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Capstead Mortgage Corporation Announces Fourth Quarter 2019 Results

Capstead Mortgage Corporation ("Capstead" or the "Company") (NYSE: CMO) today announced financial results for the quarter ended December 31, 2019.

Fourth Quarter 2019 Summary

  • Recognized GAAP net income of $32.7 million or $0.29 per diluted common share
  • Generated core earnings of $19.1 million or $0.15 per diluted common share
  • Increased fourth quarter dividend by 25% to $0.15 per common share
  • Book value per common share increased $0.02 to $8.62 per common share
  • Agency-guaranteed residential adjustable-rate mortgage (ARM) portfolio and leverage ended the quarter relatively unchanged at $11.22 billion and 8.77 times long-term investment capital, respectively

Fourth Quarter Earnings and Related Discussion

Capstead reported GAAP net income of $32.7 million or $0.29 per diluted common share for the quarter ended December 31, 2019, compared to net income of $3.2 million for a loss of $(0.02) per diluted common share for the quarter ended September 30, 2019. The Company reported core earnings of $19.1 million or $0.15 per diluted common share for the quarter ended December 31, 2019. This compares to core earnings of $14.8 million or $0.11 per diluted common share for the quarter ended September 30, 2019. See the "Non-GAAP Financial Measures" section of this release for more information.

Portfolio yields averaged 2.67% during the fourth quarter of 2019, a decrease of nine basis points from 2.76% reported for the third quarter. Yields declined primarily due to declining coupon interest rates on loans underlying the Company’s portfolio of agency-guaranteed residential ARM securities. Mortgage prepayments decreased modestly during the quarter to an average annualized constant prepayment rate, or CPR, of 29.39%, compared to 30.18% CPR in the prior quarter. Outstanding portfolio balances of $11.22 billion at year-end were little changed from September 30, 2019 balances. Average portfolio balances were $235 million lower quarter over quarter due to the timing of acquisitions relative to portfolio run off. Portfolio leverage was relatively unchanged at 8.77 to one at December 31, 2019 from 8.80 to one at September 30, 2019.

Rates on Capstead’s $10.28 billion in secured borrowings, after adjusting for hedging activities, averaged 34 basis points lower at 1.97% during the fourth quarter of 2019, compared to 2.31% for the prior quarter. Borrowing rates before hedging activities averaged 2.10% during the fourth quarter, a decline of 42 basis points over the prior quarter in large part due to the Federal Reserve’s actions at its July, September and October meetings to reduce the Fed Funds rate by a total of 75 basis points.

Fixed rates on the Company’s $7.40 billion notional amount of secured borrowings-related interest rate swaps averaged 23 basis points lower at 1.91% during the fourth quarter of 2019, primarily as a result of efforts to reduce hedging costs by replacing higher rate swaps with new swaps at lower prevailing rates. At December 31, 2019, fixed rates on these swaps averaged 1.77%, a 27 basis point decline from rates in effect on September 30, 2019.

The following table illustrates the progression of Capstead’s portfolio of residential mortgage investments for the quarter and year ended December 31, 2019 (dollars in thousands):

 

 

Quarter Ended

December 31, 2019

 

Year Ended

December 31, 2019

Residential mortgage investments, beginning of period

 

$

11,235,803

 

 

$

11,965,381

 

Portfolio acquisitions (principal amount)

 

 

989,691

 

 

 

3,239,372

 

Investment premiums on acquisitions

 

 

20,336

 

 

 

76,788

 

Portfolio runoff (principal amount)

 

 

(988,295

)

 

 

(3,752,774

)

Sales of investments (basis)

 

 

 

 

(305,356

)

Investment premium amortization

 

 

(18,532

)

 

 

(73,742

)

(Decrease) increase in net unrealized gains on securities

classified as available-for-sale

 

 

(16,821

)

 

 

72,513

 

Residential mortgage investments, end of period

 

$

11,222,182

 

 

$

11,222,182

 

Decrease in residential mortgage investments

during the indicated periods

 

$

(13,621

)

 

$

(743,199

)

Capstead operates a highly efficient, internally-managed investment platform, particularly compared to other mortgage REITs and has a competitive cost structure relative to a wide variety of high yielding investment vehicles. Operating costs expressed as an annualized percentage of long-term investment capital averaged 1.07% for the fourth quarter of 2019 and 1.10% for the year ended December 31, 2019. As an annualized percentage of total assets, operating costs averaged 0.11% during these periods.

Book Value per Common Share

Book value per share as of December 31, 2019 was $8.62, an increase of $0.02 or 0.2% from the September 30, 2019 book value of $8.60, primarily reflecting $0.19 in derivative-related increases in value, partially offset by $0.18 in portfolio-related declines in unrealized gains. Capstead’s investment strategy attempts to mitigate risks to book value by focusing on investments in agency-guaranteed residential mortgage pass-through securities, which are considered to have little, if any, credit risk and are collateralized by ARM loans with interest rates that reset periodically to more current levels.

