Western Asset Mortgage Capital Corporation

Welcome to Western Asset Mortgage Capital Corporation's third quarter of 2021 earnings conference call. Today's call is being recorded and will be available for replay beginning at 5 p.m. Eastern Standard Time. At this time, all participants have been placed in a listen-only mode, and the floor will be open for questions following the presentation. Now, first, I'd like to turn the call over to Mr. Larry Clark, Investor Relations. Please go ahead, Mr. Clark.

Thank you, Matt. I want to thank everyone for joining us today to discuss Western Asset Mortgage Capital Corporation's financial results for the third quarter of 2021. The company issued its earnings press release yesterday afternoon, and it's available in the investor relations section of the company's website at www.westernassetmcc.com. In addition, the company has included a slide presentation on the website that you can refer to during the call. With us today from our management team are Bonnie Wong-Terkul, Chief Executive Officer, Lisa Meyer, President and Chief Financial Officer, Greg Handler, Chief Investment Officer, and Shawn Johnson, Deputy Chief Investment Officer. Before we begin, I'd like to review the Safe Harbor Statement. This conference call will contain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are intended to be subject to the safe harbor protection provided by the Reform Act. Actual outcomes and results could differ materially from those forecast due to the impact of many factors beyond the control of the company. All forward-looking statements included in this presentation are made only as of the date of this presentation and are subject to change without notice. Certain factors that could cause actual results to differ materially from those contained in the forward-looking statements are included in the risk factors section of the company's reports filed with the SEC. We disclaim any obligation to update our forward-looking statements unless required by law. With that, I'll now turn the call over to Bonnie Wong Turcool. Bonnie?

Thank you, Larry, and welcome, everyone. I'm pleased to be joining WMC as its recently appointed CEO and look forward to meeting you in the weeks and months ahead. I'm no stranger to the company, as I was part of the portfolio management team during its early years as a public company. However, many of you may not know me, so I thought it appropriate to provide you some background on my tenure at Western Asset. I joined Western Asset in 2003 and have more than 18 years of fixed income investment management experience. I was a member of Western Asset's Mortgage and Consumer Credit team for 14 years, first as an analyst, then as a portfolio manager managing the firm's dedicated mortgage funds. My more recent roles at Western Asset include being a member of the firm's U.S. Broad Strategy Committee, as well as chairing the ESG Strategic Steering Committee. With respect to WMC, I have enjoyed partnering with both Greg Handler and Sean Johnson over the years, and look forward to working with them more closely again as part of the senior management team. I also want to congratulate Lisa Meyer in her expanded role as both President and CFO of WMC. Lisa has served as CFO and Treasurer since 2016 and brings more than 23 years of financial experience to the role. She has been a principal contributor to the company's financial and operating strategies, particularly as we continue to strengthen our balance sheet. At this time, I want to take a step back and review the proactive steps we have taken over the last 18 months to address the impact of the pandemic on our portfolio. Following the onset of the pandemic in the spring of last year, the resulting volatility in the equity and fixed income markets adversely impacted portions of our portfolio, which led us to take swift action to protect the portfolio, strengthen our balance sheets, and reduce overall risk. Our early actions involved significantly reducing our leverage, securing longer-term fixed-rate financing at attractive levels, reducing our reliance on short-term repurchase agreements, increasing our liquidity, and bolstering our common equity by selling new shares at a premium-to-book value. Over the course of 2020 and throughout this year, we have focused on strengthening our balance sheet, lowering recourse leverage, refinancing and extending our funding agreements, and improving the earnings power of the portfolio. To be specific, we have, number one, secured longer-term financing for our commercial and residential whole loan holdings at reduced rates, including a $356 million securitization of a large portion of our residential non-QM loans. Number two, recalibrated our dividend to better reflect the earnings profile of our portfolio. Number three, repurchased or retired approximately $159 million of our 2022 six and three quarter convertible senior notes at an average discount of 3.5%. And number four, issued $86 million of new convertible notes that mature in 2024. The combination of our new note issuance and the repurchase of our existing notes during the quarter enabled us to reduce our convertible debt by $36 million. which improves our ability to further execute on our investment strategy. These actions were driven by our commitment to protecting shareholder value and improving our earnings power. Turning to our investment activity, this year we have focused on residential non-QM originations, an area where we have deep experience and a solid track record. Western Asset has been investing in this sector since 2014, and WMC has not experienced any cumulative losses over the whole timeframe. We continue to view non-QM as an attractive bulk value proposition, and as of September 30th, 2021, have acquired more than $240 million of residential non-QM loans. Our residential portfolio has performed well this year, as the housing market and consumer balance sheets remain strong. While we expect housing price appreciation to moderate, we believe that housing market will remain well supported given favorable supply and demand dynamics and disciplined lender underwriting standards. Our commercial portfolio is also benefiting from the economic recovery and a more vibrant sales and refinance market. Aside from the two special situations that we have discussed in the past and have been diligently working through, most of our commercial investments continue to perform in line with our expectations for continued economic recovery. This year, we have received approximately $162 million in proceeds from payoffs in our commercial portfolio, including both full loans and non-agency CMVF investments. In the third quarter alone, we had five of these investments fully pay off, amounting to nearly $150 million in proceeds. We have used those proceeds to make new investments in non-QM loans and to pay down debt. Both Greg and Sean will discuss our portfolio strategy in more detail. But I will say that under current market conditions, going forward, we expect that our core investments will focus on high-quality residential non-QM investments, complemented by select commercial investments that are backed by solid properties and seasoned sponsors. We believe that this portfolio mix will enable us to maintain our current relatively low leverage and enhance our ability to return to generating sustainable earnings that support an attractive dividend. with the overall goal of protecting and improving value for the benefit of our shareholders. Now, I'll hand it over to Sean and Greg to go into more detail about the investment portfolio. Sean?