residential Residential Other Securitized Agency Agency Agency Whole- Bridge Investments Commercial Commercial RMBS CMBS RMBS Loans Loans(6) (8) Loans Loans(17) Total Interest Income(12) $ 41 $ 5,186 $ 461 $ 12,699 $ 325 $ 711 $ 5,390 $ 19,191 $ 44,004 Interest expense(13) (9) (1,590) (272) (10,767) (210) (335) (1,948) (18,722) (33,853) Miscellaneous income (expense)(14) — — — — (31) — — (31) Net Interest Income 32 3,596 189 1,932 115 345 3,442 469 10,120 Realized gain/(loss) on investments 1 163 (23) 776 (480) 35 227 20 719 Unrealized gain/(loss) on investments(15) 61 5,873 (858) 48,306 537 1,603 2,194 4,564 62,280 Securitized debt unrealized gain/ (loss) — — — 66 — — — (7,589) (7,523) Gain/(loss) on derivative instruments, net — — — — — (193) — — (193) Portfolio Income (loss) $ 94 $ 9,632 $ (692) $ 51,080 $ 172 $ 1,790 $ 5,863 $ (2,536) $ 65,403 BV Per Share Increase (Decrease) $ — $ 0.15 $ (0.01) $ 0.84 $ — $ 0.03 $ 0.09 $ (0.04) $ 1.06 Please refer to page 22 for footnote disclosures. 12


 
51085000 Adjusted* Portfolio Composition Total Investment Portfolio ($ in millions) September 30, 2020 Consolidated Third Party Company Sponsored Unconsolidated (As Reported) Consolidated Trust Securitization (Non GAAP) Agency RMBS $ 2 $ — $ — $ 2 Non-Agency CMBS 181 51 — 232 Non-Agency RMBS 26 — 73 99 Residential Whole-Loans 1,097 — (1,022) 75 Residential Bridge Loans 18 — — 18 Securitized Commercial Loans 1,688 (1,688) — — Commercial Loans 326 — — 326 Other Securities(8) 41 — — 41 Total $ 3,379 $ (1,637) $ (949) $ 793 *Excludes consolidation of VIE Trusts required under GAAP 9.4% 2.3% 29.3% Agency RMBS Non-Agency RMBS Non-Agency CMBS Residential Whole-Loans Residential Bridge Loans 41.1% Commercial Loans Other Securities 12.4% 0.3% 5.2% Please refer to page 22 for footnote disclosures. 13


 
Adjusted* Portfolio Income Attribution(9) For the Three Months Ended September 30, 2020 ($ in thousands except per share data) Non- Non- Residential Residential Other Agency Agency Agency Whole- Bride Investments Commercial RMBS CMBS RMBS Loans Loans(6) (8) Loans Total Interest Income(12) $ 41 $ 6,974 $ 12,553 $ 596 $ 325 $ 711 $ 5,390 $ 26,590 Interest expense(13) (9) (1,715) (10,503) (524) (210) (335) (1,948) (15,244) Miscellaneous income (expense)(14) — — — — (31) — (31) Net Interest Income 32 5,259 2,050 72 115 345 3,442 11,315 Investment realized gain/(loss) 1 183 701 51 (480) 35 227 719 Investment unrealized gain/(loss)(15) 61 1,654 45,263 2,186 537 1,603 2,194 53,497 Securitized debt unrealized gain/(loss) — — — — — — 66 Gain (loss) on derivatives(16) — — — — (193) — (193) Portfolio Income (loss) $ 94 $ 7,096 $ 48,014 $ 2,309 $ 172 $ 1,790 $ 5,863 $ 65,403 BV Per Share Increase (Decrease) $ — $ 0.11 $ 0.79 $ 0.04 $ — $ 0.03 $ 0.09 $ 1.06 *Excludes the securitized commercial loan and debt from the consolidation of VIE trusts required under GAAP. Reflects only our interest in the Non-Agency CMBS security that was acquired. Income from securitized Residential Whole Loans has been reclassified as Non-Agency RMBS. 14 Please refer to page 22 for footnote disclosures.


