Capstead Mortgage Corporation Announces Fourth Quarter 2018 Results
DALLAS--(BUSINESS WIRE)--Jan 30, 2019--Capstead Mortgage Corporation (“Capstead” or the “Company”) (NYSE: CMO ) today announced financial results for the quarter ended December 31, 2018.
Fourth Quarter 2018 SummaryGenerated earnings of $9.0 million or $0.05 per diluted common share Paid common dividend of $0.08 per common share Repurchased 5.8 million shares of common stock for $43.3 million, generating book value accretion of $0.14 per share Book value per common share declined 0.9% or $0.09 to $9.39 per common share, which together with the fourth quarter dividend generated an economic return of -0.1% Agency-guaranteed residential adjustable-rate mortgage (ARM) portfolio and leverage ended the quarter at $11.97 billion and 9.49 times long-term investment capital, respectively
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.
Fourth Quarter Earnings and Related Discussion
Capstead reported net income of $9.0 million or $0.05 per diluted common share for the quarter ended December 31, 2018. This compares to net income of $8.7 million or $0.04 per diluted common share for the quarter ended September 30, 2018. The Company paid a fourth quarter 2018 dividend of $0.08 per common share on January 18, 2019.
Portfolio yields averaged 2.34% during the fourth quarter of 2018, an increase of 26 basis points from the 2.08% reported for the third quarter. Cash yields (yields on the portfolio before investment premium amortization) increased 14 basis points to average 3.21% during the fourth quarter, benefiting from mortgage loans underlying the portfolio resetting to higher rates based on higher prevailing six- and 12-month interest rate indices and higher coupon interest rates on recent acquisitions. As of December 31, 2018, current-reset ARMs (52% of the Company’s ARM securities portfolio) will reset in rate on average in approximately six months, allowing the Company’s cash yields to continue benefiting from higher prevailing interest rates in future quarters. Yield adjustments for investment premium amortization decreased 12 basis points to average a negative 0.87% for the fourth quarter. Mortgage prepayment rates averaged an annualized constant prepayment rate, or CPR, of 22.37%, a decrease of 3.34% CPR from an average of 25.71% CPR the previous quarter. This decrease was driven largely by seasonal factors, including the end of the summer home selling season.
The following table illustrates the progression of Capstead’s portfolio of residential mortgage investments for the quarter and year ended December 31, 2018 (dollars in thousands):
* Residential mortgage investments typically are acquired at a premium to the securities’ unpaid principal balances. Investment premiums are recognized in earnings as portfolio yield adjustments using the interest method over the estimated lives of the related investments. As such, the level of mortgage prepayments impacts how quickly investment premiums are amortized.
Rates on Capstead’s $10.98 billion in secured borrowings, after adjusting for hedging activities, averaged 25 basis points higher at 2.07% during the fourth quarter of 2018, compared to 1.82% for the prior quarter. Average unhedged secured borrowing rates also increased 25 basis points during the fourth quarter to 2.46%. This increase is largely attributable to the funding market’s response to 25 basis point increases in the Federal Funds Rate in September 2018 and, to a lesser extent, in December 2018, as well as year-end funding pressures. Related hedged borrowing rates increased 23 basis points to 1.75% primarily due to $800 million of swaps with relatively low fixed rates maturing during the fourth quarter while $800 million in new swaps were added at higher prevailing rates. The Company typically uses two- and three-year term interest rate swap agreements with variable rate receipts based on three-month LIBOR to help mitigate exposure to rising short-term interest rates. At quarter-end the Company held $6.55 billion notional amount of portfolio financing-related swap agreements with contract expirations occurring at various dates through the fourth quarter of 2021, and a weighted average expiration of 13 months.
Capstead operates a highly efficient 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 1.15% for the fourth quarter of 2018 and 0.98% for the full year. As an annualized percentage of total assets, operating costs averaged 0.11% and 0.09% during these periods.
Common Stock Repurchases
Capstead repurchased 5.8 million shares of its common stock in the open market for $43.3 million during the fourth quarter of 2018. At an average price, including underwriting fees, of $7.47, these repurchases resulted in book value accretion of nearly $0.14 per share for the fourth quarter (calculated using beginning of the quarter book value). For the year, repurchases totaled 10.7 million shares for $84.6 million, generating book value accretion of $0.29 per share (calculated using beginning of the year book value). Future levels of stock repurchases will largely be dependent upon market conditions, including alternative capital investment opportunities, and are subject to applicable trading restrictions.
Long-Term Investment Capital and Portfolio Leverage
Capstead’s long-term investment capital, which consists of common and perpetual preferred stockholders’ equity and long-term unsecured borrowings, decreased by $62.0 million during the fourth quarter of 2018 to $1.16 billion, largely attributable common stock repurchases as well as swap valuation declines that outpaced higher portfolio valuations. For the year, capital decreased by $179.7 million primarily as a result of common stock repurchases, lower portfolio and related swap valuations and dividend distributions in excess of earnings. Portfolio leverage (secured borrowings divided by long-term investment capital) decreased to 9.49 to one at December 31, 2018 from 9.53 to one at September 30, 2018.
