Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Get to Know This 16% Dividend Yielder: Western Asset Mortgage Capital Corp (WMC), American Capital Agency Corp. (AGNC)

While Western Asset Mortgage Capital Corp (NYSE:WMC) is trading in line with its peers as far as its relative valuations are concerned, it is still an attractive investment for investors looking to enhance their regular income. The investment thesis aims to explore reasons for its attractiveness and review its recent operating performance.

Company Business

Western Asset operates as a mortgage REIT in the United States with a market cap of $530 million. The company has investments in mortgage backed securities backed by residential loans for which the principal and interest payments are guaranteed by any of the government Agencies. To further diversify its portfolio, the company also invests in non-Agency RMBS, commercial mortgage backed securities and other asset backed securities.

Investment Portfolio

The following chart displays each specific security’s proportion within the entire MBS portfolio.

A large concentration in Agency RMBS is visible in figure 1. Around 94% of the recent quarter’s portfolio is composed up of Agency RMBS, while the rest is non-Agency RMBS with a negligible proportion of collateralized mortgage obligations. Figure 2 illustrates the proportion of each security within the Agency holdings. It is visible that WMC has large chunks of 30-year fixed rate securities. Over half of these 30-year fixed rate RMBS have a coupon rate of over 3.5%. The 15-year fixed rate RMSB form 7% of the entire Agency holdings.

Recent Quarter Performance

Western Asset Mortgage Capital Corp (NYSE:WMC)’s fourth quarter earnings came in better than expected. The company reported EPS of $1.05, $0.18 per share ahead of the consensus mean expectation. WMC reported interest income of $35.9 million during the fourth quarter, up 144% from the linked quarter. During the quarter, WMC earned 2.86% in asset yields compared to 2.79% during the third quarter. Also, during the quarter, interest earning assets increased 11%. The sequential surge in interest earning assets and the asset yield is cited as the reason for the surge in interest income during the fourth quarter.

Interest expense during the quarter for Western Asset Mortgage Capital Corp (NYSE:WMC) came in at $5.4 million, compared to $1.93 million during the third quarter of 2012. This is partially the result of the 2 bps increase in the effective cost of funds to 0.81%. Borrowings under repurchase agreements increased 150% to $4.79 billion. This was another reason for the surge in the fourth quarter’s cost of funds.

As a result, the fourth quarter net interest rate spread came in at 2.05%, up from the prior quarter’s 2.0%. Also, during the quarter, WMC incurred $2.5 million in other losses, largely on higher unrealized loss on RMBS, partially offset by realized gain on sale of RMBS. Operating expenses of $3.2 million also remained higher from a quarter ago, causing the net income to decline 12% to $24.8 million.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.