Management Remarks

Commenting on current operating and market conditions, Phillip A. Reinsch, President and Chief Executive Officer, said, "In December we announced a 25% dividend increase to $0.15 per common share, equal to our core earnings for the fourth quarter. This follows a 50% dividend increase announced in June. For the year we paid dividends of $0.47 per common share on core earnings of $0.50 per share.

"Much of the improvement in our core earnings in the fourth quarter and for all of 2019 is attributable to lower funding costs as a result of the Federal Reserve’s actions to reduce the Fed Funds rate and actions we took to lower fixed pay rates on swaps held for hedging purposes in response to significantly lower market interest rates. Core earnings also benefited from acquisitions of agency-guaranteed ARM securities at attractive levels. Hampering earnings throughout much of the year was an increase in market volatility that contributed to sharply lower longer-term rates, putting upward pressure on mortgage prepayment rates and negatively affecting mortgage security pricing relative to swap valuations. Additionally, rate pressures in short-term funding markets resulted in elevated borrowing rates relative to declines in the Fed Funds rate and other short-term rates. In response, we took a measured approach to deploying capital during the latter half of the year, with leverage declining in the third quarter and into the fourth quarter before ending the year relatively unchanged from September 30 levels. Future changes in leverage will depend on market conditions.

"Looking forward, we are encouraged by cycle-low unhedged borrowing rates presently available in the funding markets and the continued attractiveness of investment returns. Together with average fixed pay rates on our secured borrowings-related swaps now at or near 30-day borrowing rates, we anticipate showing further improvement in our financing spreads and net interest margins leading to higher earnings in the coming quarters.

"For the last 20 years, Capstead has operated as a cost-effective, internally managed REIT that invests in a leveraged portfolio of relatively short duration agency-guaranteed residential ARM securities with the goal of generating attractive risk-adjusted returns over the long-term. For investors seeking risk-adjusted levered returns with a comparably higher degree of safety from interest rate and credit risk, we believe Capstead represents a reasonably compelling opportunity that is difficult to find elsewhere in the markets."

Non-GAAP Financial Measures

Management believes the presentation of core earnings and core earnings per common share, both non-GAAP financial measures, when analyzed in conjunction with the Company’s GAAP operating results, allows investors to more effectively evaluate the Company’s performance and compare its performance to that of its peers. Prior to March 2019, the Company designated its secured borrowings-related swaps as hedges for GAAP accounting purposes, whereby changes in the swaps’ fair values were recorded in Accumulated other comprehensive income (loss) ("AOCI"). Beginning in March 2019, for GAAP accounting purposes, related changes in the fair value of these derivatives are recorded in the Company’s consolidated statements of operations. Also, for GAAP accounting purposes, related net unrealized gains recorded in AOCI through February 28, 2019 are being recognized as a component of interest expense in the Company’s consolidated statements of operations over the remaining life of these swaps.

Management also believes that presenting financing spreads on residential mortgage investments, a non-GAAP financial measure, provides important information for evaluating the performance of the Company’s portfolio as opposed to total financing spreads because the non-GAAP measure speaks specifically to the performance of the Company’s investment portfolio. See the "Reconciliation of GAAP Measures to Non-GAAP Measures" section of this release.

Earnings Conference Call Details

An earnings conference call and live audio webcast will be hosted Thursday, January 30, 2020 at 9:00 a.m. ET. The conference call may be accessed by dialing toll free (877) 505-6547 in the U.S., (855) 669-9657 for Canada, or (412) 902-6660 for international callers. A live webcast of the conference call can be accessed via the investor relations section of the Company’s website at www.capstead.com and an archive of the webcast will be available up to the date of our next earnings press release. An audio replay can be accessed one hour after the end of the conference call, also up to the date of our next earnings press release, by dialing toll free (877) 344-7529 in the U.S., (855) 669-9658 for Canada, or (412) 317-0088 for international callers and entering conference number 10138407.

About Capstead

Capstead is a self-managed real estate investment trust, or REIT, for federal income tax purposes. The Company earns income from investing in a leveraged portfolio of residential adjustable-rate mortgage pass-through securities, referred to as ARM securities, issued and guaranteed by government-sponsored enterprises, either Fannie Mae or Freddie Mac, or by an agency of the federal government, Ginnie Mae.

