Information as of June 30, 2017 Investor Presentation Exhibit 99.1
and individual income tax reform, federal government fiscal challenges and Federal Reserve monetary policy, including policy regarding its holdings of Agency and U.S. Treasury Securities; deterioration in credit quality and ratings of existing or future issuances of Fannie Mae, Freddie Mac or Ginnie Mae securities; changes in legislation or regulation affecting Fannie Mae, Freddie Mac, Ginnie Mae and similar federal government agencies and related guarantees; changes in legislation or regulation affecting exemptions for mortgage REITs from regulation under the Investment Company Act of 1940; other changes in legislation or regulation affecting the mortgage and banking industries; and increases in costs and other general competitive factors. Safe Harbor Statement - Private Securities Litigation Reform Act of 1995 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. Forward-looking statements are based largely on the expectations of management and are subject to a number of risks and uncertainties including, but not limited to, the following: In addition to the above considerations, actual results and liquidity are affected by other risks and uncertainties which could cause actual results to be significantly different from those expressed or implied by any forward-looking statements included herein. It is not possible to identify all of the risks, uncertainties and other factors that may affect future results. In light of these risks and uncertainties, the forward-looking events and circumstances discussed herein may not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements. 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. changes in general economic conditions; fluctuations in interest rates and levels of mortgage prepayments; the effectiveness of risk management strategies; the impact of differing levels of leverage employed; liquidity of secondary markets and credit markets; the availability of financing at reasonable levels and terms to support investing on a leveraged basis; the availability of new investment capital; the availability of suitable qualifying investments from both an investment return and regulatory perspective; changes in market conditions as a result of federal corporate and individual income tax reform, federal government fiscal 2
Company Summary Proven Strategy of Efficiently Managing a Leveraged Portfolio of Short-Duration Agency-Guaranteed ARM Securities Experienced Management Team Aligned with Stockholders Overview of Capstead Mortgage Corporation Founded in 1985, Capstead is the oldest publicly-traded residential mortgage REIT. Our sole focus is on managing a leveraged portfolio of short-duration* agency-guaranteed (i.e. Fannie Mae, Freddie Mac and Ginnie Mae) residential ARM securities that is appropriately hedged and can earn attractive risk-adjusted returns over the long term, with little, if any, credit risk. At June 30, 2017, our agency-guaranteed ARM securities portfolio stood at $13.60 billion, supported by $1.34 billion in long-term investment capital levered 9.27 times. Our short-duration strategy differentiates us from our peers because the adjustable-rate mortgages underlying our portfolio reset to more current interest rates within a relatively short period of time: allowing us to benefit from future recoveries in financing spreads that typically contract during periods of rising interest rates, and resulting in smaller fluctuations in portfolio values from changes in interest rates compared to portfolios containing a significant amount of longer-duration ARM or fixed-rate mortgage securities. By virtue of being internally-managed and with our sole focus on agency-guaranteed securities, we are arguably the most efficient mortgage REIT in the industry. Our top three executive officers have a combined 75 years of mortgage finance industry experience. We are internally-managed with low operating costs and a strong focus on performance-based compensation. This structure greatly enhances the alignment of management interests with those of our stockholders. 3 This singular and straightforward investment strategy, together with our use of cash flow hedge accounting, allows for easily understood, transparent financial reporting, with limited use of non-GAAP financial measures. Additional transparency is evident by virtue of our internally-managed structure – our compensation-related decisions and costs are fully disclosed and subject to annual say-on-pay approvals. We make every effort to provide additional analysis in our earnings reports, SEC filings and analyst presentations that tells our story in a complete and straightforward fashion. Straightforward Investment Strategy and Transparent Reporting * Duration is a measure of market price sensitivity to interest rate movements. A shorter duration generally indicates less interest rate risk.
Market Snapshot 4 As of June 30, 2017. Excludes any shares issued subsequent to June 30, 2017. Capstead’s $1.34 billion in long-term investment capital consists of $1.04 billion of our common equity trading on the NYSE, $209 million of our 7.50% Series E perpetual preferred capital also trading on the NYSE, and $98 million in privately-placed unsecured borrowings maturing in 2035 and 2036.
