Western Asset Mortgage Capital Corporation

Welcome to the Western Asset Mortgage Capital Corporation's fourth quarter and full year 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 your 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, Tom. I want to thank everyone for joining us today to discuss Western Asset Mortgage Capital Corporation's financial results for the fourth quarter and full year 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's included a slide presentation on the website that you can refer to during the call. With us today for management are Bonnie Wonterkuhl, Chief Executive Officer, Lisa Meyer, President and Chief Financial Officer, Greg Handler, Chief Investment Officer, and Sean 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 are included in the Risk Factor section of the company's reports filed with the SEC. We just claim any obligation to update our forward-looking statements unless required by law. With that, I'll now turn the call over to Bonnie Wontrakul. Bonnie?

Thank you, Larry, and welcome, everyone. As you know, we announced last December that going forward, We plan to focus on residential real estate-related investments and to transition out of the commercial investments in our portfolio. We expect this transition to occur over the next 12 to 18 months. We believe this focus will allow us to address attractive market opportunities while maintaining alignment with Western Asset's core competencies. Investing in residential non-QM whole loans is an area where we have deep experience and a solid track record. Western has been investing in this sector since 2014, and WMC has not experienced any cumulative losses over this timeframe. During the fourth quarter, we continued to implement our strategic shift by acquiring approximately $185 million of residential whole loans, extending the maturity of our residential whole loan facility, and exiting $27.5 million of our non-agency CMBS investments. In addition, we repurchased an additional $8 million of our 2022 convertible notes and bought back approximately 480,000 shares of our common stock at a significant discount to book value. In February, we completed our third securitization of approximately $400 million, backed by $432 million of residential whole loans. This securitization enabled us to lock in long-term fixed rate financing and an attractive weighted average interest rate of 3.1%, which we believe was the right move given the market expectation for short-term interest rates to rise in 2022. In addition, in February, we reached a successful resolution on one of our challenged investments. Specifically, we sold the unencumbered hotel property we foreclosed on in 2021. We received $36 million in net proceeds and estimate we will record a $6.7 million gain on sale of the property. We are in the process of redeploying the proceeds, which we anticipate will be a combination of investing in our target assets, retiring a portion of the remaining outstanding principal amount of our 2022 convertible notes, and repurchasing our common stock. We anticipated that as we transitioned and repositioned our portfolio, There could be timing issues that would impact the near-term earnings power of our portfolio. This was the case in the fourth quarter, as our earnings were negatively impacted by several factors. First, relating to the transition, we had lower net interest income for the quarter as we exited $157 million of commercial real estate investments in the third quarter, we incurred incremental expenses associated with the ownership and sale of the hotel property, and we placed one investment in our non-agency CMBS portfolio on non-accrual status. Second, we experienced elevated prepayment activity on a residential whole loan portfolio. And third, market conditions in the fourth quarter were challenging due to higher interest rate volatility and fluctuating asset values. The combination of these factors resulted in a GAAP net loss of $12.1 million, or $0.20 per share, Distributable earnings of $908,000, or one cent per share, and a decrease in our gap book value per share of 7.2% from the third quarter. While this was clearly a challenging quarter, we remain committed to growing our portfolio and protecting shareholder value. We are confident that we are taking the necessary steps to resolve our challenged investments, strengthen our balance sheet, and improve the earnings power of the portfolio. in order to generate sustainable earnings that support an attractive dividend. Now, I'll hand it over to Sean and Greg to go into more detail about the investment portfolio. Sean?