Statement Concerning Forward-looking Statements

This document contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain the words "believe," "anticipate," "expect," "estimate," "intend," "will be," "will likely continue," "will likely result," or words or phrases of similar meaning. Actual results could differ materially from those projected in these forward-looking statements due to a variety of factors, including without limitation, fluctuations in interest rates, the availability of suitable qualifying investments, changes in mortgage prepayments, the availability and terms of financing, changes in market conditions as a result of federal corporate and individual tax law changes, changes in legislation or regulation affecting the mortgage and banking industries or Fannie Mae, Freddie Mac or Ginnie Mae securities, the availability of new investment capital, the liquidity of secondary markets and funding markets, our ability to maintain our qualification as a REIT for U.S. federal tax purposes, our ability to maintain our exemption from registration under the Investment Company Act of 1940, as amended, and other changes in general economic conditions. These and other applicable uncertainties, factors and risks are described more fully in the Company’s filings with the U.S. Securities and Exchange Commission.

Forward-looking statements speak only as of the date the statement is made and the Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Accordingly, readers of this document are cautioned not to place undue reliance on any forward-looking statements included herein.

 

CAPSTEAD MORTGAGE CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except ratios, pledged and per share amounts)

 

 

 

 

 

 

December 31,
2019

 

December 31,
2018

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Residential mortgage investments ($10.83 and $11.57 billion pledged at December 31, 2019 and 2018, respectively)

 

$

11,222,182

 

 

$

11,965,381

 

Cash collateral receivable from derivative counterparties

 

 

65,477

 

 

 

31,797

 

Derivatives at fair value

 

 

1,471

 

 

 

 

Cash and cash equivalents

 

 

105,397

 

 

 

60,289

 

Receivables and other assets

 

 

125,474

 

 

 

129,058

 

 

 

$

11,520,001

 

 

$

12,186,525

 

Liabilities

 

 

 

 

 

 

 

 

Secured borrowings

 

$

10,275,413

 

 

$

10,979,362

 

Derivatives at fair value

 

 

29,156

 

 

 

17,834

 

Unsecured borrowings

 

 

98,392

 

 

 

98,292

 

Common stock dividend payable

 

 

14,605

 

 

 

7,132

 

Accounts payable and accrued expenses

 

 

28,702

 

 

 

24,842

 

 

 

 

10,446,268

 

 

 

11,127,462

 

Stockholders’ equity

 

 

 

 

 

 

 

 

Preferred stock - $0.10 par value; 100,000 shares authorized:

7.50% Cumulative Redeemable Preferred Stock, Series E, 10,329 shares issued and outstanding ($258,226 aggregate liquidation preference) at December 31, 2019 and 2018

 

 

250,946

 

 

 

250,946

 

Common stock - $0.01 par value; 250,000 shares authorized:

94,606 and 85,277 shares issued and outstanding at December 31, 2019 and 2018, respectively

 

 

946

 

 

 

853

 

Paid-in capital

 

 

1,252,481

 

 

 

1,174,880

 

Accumulated deficit

 

 

(444,039

)

 

 

(346,570

)

Accumulated other comprehensive income (loss)

 

 

13,399

 

 

 

(21,046

)

 

 

 

1,073,733

 

 

 

1,059,063

 

 

 

$

11,520,001

 

 

$

12,186,525

 

 

 

 

 

 

 

 

 

 

Long-term investment capital (consists of stockholders’ equity and unsecured borrowings) (unaudited)

 

$

1,172,125

 

 

$

1,157,355

 

Portfolio leverage (secured borrowings divided by long-term investment capital) (unaudited)

 

8.77:1

 

 

9.49:1

 

Book value per common share (based on shares of common stock outstanding and calculated assuming liquidation preferences for preferred stock) (unaudited)

 

$

8.62

 

 

$

9.39

 

CAPSTEAD MORTGAGE CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

 

 

 

Quarter Ended

December 31

 

Year Ended

December 31

 

 

2019

 

2018

 

2019

 

2018

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage investments

 

$

73,617

 

 

$

72,902

 

 

$

320,217

 

 

$

274,891

 

Other

 

 

666

 

 

 

626

 

 

 

2,753

 

 

 

1,689

 

 

 

 

74,283

 

 

 

73,528

 

 

 

322,970

 

 

 

276,580

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured borrowings

 

 

(51,688

)

 

 

(59,321

)

 

 

(246,212

)

 

 

(206,976

)

Unsecured borrowings

 

 

(1,910

)

 

 

(1,910

)

 

 

(7,611

)

 

 

(7,611

)

 

 

 

(53,598

)

 

 

(61,231

)

 

 

(253,823

)

 

 

(214,587

)

 

 

 

20,685

 

 

 

12,297

 

 

 

69,147

 

 

 

61,993

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain (loss) on derivative instruments (net)

 

 

15,142

 

 

 

 

 

 

(90,578

)

 

 

 

Loss on sale of investments (net)

 

 

 

 

 

 

 

 

(1,365

)

 

 

 

Compensation-related expense

 

 

(2,050

)

 

 

(2,238

)

 

 

(8,197

)

 

 

(7,759

)