Capstead’s Economic Returns Relative to Peers Our agency-only, short-duration ARM strategy typically leads to outperformance during periods of rising interest rates and/or worsening credit conditions relative to other residential mortgage REITs. 5 (a) Excludes $(0.28) per share one-time effect of preferred capital redemption and issuance transactions on book value in 2013. Including this unusual charge, our economic returns would have been lower by 206 basis points in 2013, and by 52 and 41 basis points for the 4- and 5-year averages, respectively. (b) CMO economic returns exclude the effect of $(0.03) per share in separation of service charges associated with the July 2016 resignation of the Company’s former chief executive officer. Including this unusual charge, our economic returns would have been lower by 26 basis points in 2016, and by seven and five basis points for the 4- and 5-year averages, respectively. (c) Agency Peers: AGNC, AI, ANH, ARR, CYS, EARN, HTS (through 2016), NLY, ORC. (d) All Peers: Agency peers plus AMTG (through 2016), CIM, DX, IVR, JMI (through 2016), MFA, MITT, MTGE, NYMT, OAKS, RWT, TWO, WMC.
Capstead’s Proven Short-Duration Investment Strategy 6 As of June 30, 2017 We finance our agency-guaranteed residential ARM securities primarily with 30- to 90-day repurchase arrangements augmented with relatively low-cost two- and three-year term interest rate swap agreements and longer-dated secured borrowings when available at attractive levels. Residential ARM Securities Portfolio Secured Borrowings & Swap Notional Amounts (by quarter of borrowing maturities / contract expirations) Total: $13.50 Billion (cost basis) Our portfolio of agency-guaranteed ARM securities have little, if any, credit risk and are either currently resetting to more current rates at least annually or will begin doing so in five years or less. Our Current-Reset ARMs reset in rate in less than 18 months and our Longer-to-Reset ARMs generally reset in less than five years. With an asset duration* of approximately 11¼ months at quarter-end, the value of our portfolio is naturally less exposed to changes in interest rates than portfolios containing longer duration ARM or fixed-rate securities. This relative stability affords us more flexibility in managing through periods of market stress. We have long-term relationships with a variety of domestic and foreign lending counterparties. At quarter-end we had borrowings outstanding with 22 counterparties. We routinely borrow for 30 to 90 days and extend the duration of our borrowings using relatively low-cost two- and three-year term, pay-fixed, receive one- and three-month LIBOR, interest rate swap agreements. When available at attractive levels, we may also enter into longer-dated secured borrowings. Together with our portfolio-related swap agreements, our secured borrowings had a duration of approximately 9¼ months at quarter-end, resulting in a net duration gap of approximately 2 months. Longer-to-Reset ARMs $6.47 Billion (cost basis) Current-Reset ARMs $7.03 Billion (cost basis) * Duration is a common measure of market price sensitivity to interest rate movements. A shorter duration generally indicates less interest rate risk.
Capstead’s Appropriate Use of Leverage 7 Portfolio and Portfolio Leverage In our view, borrowing at current levels represents an appropriate use of leverage for a short-duration, agency-guaranteed ARM securities portfolio in today’s market conditions. Long-term Investment Capital
Financing Spreads 8 Cash yields continue to benefit from higher coupon interest rates as mortgage loans underlying our current-reset ARM securities reset to higher rates primarily due to increases in the underlying indices (principally 12-month LIBOR, six-month LIBOR and one-year CMT). Mortgage prepayment levels directly impact our financing spreads because purchased investment premiums are amortized to earnings as portfolio yield adjustments. Mortgage prepayments are influenced by housing market conditions, including prevailing mortgage interest rates, as well as seasonal factors, in particular the summer home selling season. Borrowing and hedging costs have increased in recent quarters as the markets absorbed the effects of three 25 basis point Federal Funds Rate increases since December 2016. In the current rate environment, older lower-rate swaps are expiring and new higher-rate swaps are being entered into in order to provide important balance sheet and future financing spread protection.
