FORWARD-LOOKING INFORMATION
The Company makes forward-looking statements herein and will make forward-looking statements in future filings with theSecurities and Exchange Commission (the "SEC"), press releases or other written or oral communications within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). 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 ongoing impact of the COVID-19 pandemic onthe United States economy, the mortgage finance markets and the broader financial markets. There is still uncertainty around the severity and duration of the pandemic domestically and internationally, as well as uncertainty around the efficacy of Federal, State and local governments' efforts to contain the spread of COVID-19 and respond to its direct and indirect impacts on many aspects of Americans' lives and economic activity. These forward-looking statements include information about possible or assumed future results of the Company's business, financial condition, liquidity, results of operations, plans and objectives. When the Company uses the words "believe," "expect," "anticipate," "estimate," "plan," "continue," "intend," "should," "may" or similar expressions, the Company intends to identify forward-looking statements. Statements regarding the following subjects, among others, may be forward-looking: market trends in the Company's industry, interest rates, real estate values, the debt securities markets, theU.S. housing and theU.S. and foreign commercial real estate markets or the general economy or the market for residential and/or commercial mortgage loans; the Company's business and investment strategy; the Company's projected operating results; changes in interest rates and the market value of the Company's target assets; credit risks; servicing-related risks, including those associated with foreclosure and liquidation; the state of theU.S. and to a lesser extent, international economy generally or in specific geographic regions; economic trends and economic recoveries; the Company's ability to obtain and maintain financing arrangements, including under the Company's repurchase agreements, a form of secured financing, and securitizations; the current potential return dynamics available in residential mortgage-backed securities ("RMBS"), and commercial mortgage-backed securities ("CMBS" and collectively with RMBS, "MBS"); the level of government involvement in theU.S. mortgage market; the anticipated default rates on CMBS and Commercial Loans; the loss severity on Non-Agency MBS; the general volatility of the securities markets in which the Company participates; changes in the value of the Company's assets; the Company's expected portfolio of assets; the Company's expected investment and underwriting process; interest rate mismatches between the Company's target assets and any borrowings used to fund such assets; changes in prepayment rates on the Company's target assets; effects of hedging instruments on the Company's target assets; rates of default or decreased recovery rates on the Company's target assets; the degree to which the Company's hedging strategies may or may not protect the Company from interest rate volatility; the impact of and changes in governmental regulations, tax law and rates, accounting guidance and similar matters; the Company's ability to maintain the Company's qualification as a real estate investment trust forU.S. federal income tax purposes; the Company's ability to maintain its exemption from registration under the Investment Company Act of 1940, as amended (the "1940 Act"); the availability of opportunities to acquire Agency RMBS, Non-Agency RMBS, CMBS, Residential and Commercial Whole Loans, Residential and Commercial Bridge Loans and other mortgage assets; the availability of qualified personnel; estimates relating to the Company's ability to make distributions to its stockholders in the future; the Company's understanding of its competition; the uncertainty and economic impact of pandemics, epidemics or other public health emergencies, such as the ongoing outbreak of COVID-19; and the Manager's expectations regarding COVID-19 recovery. The forward-looking statements are based on the Company's beliefs, assumptions and expectations of its future performance, taking into account all information currently available to it. Forward-looking statements are not predictions of future events. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to the Company. Some of these factors, are described in "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" herein and in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 , filed with theSEC onMarch 8, 2022 . These and other risks, uncertainties and factors, including those described in the annual, quarterly and current reports that the Company files with theSEC , could cause its actual results to differ materially from those included in any forward-looking statements the Company makes. All forward-looking statements speak only as of the date they are made. New risks and uncertainties arise over time and it is not possible to predict those events or how they may affect the Company. Except as required by law, the Company is not obligated to, and does not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 44
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Table of Contents OverviewWestern Asset Mortgage Capital Corporation , aDelaware corporation, and its subsidiaries (the "Company" unless otherwise indicated or except where the context otherwise requires "we," "us" or "our") commenced operations inMay 2012 , focused on investing in, financing and managing a portfolio of real estate related securities, Whole Loans and other financial assets, which we collectively refer to as our target assets. We are externally managed byWestern Asset Management Company, LLC (our "Manager") pursuant to the terms of a management agreement. We conduct our operations to qualify and be taxed as a real estate investment trust, or REIT, forU.S. federal income tax purposes. Accordingly, we generally will not be subject toU.S. federal income taxes on our taxable income that we distribute currently to our stockholders as long as we maintain our intended qualification as a REIT. However, certain activities that we may perform may cause us to earn income which will not be qualifying income for REIT purposes. We have designated a subsidiary as a taxable REIT subsidiary, or TRS, to engage in such activities. We also intend to operate our business in a manner that permits us to maintain our exemption from registration under the 1940 Act. Our common stock is traded on theNew York Stock Exchange , or the NYSE, under the symbol "WMC." Our objective is to provide attractive risk adjusted returns to our stockholders primarily through an attractive dividend, which we intend to support with sustainable distributable earnings (which we previously referred to as core earnings), as well as the potential for higher returns through capital appreciation. Our investment strategy is based on our Manager's perspective of which mix of our target assets it believes provides us with the best risk-reward opportunities at any given time. We also deploy leverage as part of our investment strategy to increase potential returns.
Our Investment Strategy
Our Manager's investment philosophy, which developed from a singular focus in fixed-income asset management over a variety of credit cycles and conditions, is to provide clients with a long-term value-oriented portfolio. We benefit from the breadth and depth of our Manager's overall investment philosophy, which focuses on a macroeconomic analysis as well as an in-depth analysis of individual assets and their relative value. In making investment decisions on our behalf, our Manager seeks to identify assets across the broad mortgage universe with attractive risk adjusted returns, which incorporates its view on the outlook for the mortgage markets, including relative valuation, supply and demand trends, the level of interest rates, the shape of the yield curve, prepayment rates, financing and liquidity, residential real estate prices, delinquencies, default rates, recovery of various segments of the economy and vintage of collateral, subject to maintaining our REIT qualification and our exemption from registration under the 1940 Act. InDecember 2021 , we announced that our investment strategy will focus on residential real estate-related investments, including but not limited to non-qualified mortgage loans, Non-Agency RMBS, and other related investments. We believe this focus will allow us to address attractive market opportunities while maintaining alignment with our Manager's core competencies. The portfolio transition is expected to be accomplished over the next 15 months. We plan to transition out of the commercial investments in our portfolio, though we may from time to time make commercial investments on an opportunistic basis.
Our Target Assets
Residential Whole Loans. - Residential Whole Loans are mortgages secured by single family residences held directly by us or through consolidated trusts with us holding the beneficial interest in the trusts. Our Residential Whole Loans are mainly adjustable rate mortgages that do not qualify for theConsumer Finance Protection Bureau's (orCFPB ) safe harbor provision for "qualified mortgages" ("Non-QM mortgages"). Our Manager's review, relating to Non-QM mortgages, includes an analysis of the loan originator's procedures and documentation for compliance with Ability to Repay requirements. As discussed in Note 7 "Financing," we have and may continue to securitize Whole Loan interests, selling more senior interests in the pool of loans and retaining residual portions. The characteristics of our Residential Whole Loans may vary going forward. Non-Agency RMBS. - RMBS that are not guaranteed by aU.S. Government agency orU.S. Government -sponsored entity. The mortgage loan collateral for Non-Agency RMBS consists of residential mortgage loans that do not generally conform to underwriting guidelines issued by aU.S. Government agency orU.S. Government -sponsored entity due to certain factors, including mortgage balances in excess of Agency underwriting guidelines, borrower characteristics, loan characteristics and/or level of documentation, and therefore are not issued or guaranteed by aU.S. Government agency orU.S. Government - 45
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sponsored entity. The mortgage loan collateral may be classified as subprime, Alternative-A or prime depending on the borrower's credit rating and the underlying level of documentation. Non-Agency RMBS collateral may also include reperforming loans, which are conventional mortgage loans that were current at the time of the securitization, but had been delinquent in the past. Non-Agency RMBS may be secured by fixed-rate mortgages, adjustable-rate mortgages or hybrid adjustable-rate mortgages. Agency RMBS. - Agency RMBS, which are RMBS for which the principal and interest payments are guaranteed by aU.S. Government agency, such as theGovernment National Mortgage Association ("GNMA" or "Ginnie Mae"), or aU.S. Government -sponsored entity ("GSE"), such as the Federal National Mortgage Association ("FNMA" or "Fannie Mae") or the Federal Home Loan Mortgage Corporation ("FHLMC" or "Freddie Mac"). The Agency RMBS we acquire can be secured by fixed-rate mortgages, adjustable-rate mortgages or hybrid adjustable-rate mortgages. Fixed-rate mortgages have interest rates that are fixed for the term of the loan and do not adjust. The interest rates on adjustable-rate mortgages generally adjust annually (although some may adjust more frequently) to an increment over a specified interest rate index. Hybrid adjustable-rate mortgages have interest rates that are fixed for a specified period of time (typically three, five, seven or ten years) and, thereafter, adjust to an increment over a specified interest rate index. Adjustable-rate mortgages and hybrid adjustable-rate mortgages generally have periodic and lifetime constraints on the amount by which the loan interest rate can change on any predetermined interest rate reset date. These investments can be in the form of pools, TBA and CMO (including interest only, principal only or other structures). GSE Risk Sharing Securities Issued by Fannie Mae and Freddie Mac. - From time to time we have and may in the future continue to invest in risk sharing securities issued by Fannie Mae and Freddie Mac. Principal and interest payments on these securities are based on the performance of a specified pool of Agency residential mortgages. The payments due on these securities, however, are not secured by the referenced mortgages. The payments due are full faith and credit obligations of Fannie Mae or Freddie Mac respectively, but neither agency guarantees full payment of the underlying mortgages. Investments in these securities generally are not qualifying assets for purposes of the 75% real estate asset test applicable to REITs and generally do not generate qualifying income for purposes of the 75% real estate income test applicable to REITs. As a result, we may be limited in our ability to invest in such assets. Other investments. - In addition to Residential Whole Loans and Non-Agency RMBS, our current target investments, we may also make investments in Commercial Loans and Non-Agency CMBS and other securities on an opportunistic basis, which our Manager believes will assist us in meeting our investment objective and are consistent with our overall investment policies. These investments will normally be limited by the REIT requirements that 75% our assets be real estate assets and that 75% of our income be generated from real estate, thereby limiting our ability to invest in such assets.