 
Financing At September 30, 2020, the company had borrowings under 6 master repurchase agreements. Of the $358.5 million borrowings outstanding $255.3 million of the borrowings are in long term facilities with limited mark to market margin call exposure. Repurchase Agreement Financing September 30, 2020 ($ in thousands) Outstanding Weighted Average Interest Weighted Average Borrowings Rate Interest Rate Remaining Days to Maturity Short Term Borrowings Agency RMBS $ 1,438 1.46% 59 Non-Agency CMBS 9,119 3.28% 13 Residential Whole-Loans 19,215 4.72% 23 Residential Bridge Loan 15,763 2.75% 36 Commercial loans 36,575 3.34% 77 Partnership interest 18,845 2.90% 29 Other securities(8) 2,599 4.50% 21 Subtotal 103,554 3.42% 45 Long Term Borrowings Non-Agency CMBS 74,145 5.25% 218 Non-Agency RMBS 14,742 5.25% 218 Residential Whole-Loans(9) 20,846 5.22% 386 Commercial Loans(9) 131,822 2.20% 377 Other securities(8) 13,769 5.25% 218 Subtotal 255,324 3.67% 314 Repurchase agreements borrowings 358,878 3.60% 236 Less unamortized debt issuance costs 353 N/A N/A Repurchase agreements borrowings, net $ 358,525 3.60% 236 15 Please refer to page 22 for footnote disclosures.


 
Financing (Continued) Longer-Term Financing Facilities Residential Whole Loan Financing Facility ▪ As of September 30, 2020, approximately $72.7 million in non QM loans remained in the facility. The outstanding borrowing under this facility was $20.8 million as of September 30, 2020, ▪ On October 6, 2020 the Company entered into an amendment with respect to its residential loan warehouse facility. The amendment serves to convert 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 85% and the facility matures on October 5, 2021.As part of the amendment, the premium recapture fee was eliminated for investments financed under the facility. With the amendment the Company paid $12 million of the accrued premium recapture fee with the balance of $8.5 million due upon the maturity of the amended facility. Commercial Whole Loan Facility • As of September 30, 2020 the company had approximately $131.8 million in borrowings, with a weighted average interest rate of 2.2% under its commercial whole loan facility. The borrowing is secured by loans with an estimated fair market value of $253.0 million. The facility automatically rolls until such time that it is terminated pursuant to the terms of the agreement by either the borrower or lender or until certain conditions of default • On October 6, 2020 the Company paid down $4.0 million of the outstanding borrowing at September 30, 2020. 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. 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 to the Company, unless the LTV Trigger has occurred, in which case all principal payments will be applied to repay the obligations. • As of September 30, 2020 the Company had borrowed $102.7 million under this facility. Convertible Senior Unsecured Notes • At September 30, 2020, the Company had $200.0 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. 16 Please refer to page 22 for footnote disclosures.


 
Financing (Continued) Non-Recourse Financings Mortgage-Backed Notes The residential mortgage backed notes issued by the 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 $43.7 million and $29.5 million, respectively, at September 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 September 30, 2020 (dollars in thousands): Classes Principal Balance Coupon Carrying Value Contractual Maturity Offered Notes:(10) Class A-1 $ 552,779 3.3% $ 552,777 4/25/2049 Class A-2 29,619 3.5% 29,618 4/25/2049 Class A-3 46,925 3.8% 46,924 4/25/2049 Class M-1 25,055 4.8% 25,055 4/25/2049 654,378 654,374 Less: Unamortized Deferred Financing Cost N/A 4,625 Total $ 654,378 $ 649,749 ▪ The following table summarizes the residential mortgage-backed notes issued by the Company's Arroyo Trust 2020 securitization at September 30, 2020 (dollars in thousands): Classes Principal Balance Coupon Carrying Value Contractual Maturity Offered Notes:(10) Class A-1A $ 246,807 1.7% $ 246,801 3/25/2055 Class A-1B 29,287 2.1% 29,286 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 319,314 2.0% 319,306 Less: Unamortized Deferred Financing Costs N/A 2,606 Total $ 319,314 $ 316,700 Please refer to page 22 for footnote disclosures. 17


 
Financing (Continued) As of September 30, 2020, the Company had two consolidated commercial mortgage-backed variable interest entity that had an aggregate securitized debt balance of $1.6 billion. The securitized debt of the trusts can only be settled with the collateral held by the trusts and is non-recourse to the Company. The Company holds an interest in certain subordinate bonds of the RETL 2019 and CMSC 2014 USA securitzations and these bonds had a fair market value of $41.7 million and $9.4 million, respectively, at September 30, 2020. The retained subordinate bonds for both securitizations are not reflected in the below tables because they are eliminated in consolidation. The following table summarizes RETL 2019 Trust's commercial mortgage pass-through certificates at September 30, 2020 (dollars in thousands): Classes Principal Balance Coupon Carrying Value Contractual Maturity Class A $ 34,022 1.3% $ 34,024 3/15/2021 Class B 101,200 1.7% 96,085 3/15/2021 Class C 308,400 2.3% 282,831 3/15/2021 Class X-EXT (Interest Only) N/A 1.2% 31 3/15/2021 $ 443,622 $ 412,971 The following table summarizes CSMC 2014 USA's commercial mortgage pass-through certificates at September 30, 2020 (dollars in thousands): Classes Principal Balance Coupon Carrying Value Contractual Maturity Class A-1 $ 124,076 3.3% $ 124,648 9/11/2025 Class A-2 531,700 4.0% 541,905 3/15/2021 Class B 136,400 4.2% 122,802 9/11/2025 Class C 94,500 4.3% 80,348 9/11/2025 Class D 153,950 4.4% 117,058 9/11/2025 Class E 180,150 4.4% 122,585 9/11/2025 Class F 153,600 4.4% 96,808 9/11/2025 Class X-1 (Interest Only) N/A 0.5% 14,638 9/11/2025 Class X-2 (Interest Only) N/A 0.4% 2,697 9/11/2025 $ 1,374,376 $ 1,223,489 18