Other general and administrative expense

 

 

(1,105

)

 

 

(1,207

)

 

 

(4,494

)

 

 

(4,527

)

Miscellaneous other revenue

 

 

 

 

 

132

 

 

 

149

 

 

 

365

 

 

 

 

11,987

 

 

 

(3,313

)

 

 

(104,485

)

 

 

(11,921

)

Net income (loss)

 

 

32,672

 

 

 

8,984

 

 

 

(35,338

)

 

 

50,072

 

Less preferred stock dividends

 

 

(4,842

)

 

 

(4,842

)

 

 

(19,368

)

 

 

(19,368

)

Net income (loss) to common stockholders:

 

$

27,830

 

 

$

4,142

 

 

$

(54,706

)

 

$

30,704

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.30

 

 

$

0.05

 

 

$

(0.62

)

 

$

0.34

 

Diluted

 

 

0.29

 

 

 

0.05

 

 

 

(0.62

)

 

 

0.34

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares

outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

93,991

 

 

 

87,884

 

 

 

88,722

 

 

 

91,114

 

Diluted

 

 

94,293

 

 

 

88,006

 

 

 

88,722

 

 

 

91,230

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common

 

$

0.15

 

 

$

0.08

 

 

$

0.47

 

 

$

0.49

 

Series E preferred

 

 

0.47

 

 

 

0.47

 

 

 

1.88

 

 

 

1.88

 

 

CAPSTEAD MORTGAGE CORPORATION

QUARTERLY STATEMENTS OF OPERATIONS AND SELECT OPERATING STATISTICS

(in thousands, except per share amounts, percentages annualized, unaudited)

 

 

 

2019

 

2018

 

 

Q4

 

Q3

 

Q2

 

Q1

 

Q4

Quarterly Statements of Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage investments

 

$

73,617

 

 

$

77,693

 

 

$

85,100

 

 

$

83,807

 

 

$

72,902

 

Other

 

 

666

 

 

 

1,065

 

 

 

600

 

 

 

422

 

 

 

626

 

 

 

 

74,283

 

 

 

78,758

 

 

 

85,700

 

 

 

84,229

 

 

 

73,528

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured borrowings

 

 

(51,688

)

 

 

(62,800

)

 

 

(67,945

)

 

 

(63,779

)

 

 

(59,321

)

Unsecured borrowings

 

 

(1,910

)

 

 

(1,910

)

 

 

(1,900

)

 

 

(1,891

)

 

 

(1,910

)

 

 

 

(53,598

)

 

 

(64,710

)

 

 

(69,845

)

 

 

(65,670

)

 

 

(61,231

)

 

 

 

20,685

 

 

 

14,048

 

 

 

15,855

 

 

 

18,559

 

 

 

12,297

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain (loss) on derivative instruments (net)

 

 

15,142

 

 

 

(9,221

)

 

 

(74,842

)

 

 

(21,657

)

 

 

 

Loss on sale of investments (net)

 

 

 

 

 

 

 

 

(1,365

)

 

 

 

 

 

 

Compensation-related expense

 

 

(2,050

)

 

 

(566

)

 

 

(1,972

)

 

 

(3,609

)

 

 

(2,238

)

Other general and administrative expense

 

 

(1,105

)

 

 

(1,123

)

 

 

(1,138

)

 

 

(1,128

)

 

 

(1,207

)

Miscellaneous other revenue

 

 

 

 

 

58

 

 

 

2

 

 

 

89

 

 

 

132

 

 

 

 

11,987

 

 

 

(10,852

)

 

 

(79,315

)

 

 

(26,305

)

 

 

(3,313

)

Net income (loss)

 

$

32,672

 

 

$

3,196

 

 

$

(63,460

)

 

$

(7,746

)

 

$

8,984

 

Net income (loss) per diluted common share

 

$

0.29

 

 

$

(0.02

)

 

$

(0.80

)

 

$

(0.15

)

 

$

0.05

 

Average diluted common shares outstanding

 

 

94,293

 

 

 

90,945

 

 

 

84,934

 

 

 

84,894

 

 

 

88,006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Core earnings

 

$

19,109

 

 

$

14,798

 

 

$

14,780

 

 

$

15,471

 

 

$

8,984

 

Core earnings per diluted common share

 

 

0.15

 

 

 

0.11

 

 

 

0.12

 

 

 

0.12

 

 

 

0.05

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Select Operating and Performance Statistics:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common dividends declared per share

 

 

0.15

 

 

 

0.12

 

 

 

0.12

 

 

 

0.08

 

 

 

0.08

 

Book value per common share

 

 

8.62

 

 

 

8.60

 

 

 

8.93

 

 

 

9.43

 

 

 

9.39

 

Average portfolio outstanding (cost basis)

 

 

11,032,252

 

 

 

11,266,776

 

...