Our Investment Portfolio
Our investment strategy will focus on residential real estate related investments, including but not limited to non-qualified mortgage loans, Non-Agency RMBS and other related investments. The portfolio transition is expected to be accomplished over 15 months.
Our investment portfolio composition at
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Table of Contents [[Image Removed: wmc-20220331_g2.jpg]] Our Financing Strategy During 2020, the uncertainties created by the COVID-19 pandemic made it challenging to obtain financing arrangements on favorable terms. In the latter part of 2020 and the beginning of 2021, terms for financing arrangements have improved significantly. As a result, we diversified our financing sources to provide an alternative to short-term repurchase agreements with daily margin requirements. We expect to continue to seek financing arrangements without daily margin requirements or with margin requirements that apply only after a significant reduction in the valuation of the assets financed, including but not limited to repurchase agreements, term financing, securitization and convertible senior unsecured notes, as the market permits. We believe the amount of leverage we use is consistent with our intention of keeping total borrowings within a prudent range, as determined by our Manager, taking into account a variety of factors such as general economic, political and financial market conditions, the anticipated liquidity and price volatility of our assets, the availability and cost of financing the assets, the creditworthiness of financing counterparties and the health of theU.S. residential and commercial mortgage markets. We expect to maintain a debt-to-equity ratio of two to four and a half times the amount of our stockholders' equity, depending on our investment composition. We seek to enhance equity returns by effectively utilizing leverage and seeking to limit our exposure to interest rate volatility and daily margin calls. The following table presents our debt-to-equity ratio onMarch 31, 2022 andDecember 31, 2021 : (dollars in thousands) March 31, 2022 December 31, 2021 Total debt(1) $ 458,727 $ 736,357 Total equity $ 165,006 $ 193,109 Debt-to-equity ratio 2.8 3.8
(1) Total debt excludes the securitized debt which is non-recourse to us.
Our Hedging and Risk Management Strategy
Our overall portfolio strategy is designed to generate attractive returns to our investors through various economic cycles. In connection with our risk management activities, we may enter into a variety of derivative and non-derivative instruments. When purchased, our primary objective for acquiring these derivatives and non-derivative instruments is to mitigate our exposure to future events that are outside our control. Our derivative instruments are designed to mitigate the 47
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effects of market risk and cash flow volatility associated with interest rate risk, including prepayment risk. As part of our hedging strategy, we may enter into interest rate swaps, including forward starting swaps, interest rate swaptions,U.S. Treasury options, future contracts, TBAs, credit default swaps, forwards and other similar instruments. There can be no assurance that appropriate hedging strategies will be available or that if implemented they will be successful. Critical Accounting Policies The consolidated financial statements include our accounts, those of our wholly-owned subsidiaries and certain VIEs in which we are the primary beneficiary. All intercompany amounts have been eliminated in consolidation. In accordance with GAAP, our consolidated financial statements require the use of estimates and assumptions that involve the exercise of judgment and use of assumptions as to future uncertainties. Our most critical accounting policies will involve decisions and assessments that could affect our reported assets and liabilities, as well as our reported revenues and expenses. We believe that all of the decisions and assessments upon which our consolidated financial statements have been based were reasonable at the time made and based upon information available to us at that time. There have been no significant changes to our critical accounting policies that are disclosed in our most recent Annual Report on Form 10-K for the year endedDecember 31, 2021 .
2022 Activity
Investment Activity
We continually evaluate potential investments and our investment selection is based on supply and demand of our target assets, costs of financing, and the expected future interest rate volatility costs of hedging. During the three months endedMarch 31, 2022 , we acquired$119.1 million of Residential Whole Loans and$40.0 million of Non-Agency RMBS. Also,we along with the other investors sold a Commercial REO for total proceeds of$54.7 million .
The following table presents our investing activity for the three months ended
Balance at Balance atDecember 31 ,
Loan Modification/Capitalized Principal Payments Proceeds from
Realized Unrealized Premium and discount Investment Type 2021 Purchases Interest and Basis Recovery Sales Transfers to REO Gain/(Loss) Gain/(loss) amortization, netMarch 31, 2022 Agency RMBS and Agency RMBS IOs$ 1,172 $ - N/A $ (76) $ - N/A $ -$ (156) $ -$ 940 Non-Agency RMBS 27,769 39,952 N/A (187) - N/A - (3,425) 102 64,211 Non-Agency CMBS 105,358 - N/A (644) - N/A - 974 (402) 105,286 Other securities(1) 51,648 - N/A - - N/A - (2,374) (234) 49,040 Total MBS and other securities 185,947 39,952 N/A (907) - N/A - (4,981) (534) 219,477 Residential Whole Loans 1,023,502 119,093 64 (95,569) - - - (41,843) (2,537) 1,002,710 Residential Bridge Loans 5,428 - - (105) - - - 27 - 5,350 Commercial Loans 130,572 - - (4) - - - (2,073) - 128,495 Securitized commercial loans 1,355,808 - - - - - - (73,564) 6,699 1,288,943 REO 43,607 - N/A - (54,681) - 12,198 - N/A 1,124 Total Investments$ 2,744,864 $ 159,045 $ 64 $ (96,585)$ (54,681) $ -$ 12,198 $ (122,434) $ 3,628$ 2,646,099
(1) Other securities include
Portfolio Characteristics
Residential Real Estate Investments
Residential Whole Loans
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The Residential Whole Loans have low LTV's and are comprised of 2,505 Non-QM adjustable rate mortgages and six investor fixed rate mortgages. The following table presents certain information about our Residential Whole Loans investment portfolio atMarch 31, 2022 (dollars in thousands): Weighted Average Contractual Principal Original Expected Maturity Coupon Current Coupon Rate Number of Loans Balance Original LTV FICO Score(1) Life (years) (years) Rate 2.01% - 3.00% 40$ 20,896 54.2 % 751 6.5 29.0 2.9 % 3.01% - 4.00% 543 266,264 61.1 % 744 4.4 27.9 3.7 % 4.01% - 5.00% 1,232 453,466 55.1 % 752 4.1 27.2 4.6 % 5.01% - 6.00% 668 260,311 63.8 % 741 3.7 26.7 5.4 % 6.01% - 7.00% 26 9,320 67.8 % 725 3.8 25.6 6.3 % 7.01% - 8.00% 2 430 73.7 % 748 3.2 26.5 7.1 % Total 2,511$ 1,010,687 59.0 % 747 4.1 27.3 4.5 %
(1)The original FICO score is not available for 249 loans with a principal
balance of approximately
Residential Bridge Loans
We are no longer allocating capital to Residential Bridge Loans. The following table presents certain information about the remaining eightResidential Bridge Loans left in the portfolio atMarch 31, 2022 (dollars in thousands): Weighted Average Contractual Principal Maturity Coupon Current Coupon Rate Number of Loans Balance Original LTV (months)(1) Rate 7.01% - 9.00% 3$ 2,946 70.4 % 0.0 8.8 % 9.01% - 11.00% 3 2,288 77.0 % 0.0 10.5 % 11.01% - 13.00% 2 495 69.7 % 0.0 11.4 % Total 8$ 5,729 73.0 % 0.0 9.7 % (1) Non-performing loans that are past their maturity date are excluded from the calculation of the weighted average contractual maturity. The weighted average contractual maturity for these loans is zero.