Changes in Interest Rates Affecting Capstead’s Earnings The ten-year U.S. Treasury rate can be viewed as a proxy for mortgage interest rates, which can affect mortgage prepayments. After declining in the first half of 2016, the ten-year rate increased significantly post-election. The primary indices underlying our residential ARM securities portfolio and affecting our cash yields are higher, in large part due to the effects of three 25 basis point Federal Funds Rate increases since December 2016. Additionally, six- and 12-month LIBOR increased considerably during the latter part of 2016 in response to money market reform. One-month LIBOR, a proxy for borrowing rates, has increased due to money market reform and increases in the Federal Funds Rate. 9
Agency Mortgage Prepayment Speeds versus Capstead Prepayment Speeds Mortgage prepayment levels are heavily influenced by the availability of mortgage financing at attractive terms and the overall health of the housing markets, as well as seasonal factors. Average mortgage prepayment levels increased 7.7% in the second quarter of 2017 compared to the first quarter of 2017, attributable to seasonal factors and a flattening of the yield curve as longer term rates have not increased in tandem with shorter term rates since year-end. This can create refinancing opportunities, particularly for borrowers whose loans have recently reset to higher levels. We expect quarterly prepayment rates may increase further in the third quarter before declining in the fourth quarter. 10 NOTE: Yellow highlighting indicates summer selling season.
*Net WAC, or weighted average coupon, is the weighted average interest rate of the mortgage loans underlying the indicated investments, net of servicing and other fees, as of June 30, 2017. Net WAC is expressed as a percentage calculated on an annualized basis on the unpaid principal balances of the mortgage loans underlying these investments. As such it is similar to cash yield on the portfolio which is calculated using amortized cost basis. Fully indexed WAC represents the weighted average coupon upon one or more resets using interest rate indexes and net margins in effect, as of June 30, 2017. Gross WAC is the weighted average interest rate of the mortgage loans underlying the indicated investments, including servicing and other fees paid by borrowers, as of June 30, 2017. Key Elements of Capstead’s ARM Portfolio 11 NOTE: Excludes $3 million legacy portfolio of fixed-rate investments. As of June 30, 2017, the Net WAC* on our current-reset ARMs stood at 2.87%, 21 basis points higher than at year-end 2016, while these securities’ Fully-Indexed WAC* stood at 3.19%, 20 basis points higher. This is primarily the result of increases in the underlying indices. With these higher rates, ARM loans underlying the current-reset component of our portfolio can be expected to continue increasing in coupon in the coming quarters. As of June 30, 2017 (dollars in thousands, unaudited) Fully- Average Months Principal Investment Amortized Cost Basis Fair Market Net Indexed Net to Balance Premiums ($) % Value WAC* WAC* Margins Roll Current-reset ARMs: Fannie Mae Agency Securities $3,798,915 $,120,323 $3,919,238 103.16729908408058 $3,993,696 3.01% 3.27% 1.70% 5.9 Freddie Mac Agency Securities 1,446,005 48,502 1,494,507 103.35420693566067 1,525,338 3.09 3.44 1.81 6.7 Ginnie Mae Agency Securities 1,563,022 51,069 1,614,091 103.267324452247 1,617,396 2.31 2.75 1.51 6.3 Residential Mortgage Loans 1,649 8 1,657 100.48514251061249 1,679 3.81 3.38 2.0699999999999998 5 (52% of total) 6,809,591 ,219,902 7,029,493 103.22929820601561 7,138,109 2.87 +0.32 3.19 1.68 6.2 Year-end 2016 2.66 +0.33 2.99 Longer-to-reset ARMs: Fannie Mae Agency Securities 3,200,478 96,958 3,297,436 103.02948497068249 3,294,083 2.71 3.36 1.63 43.7 Freddie Mac Agency Securities 2,022,386 63,503 2,085,889 103.14000393594496 2,082,178 2.72 3.39 1.65 40.5 Ginnie Mae Agency Securities 1,052,406 32,866 1,085,272 103.12293924588039 1,081,953 3.01 2.74 1.51 42.1 (48% of total) 6,275,270 ,193,327 6,468,597 103.0807758072561 6,458,214 2.76 +0.51 3.27 1.61 42.4 Year-end 2016 2.73 +0.41 3.14 $13,084,861 $,413,229 $13,498,090 103.15806946669133 $13,596,323 2.82 +0.41 3.23 1.65 23.5 Year-end 2016 2.69 +0.37 3.06 Gross WAC (rate paid by borrowers)* 3.41