Book Value per Common Share
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, generally within five years. Nearly all of the Company’s residential mortgage investments and all interest rate swap agreements are reflected at fair value on the Company’s balance sheet and related unrealized gains and losses are included in the calculation of book value per common share. Fair value is impacted by market conditions, including changes in interest rates, and the availability of financing at reasonable rates and leverage levels, among other factors. Because of these characteristics, the fair value of the Company’s portfolio is expected to be less vulnerable to significant pricing declines caused by credit concerns or rising interest rates compared to leveraged portfolios containing a significant amount of non-agency-guaranteed securities or agency-guaranteed securities backed by longer-duration ARM or fixed-rate loans.
The following table illustrates the progression of Capstead’s book value per common share (total stockholders’ equity, less preferred share liquidation preferences, divided by shares of common stock outstanding) as well as changes in book value expressed as percentages of beginning book value for the quarter and year ended December 31, 2018:
* Changes in book value together with common stock dividends of $0.08 and $0.49 for the indicated periods resulted in total economic returns of (0.11)% and (3.61)%, respectively.
Commenting on current operating and market conditions, Phillip A. Reinsch, President and Chief Executive Officer, said, “With the benefit of higher cash yields on our agency-guaranteed ARM portfolio and seasonally lower mortgage prepayment rates, our financing spreads and net interest margins improved modestly this quarter even as we absorbed higher borrowing costs and funded common stock repurchases with capital made available from portfolio runoff. Borrowing costs continued trending higher during the quarter due largely to increases in the Fed Funds Rate in September and, to a lesser extent, in December as well as other transitory year-end funding pressures.
“Looking forward, we anticipate further increases in cash yields through acquisitions and coupon resets and will continue to be disciplined and opportunistic in deploying capital from portfolio runoff. We are also encouraged that the Federal Reserve appears less inclined to continue increasing the Fed Funds Rate at its previous pace of 25 basis points per quarter. This should result in more stability in borrowing costs and afford us the opportunity over time to recover financing spreads diminished by previous increases in borrowing rates. However, with recent declines in available mortgage interest rates and seasonality, mortgage prepayments are expected to trend higher this spring which may act as at least a partial offset to higher cash yields.
“For nearly 20 years Capstead has operated as a cost-effective, internally managed REIT that invests in a leveraged portfolio of short duration agency-guaranteed residential ARM securities with the goal of generating attractive risk-adjusted returns over the long-term. A consequence of our lower risk strategy is that our dividend yield will often be lower than the dividend yields of other residential mortgage REITs that invest in higher-yielding mortgage assets with more interest rate risk, more credit risk, or both.
“We believe it is appropriate to focus not just on current dividends, but also on the risk of loss of capital. This more holistic view is embodied in total economic returns (dividends plus changes in book value). Capstead’s economic returns for a very volatile fourth quarter and for all of 2018 – periods negatively affected by five 25 basis point increases in the Federal Funds Rate since December 2017 – are certainly not indicative of what we anticipate returning over the full course of an interest rate cycle. That said, we believe our total economic returns will compare favorably with the returns of many higher dividend yielding investment alternatives due to significant losses of capital incurred by these alternatives during these periods.
“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.”
Earnings Conference Call Details
An earnings conference call and live audio webcast will be hosted Thursday, January 31, 2019 at 9:00 a.m. ET. The conference call may be accessed by dialing toll free (877) 220-8451 in the U.S. and Canada, or (786) 789-4776 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 (888) 203-1112 in the U.S. and Canada, or (719) 457-0820 for international callers and entering conference number 1821513.
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, 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 reform, 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 credit markets, 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.
Financing spreads on residential mortgage investments, a non-GAAP financial measure, differ from total financing spreads, an all-inclusive GAAP measure, that is based on all interest-earning assets and all interest-paying liabilities. Management believes that presenting financing spreads on residential mortgage investments provides useful information for evaluating the performance of the Company’s portfolio. The following reconciles these two measures:
View source version on businesswire.com:https://www.businesswire.com/news/home/20190130005792/en/
CONTACT: Lindsey Crabbe
KEYWORD: UNITED STATES NORTH AMERICA TEXAS
INDUSTRY KEYWORD: PROFESSIONAL SERVICES REIT FINANCE CONSTRUCTION & PROPERTY RESIDENTIAL BUILDING & REAL ESTATE
SOURCE: Capstead Mortgage Corporation
Copyright Business Wire 2019.
PUB: 01/30/2019 04:35 PM/DISC: 01/30/2019 04:35 PM