Non-performing Residential Loans
The following table presents the aging of the Residential Whole Loans and Bridge
Loans as of
Residential Whole Loans Bridge Loans No of Loans Principal Fair Value No of Loans Principal Fair Value Current 2,479$ 994,489 $ 986,712 1$ 849 $ 859 1-30 days 16 7,247 7,250 1 75 75 31-60 days 2 824 766 - - - 61-90 days 1 536 509 - - - 90+ days 13 7,591 7,473 6 4,805 4,416 Total 2,511$ 1,010,687 $ 1,002,710 8$ 5,729 $ 5,350
Residential Whole Loans in Non-Accrual Status
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Table of Contents As ofMarch 31, 2022 , there were 13 Non-QM loans carried at fair value in non-accrual status with an unpaid principal balance of approximately$7.6 million and a fair value of$7.5 million . These nonperforming loans represent approximately 0.8% of the total outstanding principal balance. No allowance or provision for credit losses was recorded as of and for the three months endedMarch 31, 2022 since the valuation adjustment, if any, would be reflected in the fair value of these loans. We stopped accruing interest income for these loans when they became contractually 90 days delinquent. As ofMarch 31, 2022 , there were six Residential Bridge Loans carried at fair value in non-accrual status with an unpaid principal balance of approximately$4.8 million and a fair value of$4.4 million . No allowance and provision for credit losses was recorded for loans carried at fair value as of and for the three months endedMarch 31, 2022 since valuation adjustments, if any, would be reflected in the fair value of these loans. We stopped accruing interest income for these loans when they became contractually 90 days delinquent. As ofMarch 31, 2022 , we had four real estate owned ("REO") properties with an aggregate carrying value of$1.1 million related to foreclosed Bridge Loans. The REO properties are held for sale and accordingly carried at the lower of cost or fair value less cost to sell. The REO properties are classified in "Other assets" in the Consolidated Balance Sheet.
Non-Agency RMBS
The following table presents the fair value and weighted average purchase price for each of our Non-Agency RMBS categories, including IOs accounted for as derivatives, together with certain of their respective underlying loan collateral attributes and current performance metrics as ofMarch 31, 2022 (fair value dollars in thousands): Weighted Average Purchase Original 60+ Day Category Fair Value Price Life (Years) Original LTV FICO Delinquent CPR Prime$ 44,095 $ 91.87 9.6 46.4 % 535 0.9 % 15.5 % Alt-A 20,116 65.31 19.1 69.9 % 641 14.4 % 13.3 % Total$ 64,211 $ 83.55 12.6 53.7 % 568 5.1 % 14.8 % Agency RMBS Portfolio
The following table summarizes our Agency portfolio by investment category as of
Net Weighted Principal Balance Amortized Cost Fair Value Average Coupon Agency RMBS IOs and IIOs (1) N/A $ 55$ 62 1.1 % Agency RMBS IOs and IIOs accounted for as derivatives (1) N/A N/A 878 1.8 % Total Agency RMBS - 55 940 1.7 % Total $ - $ 55$ 940 1.7 %
(1)IOs and IIOs have no principal balances and bear interest based on a notional balance. The notional balance is used solely to determine interest distributions on the interest-only class of securities.
Commercial Real Estate Investments
With the new focus on residential real estate related investments, we plan to transition out of commercial real estate investments over the next 15 months.
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The following table presents certain characteristics of our Non-Agency CMBS
portfolio as of
Principal Weighted Average Type Vintage Balance Fair Value Life (Years) Original LTV Conduit: 2006-2009$ 164 $ 159 1.9 83.7 % 2010-2020 78,776 21,691 4.4 62.8 % 78,940 21,850 4.4 62.9 % Single Asset: 2010-2020 100,034 83,436 1.7 65.3 % Total$ 178,974 $ 105,286 2.2 64.8 %
Commercial Real Estate Investments
The following table presents our commercial loan investments as of
Principal Loan Loan Type Balance Fair Value Original LTV Interest Rate Maturity Date Extension Option Collateral Geographic Location CRE 3 Interest-Only Mezzanine$ 90,000 $ 27,060 58% 1-Month LIBOR plus 9.25%6/29/2021 None(1) Entertainment and Retail NJ loan CRE 4 Interest-Only First 38,367 38,229 63% 1-Month LIBOR plus 3.02%8/6/2022 A One-Year Extensions Retail CT Mortgage CRE 5 Interest-Only First 24,535 24,242 62% 1-Month LIBOR plus 3.75%11/6/2022 Two One-Year Extensions Hotel NY Mortgage CRE 6 Interest-Only First 13,207 13,049 62% 1-Month LIBOR plus 3.75%11/6/2022 Two One-Year Extensions Hotel CA Mortgage CRE 7 Interest-Only First 7,259 7,172 62% 1-Month LIBOR plus 3.75%11/6/2022 Two One-Year Extensions Hotel IL, FL Mortgage CRE 8 Interest-Only First 4,425 4,381 79% 1-Month LIBOR plus 4.85%12/6/2022 None Assisted Living Facilities FL Mortgage SBC 3 Interest-Only First 14,362 14,362 49% 1-Month LIBOR plus 4.10%7/6/2022 None CT Mortgage Nursing Facilities$ 192,155 $ 128,495
(1) CRE 3 is in default and not eligible for extension.
Non-Performing Commercial Loans
The COVID-19 pandemic has adversely impacted a broad range of industries in which our commercial loan borrowers operate and could impair their ability to fulfill their financial obligations to us, most significantly retail and hospitality asset. All but the one loan discussed below remain current.
CRE 3 Loan
As ofMarch 31, 2022 , the CRE 3 junior mezzanine loan with an outstanding principal balance of$90.0 million secured by a retail facility was non-performing and past its maturity date ofJune 29, 2021 . We were receiving interest payments on this loan from a reserve that was exhausted inMay 2021 . We are currently in discussions with the borrower and 51
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certain other lenders regarding alternatives to address the situation which might include modifications of loan terms, deferral of payments and the funding of new advances. There can be no assurance that these discussions will result in an outcome in which we would be repaid any amount of the loan and we may suffer further declines in fair value with respect to the mezzanine investment. We could experience a total loss of our investment under various scenarios, which at current levels would result in a$27.1 million reduction in the Company's book value. Refer to Note 6 - "Commercial Loans" for details.
The following table presents the aging of the Commercial Loans as of
Commercial Loans No of Loans Principal Fair Value Current 6$ 102,155 $ 101,435 1-30 days - - - 31-60 days - - - 61-90 days - - - 90+ days 1 90,000 27,060 Total 7$ 192,155 $ 128,495
Commercial Real Estate Owned
InFebruary 2022 , we and the other investors sold the unencumbered hotel property for$55.9 million which was foreclosed on in the third quarter of 2021. We and the other investors fully recovered our aggregate initial investment of$42.0 million . We recognized a gain on sale of approximately$12.2 million .
Geographic Concentration
The mortgages underlying our Non-Agency RMBS and Non-Agency CMBS are located in various states acrossthe United States and other countries. The following table presents the five largest concentrations by location for the mortgages collateralizing our Non-Agency RMBS and Non-Agency CMBS as ofMarch 31, 2022 , based on fair value (dollars in thousands): Non-Agency RMBS Non-Agency CMBS Concentration Fair Value Concentration Fair Value California 37.2 %$ 23,890 California 36.4 %$ 38,343 Florida 14.6 % 9,402 Nevada 18.5 % 19,468 New York 7.2 % 4,628 Bahamas 13.7 % 14,420 New Jersey 3.8 % 2,425 Delaware 5.2 % 5,474 Texas 3.7 % 2,363 Texas 4.1 % 4,298 The following table presents the various states acrossthe United States in which the collateral securing our Residential Whole Loans andResidential Bridge Loans atMarch 31, 2022 , based on principal balance, is located (dollars in thousands): Residential Whole Loans Residential Bridge Loans State Principal State Principal Concentration Balance Concentration Balance California 69.6 %$ 703,135 New York 45.9 %$ 2,631 New York 12.6 % 127,581 California 30.6 % 1,754 Georgia 3.3 % 33,024 Florida 19.6 % 1,125 Texas 2.9 % 29,139 New Jersey 3.9 % 219 Florida 2.7 % 27,221 Total 100.0 % 5,729 Other 8.9 % 90,587 Total 100.0 %$ 1,010,687 52
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Table of Contents Financing Activity
We will look to continue to expand and diversify our financing sources, especially those sources that provide an alternative to short-term repurchase agreements with daily margin requirements.