Capstead’s Stockholder Friendly Structure 12 Year ended December 31, 2016 excludes the effects of separation of service charges totaling $(3.0 million). Six months ended June 30, 2017 excludes the effects of a $938,000 adjustment to the 2016 annual incentive compensation accrual recorded in Q1 2017. Capstead is internally-managed with low operating costs and stands out as a leader among our mortgage REIT peers (as well as other investment vehicles) in terms of operating cost efficiency. Our executives’ pay structure is variable through compensation elements that focus on “pay for performance” as opposed to fees paid to an external manager that are based solely on capital under management. Additionally, our board of directors and our senior executives hold a significant amount of Capstead stock. As a result, we are incented to grow the Company by raising capital only when it is accretive to book value and earnings rather than for the purpose of increasing compensation or external management fees. Conversely, we are also not conflicted regarding whether or not to repurchase shares when appropriate. The majority of compensation-related expenses are performance-based.
Appendix 13
Capstead’s Second Quarter 2017 Highlights Generated earnings of $17.5 million or $0.14 per diluted common share Paid common dividend of $0.21 per common share Book value per common share declined $0.26 to $10.72 due to portfolio and swap changes ($0.19) and dividends in excess of earnings ($0.07) Since year-end, book value decreased by $0.13, including $0.08 in dividends in excess of earnings, which together with $0.42 in common dividends produce an annualized economic return of 5.3% Net interest margins declined by $4.3 million as benefits of portfolio growth and higher cash yields were outstripped by higher mortgage prepayment levels and higher borrowing costs Agency-guaranteed residential ARM portfolio and leverage ended the quarter at $13.60 billion and 9.27 times long-term investment capital, respectively Operating costs averaged 0.92% of long-term investment capital on an annualized basis Management remarks from our July 26, 2017 earnings press release: “Second quarter earnings were negatively affected by higher mortgage prepayment levels and higher borrowing costs, while benefiting from higher cash yields and higher average portfolio balances. “Because average mortgage prepayment levels were higher this quarter by 1.76% CPR (an increase of 7.7%, compared to a decline in the first quarter of 10.4%), we recorded an additional $2.3 million in investment premium amortization. The second quarter increase in prepayments is attributable to a number of factors, including seasonality and a flattening of the yield curve as longer term rates have not increased in tandem with shorter term rates since year-end. This can create refinancing opportunities, particularly for borrowers whose loans have recently reset to higher levels. Given current market conditions, we anticipate quarterly prepayment levels may increase further in the third quarter before declining in the fourth quarter. “Borrowing and hedging costs were up appreciably in the second quarter as the markets absorbed the effects of three 25 basis point Federal Funds Rate increases since December 2016. During the second quarter average unhedged secured borrowing rates increased 20 basis points over the first quarter to 1.09%, while related hedged borrowing rates increased 12 basis points to average 1.08%. On a combined basis, secured borrowing rates were up 15 basis points. In the current rate environment, older, lower-rate swaps are expiring and new, higher-rate swaps are being entered into in order to provide important balance sheet and future financing spread protection, particularly as it pertains to additions to the longer-to-reset portion of our ARM securities portfolio. “Importantly, higher borrowing costs were partially offset by a six basis point increase in overall cash yields largely attributable to periodic coupon interest rate resets on mortgage loans underlying the currently-resetting portion of our portfolio. This key feature of our short duration ARM strategy should continue to benefit cash yields in the coming quarters. “Given our current opportunity for continued increases in cash yields and our prudent hedging posture, we believe that our short duration agency-guaranteed residential ARM portfolio is well positioned to generate attractive risk-adjusted returns over the long term. Key to our near-term success will be mortgage prepayment levels and the pace of future increases in short-term interest rates.” 14
Capstead’s Quarterly Income Statements 15 See page 20 for further information regarding this non-GAAP financial measure. Excludes the effects of first quarter 2017 adjustments to annual incentive compensation accruals of $938,000 and third and fourth quarter 2016 separation of service charges totaling $(3.0 million).