 
(16) Hedging Summary The following tables provide information on other derivative instruments as of September 30, 2020 ($ in thousands): Other Derivative Instruments Notional Amount Fair Value Credit default swaps, asset $ 2,030 $ 481 Total derivative instruments, assets 481 Credit default swaps, liability 4,140 (1,166) Total derivative instruments, liabilities (1,166) Total other derivative instruments, net $ (685) 19 Please refer to page 22 for footnote disclosures.


 
4th Quarter 2020 - 2021 Outlook The road ahead will be a long hard slog; ▪ Coronavirus-related growth setbacks have meaningfully reduced global and US growth ▪ Incipient global recovery appears to be gaining traction ▪ The medical battle will take time and prolonged efforts; recent developments are encouraging ▪ US and global inflation rates are expected to be very subdued ▪ Central banks will likely remain extraordinarily accommodative ▪ Fiscal policy will have to remain very supportive ▪ Even after recovery begins, central banks are expected to keep rates ultra low ▪ Spread products ultimately should be beneficiaries of the expected recovery 20


 
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. 21


 
Footnotes (1) As of September 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, CSMC 2014 USA, 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 September 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 September 30, 2020 includes $16.3 million of residential bridge loans carried at fair value and $1.5 million of residential bridge loans carried at amortized costs. (7) At September 30, 2020, the Company held a $51.1 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) 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. (10) The subordinate notes were retained by the Company. (11) Non-GAAP measure which includes net interest margin (as defined in footnote 11) and realized and unrealized gains or losses in the portfolio. (12) Non-GAAP measure which includes interest income on IO's and IIO's accounted for as derivatives and other income. (13) Convertible senior notes interest expense has been allocated based on fair value of investments at September 30, 2020. (14) Includes miscellaneous fees and interest on cash investments. (15) Non-GAAP measure which includes net unrealized losses on IO's and IIO's accounted for as derivatives. (16) 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. (17) The portfolio income attribution for securitized commercial loan is presented on a consolidated basis (18) GAAP book value and Economic book value for the three months ended June 30, 2020 was revised to reflect the under accrual of interest expense in the amount of $1.5 million. 22


 
Supplemental Information 23


 
Book Value Roll Forward September 30, 2020 June 30, 2020 Amounts in 000's Per Share Amounts in 000's Per Share GAAP Book Value at June 30, 2020 and March 31, 2020 $ 187,253 $ 3.15 $ 182,191 $ 3.41 Equity portion of our convertible senior unsecured notes 3,588 (0.01) — — Proceeds from At-the-Market(ATM) program, net — — 21,986 0.02 Common dividend (3,041) (0.05) — — 187,800 3.09 204,177 3.43 Portfolio Income Net Interest Margin 10,120 0.16 7,098 0.12 Realized gain (loss), net (374) (0.01) (20,147) (0.34) Net realized gain on debt extinguishment 1,258 0.02 — — Unrealized gain (loss), net 54,399 0.89 21,016 0.36 Net portfolio income 65,403 1.06 7,967 0.14 Financing transaction cost — — (20,540) (0.35) Operating expenses (2,711) (0.04) (1,260) (0.02) General and administrative expenses, excluding equity based compensation (2,498) (0.04) (2,836) (0.05) Provision for taxes (205) — (255) — GAAP Book Value at September 30, 2020 and June 30, 2020 $ 247,789 $ 4.07 $ 187,253 $ 3.15 Adjustments to deconsolidate VIEs and reflect the Company's interest in the securities owned Deconsolidation of VIEs assets (2,827,360) (46.48) (1,555,962) (26.17) Deconsolidation VIEs liabilities 2,705,246 44.48 1,486,107 25.00 Interest in securities of VIEs owned, at fair value 124,309 2.04 121,315 2.04 Economic Book Value at September 30, 2020 and June 30, 2020 $ 249,984 $ 4.11 $ 238,713 $ 4.02 24 Please refer to page 22 for footnote disclosures.


 
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