Repurchase Agreements
Our repurchase agreements bear interest at a contractually agreed-upon rate and have terms ranging from one month to 12 months. Our counterparties generally require collateral in excess of the loan amount, or haircuts. As ofMarch 31, 2022 , the contractual haircuts required under repurchase agreements on our investments were as follows: Minimum Maximum Short-Term Borrowings Agency RMBS IOs 33% 37% Non-Agency RMBS 13% 61% Residential Whole Loans 21% 21% Residential Bridge Loans 18% 18% Commercial Loans 55% 55% Other Securities 63% 65% Long-Term Borrowings Non-Agency CMBS and Non-Agency RMBS Facility Non-Agency RMBS 25% 25% Non-Agency CMBS 30% 30% Other Securities 25% 30% Residential Whole Loan Facility Residential Whole Loans(1) 10% 10% Commercial Whole Loan Facility Commercial Loans(2) 22% 31%
(1) The haircut is based on 10% of the outstanding principal amount of the Residential Whole Loans. (2) Each Commercial Loan is financed separately under this facility and the haircuts are dependent on the type of collateral.
Convertible Senior Unsecured Notes
During the quarter endedMarch 31, 2022 , we repurchased$3.4 million aggregate principal amount of the 2022 Notes at an approximate 0.8% premium to par value, plus accrued and unpaid interest.
Securitized Debt
InFebruary 2022 , we completed a residential mortgage-backed securitization.The Arroyo Trust 2022 issued$398.9 million of mortgage-backed notes and we retained the subordinate non-offered securities in the securitization, which include the Class B, Class A-IO-S and Class XS certificates. These non-offered securities were eliminated in the consolidation. As ofMarch 31, 2022 , Residential Whole Loans, with an outstanding principal balance of approximately$415.2 million , serve as collateral for theArroyo Trust 2022's securitized debt. 53
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Table of Contents Outstanding Borrowings Repurchase Agreements
At
Weighted Average Interest Rate on
Repurchase Agreement Borrowings Outstanding at end Weighted Average Securities Pledged Borrowings of period Remaining Maturity (days) Short-Term Borrowings: Agency RMBS $ 354 1.13 % 32 Non-Agency RMBS(1) 54,388 2.33 % 11 Residential Whole Loans (2) 1,322 2.95 % 28 Residential Bridge Loans (2) 4,231 2.95 % 28 Commercial Loans (2) 6,463 3.56 % 28 Other Securities 2,410 3.49 % 18 Total short term borrowings 69,168 2.53 % 15 Long Term Borrowings: Non-Agency CMBS and Non-Agency RMBS Facility Non-Agency CMBS (1) 56,486 2.14 % 35 Non-Agency RMBS 16,451 2.15 % 35 Other Securities 27,506 2.22 % 35 Subtotal 100,443 2.17 % 35 Residential Whole Loan Facility Residential Whole Loans (2) 109,111 2.25 % 218 Commercial Whole Loan Facility Commercial Loans 63,658 2.27 % 178 Total long term borrowings 273,212 2.22 % 141 Repurchase agreements borrowings $ 342,380 2.29 % 116 Less unamortized debt issuance costs - N/A N/A Repurchase agreement borrowings, net $ 342,380 2.29 % 116 (1)Includes repurchase agreement borrowings on securities eliminated upon VIE consolidation. (2)Repurchase agreement borrowings on loans owned are through trust certificates. The trust certificates are eliminated in consolidation.
At
(dollars in thousands) Amount Percent of Total Amount Company Investments Repurchase Agreement Counterparties Outstanding Outstanding Held as Collateral Counterparty Rating(1) Credit Suisse AG, Cayman Islands Branch (2)$ 207,753 60.7 % $ 241,846 A+ Citigroup Global Markets Inc. 100,443 29.3 % 173,733 A+ RBC Capital Markets LLC 19,405 5.7 % 22,349 AA- Nomura Securities International, Inc. (3) 12,016 3.5 % 21,092 Unrated (3) All other counterparties (4) 2,763 0.8 % 6,956 Total$ 342,380 100.0 % $ 465,976 54
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(1)The counterparty ratings presented above are the long-term issuer credit ratings as rated atMarch 31, 2022 by S&P. (2)Includes master repurchase agreements in which the buyer includesAlpine Securitization LTD. , a Credit Suisse sponsored asset-backed commercial paper conduit. (3) Nomura Holdings, Inc., the parent company ofNomura Securities International, Inc. , is rated BBB+ by S&P atMarch 31, 2022 . (4) Represents amount outstanding with two counterparties, which each holds collateral valued less than 5% of our stockholders' equity as security for our obligations under the applicable repurchase agreements as ofMarch 31, 2022 .
The following table presents our average repurchase agreement borrowings,
excluding unamortized debt issuance costs, by type of collateral pledged for the
three months ended
Collateral Three Months Ended March 31, 2022 Agency RMBS $ 850 Non-Agency RMBS(1) 56,798 Non-Agency CMBS(1) 71,803 Residential Whole Loans 201,228 Commercial loans 65,272 Residential Bridge Loans 5,625 Other securities 36,343 Total $ 437,919 Maximum borrowings during the period(2) $ 613,518 (1)Includes repurchase agreement borrowings on securities eliminated upon VIE consolidation. (2)Amount represents the maximum borrowings at month-end during each of the respective periods.
Repurchase Agreements Financial Metrics
Certain of our financing agreements provide the counterparty with the right to terminate the agreement and accelerate amounts due under the associated agreement if we do not maintain certain financial metrics. Although specific to each financing arrangement, typical financial metrics include minimum equity and liquidity requirements, leverage ratios, and performance triggers. In addition, some of the financing arrangements contain cross-default features, whereby default under an agreement with one lender simultaneously causes default under agreements with other lenders. with borrowings outstanding as ofMarch 31, 2022 . We complied with the terms of such financial metrics as ofMarch 31, 2022 .
Securitized Debt
Residential Mortgage-Backed Notes
The following table summarizes the consolidated
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Table of Contents Classes Principal Balance Coupon Carrying Value Contractual Maturity
Issued Mortgage-Backed Notes Class A-1 $ 234,900 3.3%$ 234,900 4/25/2049 Class A-2 12,598 3.5% 12,598 4/25/2049 Class A-3 19,959 3.8% 19,959 4/25/2049 Class M-1 25,055 4.8% 25,055 4/25/2049 Subtotal $ 292,512$ 292,512 Less: Unamortized deferred financing costs N/A 3,280 Total $ 292,512$ 289,232 Arroyo Trust 2020
The following table summarizes the consolidated
Classes Principal Balance Coupon Carrying Value Contractual Maturity Issued Mortgage-Backed Notes Class A-1A $ 96,193 1.7%$ 96,193 3/25/2055 Class A-1B 11,414 2.1% 11,414 3/25/2055 Class A-2 13,518 2.9% 13,518 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 $ 150,827$ 150,827 Less: Unamortized deferred financing costs N/A 1,910 Total $ 150,827$ 148,917 Arroyo Trust 2022
The following table summarizes the consolidated
Classes Principal Balance Coupon Fair Value Contractual Maturity Issued Mortgage-Backed Notes Class A-1A $ 238,419 2.5%$ 232,676 12/25/2056 Class A-1B 82,942 3.3% 79,703 12/25/2056 Class A-2 21,168 3.6% 20,381 12/25/2056 Class A-3 28,079 3.7% 26,918 12/25/2056 Class M-1 17,928 3.7% 16,744 12/25/2056 Total $ 388,536$ 376,422
Commercial Mortgage-Backed Notes
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We hold a controlling financial variable interest inCSMC USA and were required to consolidate the CMBS VIE. Refer to Note 7 - "Financings" for details. The following table summarizes the consolidated 2014CSMC USA's commercial mortgage pass-through certificates atMarch 31, 2022 which is classified in "Securitized debt, net" in the Consolidated Balance Sheets (dollars in thousands): Classes Principal Balance Coupon Fair Value Contractual Maturity Class A-1 $ 120,391 3.3 %$ 117,768 9/11/2025 Class A-2 531,700 4.0 % 523,078 9/11/2025 Class B 136,400 4.2 % 126,957 9/11/2025 Class C 94,500 4.3 % 86,707 9/11/2025 Class D 153,950 4.4 % 142,388 9/11/2025 Class E 180,150 4.4 % 152,369 9/11/2025 Class F 153,600 4.4 % 113,725 9/11/2025 Class X-1(1) N/A 0.7 % 12,347 9/11/2025 Class X-2(1) N/A 0.2 % 2,572 9/11/2025$ 1,370,691 $ 1,277,911
(1) Class X-1 and X-2 are interest-only classes with notional balances of
The above table does not reflect the portion of the class F bond held by us because the bond is eliminated in consolidation. Our ownership interest in the F bonds represents a controlling financial interest, which resulted in consolidation of the trust. The bond had a fair market value of$11.0 million atMarch 31, 2022 , and our exposure to loss is limited to our ownership interest in this bond.
