Western Asset Mortgage Capital Corporation

Welcome to Western Asset Mortgage Capital Corporation's second quarter 2022 earnings conference call. Today's call is being recorded and will be available for replay beginning at 5 o'clock p.m. Eastern Standard Time. Now, I'd like to turn the call over to Mr. Larry Clark, Investor Relations. Please go ahead, Mr. Clark.

Thank you, Anthony. I want to thank everyone for joining us today to discuss Western Asset Mortgage Capital Corporation's financial results for the second quarter of 2022. The company issued its earnings press release yesterday afternoon, and it's available in the investor relations section of the company's website. 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 are Bonnie Wanker-Cole, Chief Executive Officer, Bob Lehman, Chief Financial Officer, and Greg Handler, Chief Investment Officer. Before I begin, I'd like to remind everyone that yesterday the company announced that its board of directors has authorized a review of strategic alternatives for the company aimed at enhancing its shareholder value, which may include a sale or merger of the company. No assurance can be given that the review being undertaken will result in a sale, merger, or other transaction involving the company, and the company has not set a timetable for completion of the review process. The company does not intend to make any further statements regarding this process, unless and until a definitive agreement has been reached or until the process of exploring strategic alternatives has ended. Therefore, as a result of embarking upon this process, we will limit this call to our prepared remarks and will not be conducting a question and answer session during the call. I'll now 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 forecasts 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 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 Wontrakole. Bonnie?

Thank you, Larry, and welcome, everyone. Before I discuss our second quarter financial results, I'd like to say a few words about our board's decision to review strategic alternatives for the company. As many of you know, while we've continued to benefit from the global scale of our manager Western assets, we have always viewed the benefits of scale as essential for WMC to support our long-term goals of increasing value and liquidity for our shareholders. The primary way to achieve scale as a mortgage rate is to issue additional common equity, but our philosophy and practice has been to conduct equity offerings only at such times when they have not been materially dilutive to existing shareholders. The last time we issued any meaningful amount of equity was in the second quarter of 2019, when we raised nearly $50 million, which was done at a modest discount to our book value at that time. Unfortunately, when COVID hit the following spring, our portfolio experienced a significant decline in value and our stock price experienced an even greater decline relative to book value. Since then, our overarching goal has been to improve and stabilize our futures earnings power. Over the last two years, we have made significant progress by taking actions to improve our liquidity and balance sheet, and by shifting our investment focus towards residential real estate. Nonetheless, we do not see these positive actions being reflected in our stock price. Therefore, we believe that yesterday's announcement regarding our decision to review strategic alternatives is the best path forward towards unlocking shareholder value. and we are committed to analyzing alternatives that may involve a sale, merger, or other transaction involving the company. In the meantime, we will continue to run the company in a manner consistent with our goal of optimizing the value of our assets and achieving improved and stable earnings, which will in turn support our ability to pay an attractive dividend. We truly appreciate our shareholders who have remained with us through this challenging period, and we, as fellow shareholders, are excited to initiate this process. With that, I will now turn to our quarterly results. Our second quarter results continue to reflect the ongoing challenges of interest rate volatility and fluctuating asset values, which again translated into credit spread widening across our holdings. This market volatility put pressure on our GAAP book value per share, which declined 15% from the prior quarter, while economic book value per share declined 12.4%. However, we are pleased to report that we generated higher distributable earnings in the quarter, driven by higher net interest income from our larger residential loan portfolio and lower prepayments in that portfolio. On our last call, we shared our view that prepayment activity would moderate in the coming quarters. This indeed began to happen in the second quarter. We're also beginning to see the benefits of our transition to a residential investment focus. as the increase in our net interest income in the quarter was substantially driven by our deployment of incremental capital into residential assets. Consequently, our distributable earnings were $2.7 million, or 44 cents per share, in the second quarter, which represented an increase of $2.3 million from the first quarter. In addition, our earnings more than covered our dividend for the quarter, which is consistent with our goal of paying dividends that are supported by the long-term earnings power of the portfolio. During the second quarter, we continued to implement our strategic portfolio shift for the focus on residential real estate-related investments, as we acquired $293 million of residential whole loans in anticipation of executing our fourth whole loan securitization, which we completed in early July. Greg will provide more detail regarding the economics of the securitization in his remarks. We continue to strengthen our balance sheet during the quarter, selling approximately $42 million of investments, including non-agency RMBS and CMBS, as well as repurchasing another $7.2 million aggregate principal amount of our existing 2022 notes at an approximate premium to par value of 1%. We are confident that we have sufficient liquidity to retire the remaining $27 million of outstanding 2022 notes on or prior to their October maturity date. The ongoing market volatility, fueled by concerns of elevated inflation levels and rising interest rates, clearly put pressure on our asset values during the quarter. However, we were able to mitigate some of this pressure through our hedging strategies and remain comfortable with the overall credit quality of our portfolio. The residential loans that we target are rigorously underwritten and supported by significant homeowner equity, and the residential loan portfolio is performing as expected. In summary, we continue to take steps to resolve our challenged investments and to further strengthen our balance sheet and improve the earnings power of the portfolio. As always, we remain committed to building value for our shareholders. Now, I'll hand it over to Greg to go into more detail about the investment portfolio.