Capstead’s Annual Income Statements – Five Years Ended 2016 16 See page 20 for further information regarding these non-GAAP financial measures. Year ended December 31, 2016 excludes the effects of separation of service charges totaling $(3.0 million) and an adjustment to the prior year annual incentive compensation accrual of $(655,000).
Capstead’s Comparative Balance Sheets 17
Quarterly Earnings, Dividends and Changes in Book Value 18 Our quarterly earnings are affected by the impact of changes in interest rates on mortgage refinancing activity and our borrowing costs. Quarterly earnings can also fluctuate with seasonal factors, most notably higher mortgage prepayment levels typically experienced during the summer house-selling season. We reassess the common dividend periodically based largely on how these factors are impacting expected future earnings. Our book value per common share is directly impacted by changes in interest rates and other market conditions as our portfolio and our hedge instruments are marked-to-market through stockholders’ equity. Book value has also been impacted to the extent common dividends exceeded earnings resulting in returns of capital to our stockholders. For presentation purposes, we adjusted our Q2 2013 diluted EPS and related change in book value to exclude certain one-time effects of preferred capital transactions totaling $(0.23) and $(0.28), respectively. These transactions replaced higher-cost preferred equity to the benefit of future earnings. See page 20 for further information and a reconciliation of diluted EPS to this presentation.
Components of Capstead’s Recent Economic Returns 19 NOTE: Percentages in the graph above represent each economic return component as a percentage of beginning book value for the respective period. * Economic returns exclude $0.28 in one-time effects of a 2013 preferred capital redemption and $0.03 in severance charges recorded in 2016.
Non-GAAP Financial Measures 20 Financing spreads on residential mortgage investments, a non-GAAP financial measure, differs from total financing spreads, an all-inclusive GAAP measure, that is based on all interest-earning assets and all interest-paying liabilities. We believe presenting financing spreads on residential mortgage investments provides useful information for evaluating the performance of the Company’s portfolio. Core earnings per diluted common share is a non-GAAP financial measure that differs from the related GAAP measure of net income per diluted common share by excluding certain one-time effects of second quarter 2013 transactions to redeem then-outstanding high-cost convertible preferred capital and issue our 7.50% Series E preferred shares. We believe presenting this metric on a core earnings basis provides useful, comparative information for evaluating the Company’s performance. Core earnings available to common stockholders Quarter EndedYear Endedand core earnings per diluted common share:June 30, 2013December 31, 2013Net income available to common stockholders$4,103$0.04$89,027$0.93Redemption preference premiums paid19,9240.2119,9240.21Convertible preferred dividends accruing from the Series E preferredstock issue date to the convertible preferred redemption date1,7410.021,7410.02Core earnings available to common stockholders$25,768$0.27$110,692$1.16
Experienced Management Team 21 Our top three executive officers have a combined 75 years of mortgage finance industry experience. Phillip A. Reinsch – President and Chief Executive Officer, Director, Chief Financial Officer* and Secretary Appointed President, CEO and Director in July 2016 Served as CFO since 2003, and has served in other executive positions at Capstead since 1993 Formerly employed by Ernst & Young LLP focusing on mortgage banking and asset securitization A CPA and member of the NAREIT Mortgage REIT Council, the FEI Dallas Chapter Real Estate Steering Committee and the NACD * Will relinquish CFO title once this open position is filled Robert R. Spears – Executive Vice President, Chief Investment Officer Has served in asset and liability management positions at Capstead since 1994 Formerly Vice President of secondary marketing with NationsBanc Mortgage Corporation Roy S. Kim – Senior Vice President, Asset and Liability Management and Treasurer Joined Capstead in April 2015 augmenting our asset and liability management capabilities with primary responsibility for liability management Has over 20 years experience in the mortgage finance industry, primarily in trading capacities with JP Morgan and Bank of America