Convertible Senior Unsecured Notes
2022 Notes
As ofMarch 31, 2022 , we had$34.3 million of the 2022 Notes outstanding. The 2022 Notes mature onOctober 1, 2022 , unless earlier converted, redeemed or repurchased by the holders pursuant to their terms, and are not redeemable by us except during the final three months prior to maturity.
2024 Notes
As ofMarch 31, 2022 , we had$86.3 million aggregate principal amount of the 2024 Notes outstanding. The 2024 notes mature onSeptember 15, 2024 , unless earlier converted, redeemed or repurchased by the holders pursuant to their terms, and are not redeemable by us except during the final three months prior to maturity.
Recourse and Non-Recourse Financing
We utilize both recourse and non-recourse debt to finance our portfolio. Our recourse debt included our short and long-term repurchase agreement financings and our convertible senior unsecured notes. AtMarch 31, 2022 , our total non-recourse financing is comprised of$814.6 million of securitized debt issued in connection with our three Residential Whole Loan securitizations and$1.3 billion of securitized debt from owning a Non-Agency CMBS bond with a fair value of$14.9 million that was deemed to be a controlling financial variable interest inCSMC USA which required us to consolidate the CMBS VIE. 57
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Table of Contents (dollars in thousands) March 31, 2022 December 31, 2021 Recourse and non-recourse financing$ 2,551,209 $ 2,599,845 Non-recourse financing Arroyo 2019-2 289,232 337,571 Arroyo 2020-1 148,917 181,547 Arroyo 2022-1 376,422 - CMSC USA 1,277,911 1,344,370 Total recourse financing$ 458,727 $458,727 $ 736,357 Stockholders' equity$ 165,006 $ 193,109 Recourse leverage 2.8x 3.8x Hedging Activity
The following tables summarize the hedging activity during the three months
ended
Notional Amount at Settlements, Notional Amount at Terminations or Derivative Instrument December 31, 2021 Acquisitions Expirations March 31, 2022 Fixed pay interest rate swaps $ 22,000$ 265,000 $ (35,000) $ 252,000 Credit default swaps 6,170 - - 6,170 Total derivative instruments $ 28,170$ 265,000 $ (35,000) $ 258,170 Fair Value at Settlements, Realized Fair Value at December 31, Terminations or Gains / Derivative Instrument 2021 Acquisitions Expirations Losses Mark-to-market March 31, 2022 Fixed pay interest rate swaps$ (38) $ - $ (5,540)$ 5,540 $ (449) $ (487) Credit default swaps (459) - - - 2,213 1,754 Total derivative instruments$ (497) $ - $ (5,540)$ 5,540 $ 1,764 $ 1,267 Dividends
During the three months ended
Book Value
The following chart reflects our book value per common share basic and diluted
over five consecutive quarters: 58
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Table of Contents [[Image Removed: wmc-20220331_g3.jpg]] We continue to implement measures to improve our balance sheet by increasing liquidity, reducing leverage, and seek alternative financing arrangements to preserve long-term shareholder value. The decrease in book value from$3.20 as ofDecember 31, 2021 , to$2.73 as ofMarch 31, 2022 , was primarily due to a decline in fair value in our investment portfolio, mainly the Residential Whole Loan investments attributable to spread widening. Also, contributing were lower net interest income from accelerated premium amortization associated prepayments in our Residential Whole Loan portfolio.
Results of Operations
Comparison of the three months ended
General Due to the continued uncertainty still surrounding the ongoing COVID-19 pandemic, our results of operations for the three months endedMarch 31, 2022 andMarch 31, 2021 may not be comparable. During the first quarter of 2022, we continued to make progress towards strengthening our balance sheet, improving liquidity and the transition of our portfolio to residential investments. During the three months endedMarch 31, 2022 , we completed our third securitization, continued to repurchase our 2022 Notes, and sold the hotel REO, realizing a gain on sale. However, due to spread widening we experienced a significant decline in the fair value of Residential Whole Loan investments. This decline in fair value of$41.8 million was a key contributor to the generation of a net loss of$25.9 million , or$0.43 per basic and diluted weighted common share for the three months endedMarch 31, 2022 In contrast, for the three months endedMarch 31, 2021 , the improved residential credit markets resulted in a significant increase in our Residential Whole Loan investments, which was a key contributor to the generation of net income of$8.0 million , or$0.13 per basic and diluted weighted common share. 59
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Table of Contents Net Interest Income The following tables set forth certain information regarding our net interest income on our investment portfolio for the three months endedMarch 31, 2022 andMarch 31, 2021 (dollars in thousands): Average Amortized Total Interest Three Months Ended March 31, 2022 Cost of Assets Income Yield on Average Assets Investments Agency RMBS $ 59 $ 4 27.50 % Non-Agency CMBS 166,171 2,570 6.27 % Non-Agency RMBS 40,422 530 5.32 % Residential Whole Loans 1,052,261 8,746 3.37 % Residential Bridge Loans 5,798 20 1.40 % Commercial loans 192,156 1,246 2.63 % Securitized commercial loans 1,274,896 21,872 6.96 % Other securities 47,641 654 5.57 % Total investments$ 2,779,404 $ 35,642 5.20 % Average Carrying Total Interest Average Cost of Value Expense Funds(1) Borrowings Repurchase agreements$ 437,919 $ 2,442 2.26 % Convertible senior unsecured notes, net 118,308 2,597 8.90 % Securitized debt 1,991,512 26,320 5.36 % Total borrowings$ 2,547,739 $ 31,359 4.99 % Net interest income and net interest margin(2) $ 4,283 0.62 % Average Amortized Total Interest Three Months Ended March 31, 2021 Cost of Assets Income Yield on Average Assets Investments Agency RMBS $ 89 $ 4 18.23 % Non-Agency CMBS 208,870 4,767 9.26 % Non-Agency RMBS 29,554 355 4.87 % Residential Whole Loans 970,642 10,058 4.20 % Residential Bridge Loans 14,141 230 6.60 % Commercial Loans 325,227 5,217 6.51 % Securitized commercial loan 1,568,571 24,564 6.35 % Other securities 49,396 822 6.75 % Total investments$ 3,166,490 $ 46,017 5.89 % Average Carrying Total Interest Average Cost of Value Expense Funds(1) Borrowings Repurchase agreements$ 348,541 $ 3,604 4.19 % Convertible senior unsecured notes, net 169,010 3,540 8.49 % Securitized debt 2,336,479 29,625 5.14 % Total borrowings$ 2,854,030 $ 36,769 5.22 % Net interest income and net interest margin(2) $ 9,248 1.18 % 60
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Table of Contents (1) Average cost of funds does not include the interest expense related to our derivatives. In accordance with GAAP, such costs are included in "Gain (loss) on derivative instruments, net" in the Consolidated Statements of Operations. (2) Since we do not apply hedge accounting, our net interest margin in this table does not reflect the benefit / cost of our interest rate swaps. See "Non-GAAP Financial Measures" for net investment income table that includes the benefit / cost from our interest rate swaps.
Interest Income
For the three months endedMarch 31, 2022 , andMarch 31, 2021 , we earned interest income on our investments of approximately$35.6 million and$46.0 million , respectively. The decrease of approximately$10.4 million was mainly due to a smaller investment portfolio from principal payments and payoffs of$421.4 million of commercial investments and$416.0 million of residential investments. Also, interest income was further reduced by our$90.0 million commercial mezzanine loan becoming non-performing inMay 2021 , and certain Non-Agency CMBS positions were placed on non-accrual status. The decrease was partially offset by acquisitions of$587.0 million of residential investments.
Interest Expense
Interest expense decreased from$36.8 million for the three months endedMarch 31, 2021 to$31.4 million for the three months endedMarch 31, 2022 . The decrease in interest expense was a result of a smaller investment portfolio, improved cost of financing from the improved terms on our amended residential and securities financing facilities and Residential Whole Loan facility and a decrease in our convertible senior unsecured notes outstanding as a result of the repurchases. Other income (loss), net Realized gain (loss), net Realized gain (loss) represents the net gain (loss) on sales or settlements from our investment portfolio and debt. The following table presents the realized gains (losses) of our investments and debt for each of the three months endedMarch 31, 2022 andMarch 31, 2021 (dollars in thousands): For the three months endedMarch 31, 2022 For
the three months ended
Proceeds ProceedsNet Gain (Payments) Gross Gains Gross LossesNet Gain (Loss) (Payments) Gross Gains Gross Losses (Loss) Non-Agency CMBS $ - $ - $ - $ - $ - $ -$ (5,929) $ (5,929) Loans transferred to REO(1) - - - - 684 - (36) (36) Disposition of REO(2) 54,681 12,198 - 12,198 - - - - Convertible senior unsecured notes(3) (3,408) (53) - (53) (6,315) 240 - 240 Total$ 51,273 $ 12,145 $ - $ 12,145$ (5,631) $ 240 $ (5,965) $ (5,725) (1)Realized gains/losses recognized on the transfer of Residential Bridge Loans to REO. Proceeds represent the fair value less estimated selling costs of the real estate on the date of transfer. (2)Realized gains/losses recognized in connection with the sale of the hotel REO. (3)Realized gains/losses recognized on the extinguishment of the 2022 Notes. See Note 7 - Financings for details.
Unrealized gain (loss), net
Our investments, and securitized debt, for which we have elected the fair value option are recorded at fair value with the periodic changes in fair value being recorded in earnings. The change in unrealized gain (loss) is directly attributable to changes in market pricing on the underlying investments and securitized debt during the period. 61
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The following table presents the net unrealized gains (losses) we recorded on our investments and securitized debt (dollars in thousands):
Three
months ended Three months ended
March 31, 2022 March 31, 2021 Agency RMBS $ (48) $ 26 Non-Agency CMBS 974 (13,972) Non-Agency RMBS (3,424) 1,454 Residential Whole Loans (41,843) 17,321 Residential Bridge Loans 27 203 Commercial loans (2,073) 1,622 Securitized commercial loans (73,564) 75,810 Other securities (2,374) 681 Securitized debt 83,422 (74,095) Total$ (38,903) $ 9,050
Gain (loss) on derivatives, net
As ofMarch 31, 2022 , we had interest rate swaps and forward starting swaps with a notional amount of$252.0 million , including$100.0 million of forward starting swaps. Our hedging strategy is designed to mitigate our exposure to interest rate volatility.
The following table presents the components of gain (loss) on derivatives for
the three months ended
Realized Gain (Loss), net Other Settlements Variation Margin Return (Recovery) of Contractual interest Description / Expirations Settlement Basis Mark-to-Market income (expense), net(1) Total Three months endedMarch 31, 2022 Interest rate swaps $ -$ 5,540 $ - $ (449) $ (291)$ 4,800 Agency and Non-Agency Interest-Only Strips- accounted for as derivatives - - (72) (109) 89 (92) Credit default swaps 15 - - 2,213 - 2,228 Total $ 15$ 5,540 $ (72)$ 1,655 $ (202)$ 6,936
Three months ended
Agency and Non-Agency Interest-Only Strips- accounted for as derivatives $ - $ - $ (94) $ - $ 121$ 27 Credit default swaps 16 - - (17) - (1) Total $ 16 $ - $ (94) $ (17) $ 121$ 26
(1)Contractual interest income (expense), net on derivative instruments includes interest settlement paid or received.
Other, net
For the three months endedMarch 31, 2022 andMarch 31, 2021 , "Other, net" was a loss of$145 thousand and a loss of$28 thousand , respectively. The balance is mainly comprised of income on cash balances, miscellaneous net interest income (expense) on cash collateral for our repurchase agreements and derivatives, and miscellaneous fees and expenses on residential mortgage loans. 62
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Table of Contents Expenses Management Fee We incurred management fee expense of approximately$1.1 million and$1.5 million for the three months endedMarch 31, 2022 andMarch 31, 2021 , respectively. The decline in management fees was a result of our Manager voluntarily waiving 25% of its management fee solely for the duration of calendar year 2022 in order to support our earnings potential and our transition to a residential focused investment portfolio. Future waivers, if any, will be at the Manager's discretion. The management fees, expense reimbursements and the relationship between our Manager and us are discussed further in Note 10, "Related Party Transactions" to the financial statements contained in this Quarterly Report on Form 10-Q.
Other Operating Expenses
We incurred other operating expenses of approximately$296 thousand and$392 thousand for the three months endedMarch 31, 2022 , andMarch 31, 2021 , respectively. Other operating costs comprise bank fees, trustee fees and asset management/loan servicing fees for loans acquired serving released. Formerly, transaction and financing costs were included in this expense category.
Transaction costs
We incurred transaction costs of
General and Administrative Expenses
General and administrative expenses for the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 was relatively flat quarter over quarter. Non-GAAP Financial Measures We believe that our non-GAAP measures (described below), when considered with GAAP, provide supplemental information useful to investors in evaluating the results of our operations. Our presentations of such non-GAAP measures may not be comparable to similarly-titled measures of other companies, who may use different calculations. As a result, such non-GAAP measures should not be considered as substitutes for our GAAP net income, as measures of our financial performance or any measure of our liquidity under GAAP. Distributable Earnings (formerly referred to as 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: (i) net realized gain (loss) on investments and termination of derivative contracts; (ii) net unrealized gain (loss) on investments and debt; (iii) net unrealized gain (loss) resulting from mark-to-market adjustments on derivative contracts; (iv) provision for income taxes; (v) non-cash stock-based compensation expense; (vi) non-cash amortization of the convertible senior unsecured notes discount; (vii) one-time charges such as acquisition costs and impairment on loans; and (viii) 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. We utilize Distributable Earnings as a key metric to evaluate the effective yield of the portfolio. Distributable Earnings allows us to reflect the net investment income of our portfolio as adjusted to reflect the net interest rate swap interest expense. Distributable Earnings allows us to isolate the interest expense associated with our interest rate swaps in order to monitor and project our borrowing costs and interest rate spread. It is one metric of several used in determining the appropriate distributions to our shareholders. 63
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The table below reconciles Net Income to Distributable Earnings for the three
months ended
Three months
ended March 31, Three months ended (dollars in thousands) 2022 March 31, 2021
Net income (loss) attributable to common stockholders and participating securities
$ (25,853) $ 7,953 Income tax provision (benefit) 56 98 Net income (loss) before income taxes (25,797) 8,051
Adjustments:
Investments:
Unrealized (gain) loss on investments, securitized debt and other liabilities
38,903 (9,050) Realized (gain) loss on investments (8,713) 5,965 One-time transaction costs 2,740 (4) Derivative Instruments: Net realized gain on derivatives (5,540) - Net unrealized (gain) loss on derivatives (1,655) 17
Other:
Realized (gain) loss on extinguishment of convertible senior unsecured notes
53 (240) Amortization of discount on convertible senior unsecured notes 223 245 Other non-cash adjustments - 977 Non-cash stock-based compensation expense 165 182 Total adjustments 26,176 (1,908) Distributable Earnings $ 379 $ 6,143 64
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Alternatively, our Distributable Earnings can also be derived as presented in the table below by starting with Adjusted net interest income, which includes 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) 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 Three months ended March 31, ended March 31, (dollars in thousands) 2022 2021 Net interest income$ 4,283 $ 9,248 Interest income from IOs and IIOs accounted for as derivatives 17 27 Net interest income (expense) from interest rate swaps (291) - Adjusted net interest income 4,009 9,275 Total expenses (6,497) (4,518) Other non-cash adjustments - 977 Non-cash stock-based compensation 165 182 One-time transaction costs 2,740 (4) Amortization of discount on convertible unsecured senior notes 223 245 Interest income on cash balances and other income (loss), net (130) (12) Income attributable to non-controlling interest (131) (2) Distributable Earnings $ 379$ 6,143
Reconciliation of GAAP Book Value to Non-GAAP Economic Book Value
"Economic book value" is a non-GAAP financial measure of our financial position on an unconsolidated basis. We own certain securities that represent a controlling variable interest, which under GAAP requires consolidation; however, our 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 us and 2) removing the asset and liabilities associated with each of consolidated trusts (CSMC USA , Arroyo 2019-2, Arroyo 2020-1 and Arroyo 2022-1). 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.
The table below is a reconciliation of the GAAP Book Value to Non-GAAP Economic Book Value (dollars in thousands - except per share data):
$ Amount Per Share GAAP Book Value atMarch 31, 2022 $
165,006
Adjustments to deconsolidate VIEs and reflect the Company's interest in the securities owned Deconsolidation of VIEs assets
(2,197,379) (36.39) Deconsolidation of VIEs liabilities 2,099,721 34.78 Interest in securities of VIEs owned, at fair value 102,031 1.69 Economic Book Value at March 31, 2022 $
169,379
Net Interest Income and Net Interest Margin
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The following tables set forth certain information regarding our Non-GAAP net investment income and net interest margin which includes interest income on Agency and Non-Agency Interest-Only Strips classified as derivatives and excludes the interest expense for third-party consolidated VIEs for the three months endedMarch 31, 2022 andMarch 31, 2021 (dollars in thousands): Average Amortized Total Interest Three Months Ended March 31, 2022 Cost of Assets(1) Income(2) Yield on Average Assets Investments Agency RMBS $ 1,022 $ 21 8.33 % Non-Agency CMBS 166,171 2,570 6.27 % Non-Agency RMBS 40,422 530 5.32 % Residential Whole Loans 1,052,261 8,746 3.37 % Residential Bridge Loans 5,798 20 1.40 % Commercial loans 192,156 1,246 2.63 % Securitized commercial loans 1,274,896 21,872 6.96 % Other securities 47,641 654 5.57 % Total investments 2,780,367 35,659 5.20 % Adjustments: Securitized commercial loans from consolidated VIEs (1,274,896) (21,872) 6.96 % Investments in consolidated VIEs eliminated in consolidation 13,966 219 6.36 % Adjusted total investments$ 1,519,437 $ 14,006 3.74 % Average Carrying Total Interest Average Effective Cost Value Expense of Funds Borrowings Repurchase agreements$ 437,919 $ 2,442 2.26 % Convertible senior unsecured notes, net 118,308 2,597 8.90 % Securitized debt 1,991,512 26,320 5.36 % Interest rate swaps n/a 291 0.05 % Total borrowings 2,547,739 31,650 5.04 % Adjustments: Securitized debt from consolidated VIEs(3) (1,259,147) (20,829) 6.71 % Adjusted total borrowings$ 1,288,592 $ 10,821 3.41 % Adjusted net interest income and net interest margin $ 3,185 0.85 %
(1)
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Table of Contents Average Amortized Total Interest Three Months Ended March 31, 2021 Cost of Assets(1) Income(2) Yield on Average Assets Investments Agency RMBS $ 1,352 $ 31 9.30 % Non-Agency CMBS 208,870 4,767 9.26 % Non-Agency RMBS 29,554 355 4.87 % Residential Whole-Loans 970,642 10,058 4.20 % Residential Bridge Loans 14,141 230 6.60 % Commercial loans 325,227 5,217 6.51 % Securitized commercial loan 1,568,571 24,564 6.35 % Other securities 49,396 822 6.75 % Total investments 3,167,753 46,044 5.89 % Adjustments: Securitized commercial loans from consolidated VIEs (1,568,571) (24,564) 6.35 % Investments in consolidated VIEs eliminated in consolidation 59,051 1,193 8.19 % Adjusted total investments$ 1,658,233 $ 22,673 5.55 % Average Carrying Total Interest Average Effective Cost Value Expense of Funds Borrowings Repurchase agreements$ 348,541 $ 3,604 4.19 %
Convertible senior unsecured notes, net
3,540 8.49 % Securitized debt 2,336,479 29,625 5.14 % Total borrowings 2,854,030 36,769 5.22 % Adjustments: Securitized debt from consolidated VIEs(3) (1,495,410) (23,035) 6.25 % Adjusted total borrowings$ 1,358,620 $ 13,734 4.10 % Adjusted net interest income and net interest margin $ 8,939 2.19 % (1)Includes Agency and Non-Agency Interest-Only Strips accounted for as derivatives. (2)Refer to below table for components of interest income. (3)Includes only the third-party sponsored securitized debt fromRETL Trust andCSMC USA .
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
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Table of Contents Three months Three months endedMarch 31 , endedMarch 31 ,
(dollars in thousands) 2022 2021 Coupon interest income: Agency RMBS $ 8 $ 15 Non-Agency CMBS 2,972 2,337 Non-Agency RMBS 545 413 Residential Whole Loans 11,283 12,105 Residential Bridge Loans 20 232 Commercial loans 1,246 5,153 Securitized commercial loans 15,173 18,414 Other Securities 888 1,591 Subtotal coupon interest 32,135 40,260
Premium accretion, discount amortization and amortization of basis, net:
Agency RMBS (4) (11) Non-Agency CMBS (402) 2,430 Non-Agency RMBS (15) (58) Residential Whole Loans (2,537) (2,047) Residential Bridge Loans - (2) Commercial loans - 64 Securitized commercial loans 6,699 6,150 Other Securities (234) (769) Subtotal accretion and amortization 3,507 5,757 Interest income$ 35,642 $ 46,017 Contractual interest income, net of amortization of basis on Agency and Non-Agency Interest-Only Strips, classified as derivatives(1): Coupon interest income $ 89$ 121 Amortization of basis (72) (94) Subtotal 17 27 Total adjusted interest income$ 35,659 $ 46,044
(1)Reported in "Gain (loss) on derivative instruments, net" in our Consolidated Statements of Operations.
Effective Cost of Funds Effective Cost of Funds includes the net interest component related to our interest rate swaps, as well as the impact of our foreign currency swaps and forwards. While we have not elected hedge accounting for these instruments, such derivative instruments are viewed by us as an economic hedge against increases in future market interest rates on our liabilities and changes in foreign currency exchange rates on our assets and liabilities and are characterized as hedges for purposes of satisfying the REIT requirements and therefore the Effective Cost of Funds reflects interest expense adjusted to include the realized gain/loss (i.e., the interest income/expense component) for all of our interest rate swaps and the impact of our foreign currency swaps and forwards. 68
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The following table reconciles the Effective Cost of Funds (Non-GAAP financial measure) with interest expense for the three months endedMarch 31, 2022 andMarch 31, 2021 : Three months ended March 31, 2022 Three months ended March 31, 2021 Cost of Funds/ Cost of Funds/ Effective Effective (dollars in thousands) Reconciliation Borrowing Costs Reconciliation Borrowing Costs Interest expense $ 31,359 4.99 % $ 36,769 5.22 % Adjustments: Interest expense on Securitized debt from consolidated VIEs (20,829) (6.71) % (23,035) (6.25) % Net interest paid - interest rate swaps 291 0.05 % - - % Effective Cost of Funds $ 10,821 3.41 % $ 13,734 4.10 % Weighted average borrowings$ 1,288,592 $ 1,358,620
Liquidity and Capital Resources
General
Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain our assets and operations, make distributions to our stockholders, and other general business needs. To maintain our REIT qualifications under the Internal Revenue Code, we must distribute annually at least 90% of our taxable income, excluding capital gains and, such distributions requirements limit our ability to retain earnings and increase capital for operations. Our principal sources of funds generally consist of borrowings under repurchase agreements, Residential Whole Loan securitizations, payments of principal and interest we receive on our investment portfolio, cash generated from investment sales and, to the extent such transactions are entered into, proceeds from capital market and unsecured convertible note transactions. We will continue to closely monitor developments related to COVID-19 as it relates to our liquidity position and financial obligations. We currently believe we have sufficient liquidity and capital resources available, for at least the next 12 months, to fund our operations, meet our financial obligations, purchase our target assets, and make dividend payments to maintain our REIT qualifications. As ofMarch 31, 2022 , we had$42.8 million in cash and cash equivalents. Also our other sources of liquidity were unencumbered investments, and unused borrowing capacity in certain borrowing facilities since the amount borrowed is less than the maximum advance rate.
Sources of Liquidity
Our primary sources of liquidity are as follows:
Cash Generated from Operations
For the three months endedMarch 31, 2022 , net cash provided by operating activities was approximately$1.6 million . This was primarily attributable to the net interest income on our investments, less operating expenses, and general and administrative expenses. For the three months endedMarch 31, 2021 , net cash provided by operating activities was approximately$3.9 million . This was primarily attributable to margin settlements of interest rate swaps, operating expenses, and general and administrative expenses, which were offset by the interest income we earned on our investments.
Cash Provided by and Used in Investing Activities
For the three months endedMarch 31, 2022 , net cash used in investing activities was approximately$4.3 million . This was primarily attributable to purchases of Non-Agency RMBS and Residential Whole Loans during the quarter, which was partially offset by receipts of principal payments and payoffs on our investments and the sale of an REO hotel. For the three months endedMarch 31, 2021 , net cash provided by investing activities was approximately$145.2 million . This was primarily 69
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attributable to proceeds from sales to meet the margin calls and receipts of principal payments and payoffs on our investments, which were partially offset by our investment acquisitions.
Cash Provided by and Used in Financing Activities
For the three months endedMarch 31, 2022 , net cash provided by financing activities was approximately$5.3 million . This was attributable theArroyo Trust 2022 securitization, which was partially offset by a net decrease in repurchase agreement borrowings, paydowns in our securitized debt, and extinguishment of convertible senior unsecured notes. For the three months endedMarch 31, 2021 , net cash used in financing activities was approximately$207.4 million . This was attributable to net repayments of our repurchase agreement borrowings to reduce our exposure to short term financings and repayment of securitized debt related to consolidated VIEs which was offset net proceeds from the Arroyo 2020-1 that closed during the quarter endedJune 30, 2020 .
Repurchase Agreements
As ofMarch 31, 2022 , we had borrowings under six of our master repurchase agreements of approximately$342.4 million . The following tables present our repurchase agreement borrowings by type of collateral pledged, as ofMarch 31, 2022 andMarch 31, 2021 , and the respective effective cost of funds (Non-GAAP financial measure) for the three months endedMarch 31, 2022 andMarch 31, 2021 , respectively (dollars in thousands). See "Non-GAAP Financial Measures" for more information: March 31, 2022 Three months ended March 31, 2022 Weighted Weighted Weighted Value of Average Weighted Average Average Borrowings Collateral Interest Rate Average Cost Effective Cost of Haircut Collateral Outstanding Pledged end of period of Funds Funds (Non-GAAP)(1) end of period Agency RMBS, at fair value$ 354 $ 300 1.13 % 0.95 % 0.95 % 25.00 % Non-Agency CMBS, at fair value(2) 56,486 106,380 2.14 % 1.75 % 1.75 % 40.00 % Non-Agency RMBS, at fair value 70,839 81,898 2.29 % 2.51 % 2.51 % 31.87 % Residential Whole Loans, at fair value(3) 110,433 121,794 2.26 % 2.33 % 2.33 % 10.00 % Residential Bridge Loans(3) 4,231 5,129 2.95 % 2.67 % 2.67 % 20.00 % Commercial loans, at fair value(3) 70,121 101,435 2.39 % 2.55 % 2.55 % 29.73 % Other securities, at fair value 29,916 49,040 2.32 % 1.94 % 1.94 % 37.01 % Interest rate swaps n/a n/a n/a n/a 0.27 % n/a Total$ 342,380 $ 465,976 2.29 % 2.26 % 2.53 % 26.05 % (1)The effective cost of funds for the period presented is calculated on an annualized basis and includes interest expense for the period and net periodic interest payments on interest rate swaps of approximately$291 thousand for the three months endedMarch 31, 2022 . While interest rate swaps are not accounted for using hedge accounting, such instruments are viewed by us as an economic hedge against increases in interest rates on our liabilities and are treated as hedges for purposes of satisfying the REIT requirements. See "Non-GAAP Financial Measures." (2)Includes repurchase agreement borrowings on securities eliminated upon VIE consolidation. (3)Repurchase agreement borrowings collateralized by Whole Loans, Bridge Loans and commercial loans owned through trust certificates. The trust certificates are eliminated upon consolidation. 70
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Table of Contents March 31, 2021 Three months ended March 31, 2021 Weighted Weighted Weighted Fair Value of Average Weighted Average Average Borrowings Collateral Interest Rate Average Cost Effective Cost of Haircut Collateral Outstanding Pledged(3) end of period of Funds Funds (Non-GAAP) end of period Agency RMBS, at fair value$ 1,242 $ 1,629 1.13 % 1.18 % 1.18 % 25.00 % Non-Agency CMBS, at fair value(1) 76,226 144,346 4.76 % 4.86 % 4.86 % 40.21 % Non-Agency RMBS, at fair value 14,456 26,659 5.20 % 5.25 % 5.25 % 33.33 % Residential Whole Loans, at fair value(2) 57,296 92,497 3.09 % 8.04 % 8.04 % 35.99 % Residential Bridge Loans(2) 10,097 12,044 2.70 % 2.76 % 2.76 % 20.00 % Commercial loans, at fair value(2) 153,542 312,061 2.36 % 2.43 % 2.43 % 34.86 % Membership interest(3) 19,551 34,439 2.86 % 3.05 % 3.05 % 35.00 % Other securities, at fair value 15,969 48,666 5.08 % 5.17 % 5.17 % 36.75 % Total$ 348,379 $ 672,341 3.28 % 4.19 % 4.19 % 35.71 % (1)Includes repurchase agreement borrowings on securities eliminated upon VIE consolidation. (2)Repurchase agreement borrowings collateralized by Whole Loans, Bridge Loans and commercial loan owned through trust certificates. The trust certificates are eliminated upon consolidation. (3)The pledged amount relates to our non-controlling membership interest in our wholly-owned subsidiary,WMC RETL LLC , which was financed under a repurchase agreement. The membership interest is eliminated in consolidation.
Contractual Obligations and Commitments
Our contractual obligations as ofMarch 31, 2022 are as follows (dollars in thousands): Less than 1 1 to 3 3 to 5 More than year years years 5 years Total
Borrowings under repurchase agreements
$ - $ -
3,257 - - - 3,257 Convertible senior unsecured notes 34,287 86,250 - - 120,537 Contractual interest on convertible senior unsecured notes 6,979 8,733 - - 15,712 Securitized debt(2) - - 1,370,691 831,875 2,202,566 Contractual interest on securitized debt 80,823 161,647 77,453 650,210 970,133 Total$ 467,726 $ 256,630 $ 1,448,144 $ 1,482,085 $ 3,654,585 (1)The table above does not include amounts due under the Management Agreement (as defined herein) with our Manager, as those obligations do not have fixed and determinable payments. (2)The securitized debt is non-recourse to us and can only be settled with the loans that serve as collateral. The collateral for the securitized debt has a principal balance of$2.3 billion . Assumes entire outstanding principal balance atMarch 31, 2022 is paid at maturity.
Management Agreement
OnMay 9, 2012 , we entered into a management agreement (the "Management Agreement") with our Manager which describes the services to be provided by our Manager and compensation for such services. Our Manager is responsible for managing our operations, including: (i) performing all of our day-to-day functions; (ii) determining investment criteria in conjunction with our Board of Directors; (iii) sourcing, analyzing and executing investments, asset sales and financings; (iv) performing asset management duties; and (v) performing financial and accounting management, subject to the direction and oversight of our Board of Directors. Pursuant to the terms of the Management Agreement, our Manager is paid a management fee equal to 1.50% per annum of our stockholders' equity, (as defined in the Management Agreement), calculated and payable (in cash) quarterly in arrears. InDecember 2021 , the Manager agreed to voluntarily waive 25% of its management fee solely for the duration of calendar year 2022 in order to support the earnings potential of the Company and its transition to a residential focused investment portfolio. Future waivers, if any, will be at the Manager's discretion.
Off-Balance Sheet Arrangements
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Table of Contents We do not have any relationships with any entities or financial partnerships, such as entities often referred to as structured investment vehicles, or special purpose or variable interest entities, established to facilitate off-balance sheet arrangements or other contractually narrow or limited purposes. Further, other than guaranteeing certain obligations of our wholly-owned taxable REIT subsidiary or TRS and the obligations of our wholly-owned subsidiary,WMC CRE LLC , we have not guaranteed any obligations of any entities or entered into any commitment to provide additional funding to any such entities.
Dividends
To maintain our qualification as a REIT,U.S. federal income tax law generally requires that we distribute at least 90% of our REIT taxable income annually, determined without regard to the deduction for dividends paid and excluding capital gains. We must pay tax at regular corporate rates to the extent that we annually distribute less than 100% of our taxable income. We evaluate each quarter to determine our ability to pay dividends to our stockholders based on our net taxable income if and to the extent authorized by our Board of Directors. Before we pay any dividend, whether forU.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service payments. If our cash available for distribution is less than our net taxable income, we could be required to sell assets or borrow funds to make cash distributions or we may make a portion of the required distribution in the form of a taxable stock distribution. 72
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