Investor Presentation Third Quarter 2018 Exhibit 99.1
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. 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.
Company Summary Proven Strategy, Efficiently Executed Overview of Capstead Mortgage Corporation Founded in 1985, Capstead is the oldest publicly-traded residential mortgage REIT. We manage a leveraged portfolio of short-duration agency-guaranteed 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 September 30, 2018, our agency-guaranteed ARM securities portfolio stood at $12.68 billion, supported by $1.22 billion in long-term investment capital levered 9.53 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. Our sole focus on agency-guaranteed ARM securities along with our internally-managed structure, we are arguably the most efficient mortgage REIT in the industry. Our top four executive officers have over 75 years of mortgage finance industry experience. We are internally managed with low operating costs and a strong focus on performance-based compensation which greatly enhances the alignment of management interests with those of our stockholders. Our singular 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. Because we are internally managed, 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 report, SEC filings and investor presentations that tell our story in a complete and straightforward fashion. Transparent Reporting Duration is a measure of market price sensitivity to interest rate movements. A shorter duration generally indicates less interest rate risk. Experienced Management Aligned with Stockholders
Market Snapshot & Stock Repurchases Beginning of quarter book value used to illustrate discount and calculate accretion. As of November 9th, we have $44 million remaining under our current repurchase authorization.
Historical Leverage & Long-Term Investment Capital Borrowing at current levels represents an appropriate use of leverage for a short-duration, agency-guaranteed ARM securities portfolio in today’s market conditions Portfolio and Portfolio Leverage Long-term Investment Capital
CMO economic returns exclude $(0.28) per share associated with 2013 preferred capital redemption and issuance transactions and $(0.03) per share in separation of service charges incurred in 2016. Including the effects of these items, our economic returns would have been lower by 206 basis points in 2013 and by 9 and 46 basis points for the 3- and 5-year averages, respectively. Agency Peers: AGNC, AI, ANH, ARR, CYS, EARN, HTS, NLY, ORC (HTS through 2016). All Peers: Agency peers plus AMTG, CIM, DX, HCFT, IVR, JMI, MFA, MITT, MTGE, NYMT, RWT, TWO, WMC (HTS, AMTG and JMI through 2016). HCFT had not reported as of November 13th, analyst estimates used. Economic Returns Economic return (change in book value plus dividends) is a key performance metric for mortgage REITs. 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.
Proven Short-Duration Investment Strategy Our strategy is designed to insulate our investment capital from credit and, to a large degree, interest rate risk by investing in relatively short-duration agency-guaranteed ARM securities augmented with low-cost two- to three-year interest rate swap agreements. As of September 30, 2018 Residential ARM Securities Portfolio Secured Borrowings & Swap Notional Amounts (by quarter of borrowing maturities / contract expirations) Total: $12.72 Billion (cost basis) Longer-to-Reset ARMs $6.18 Billion (cost basis) Current-Reset ARMs $6.55 Billion (cost basis) Our portfolio of agency-guaranteed ARM securities has little, if any, credit risk. Our Current-Reset ARMs (less than 18 months to reset) reset in rate on average in approximately 6 months and our Longer-to-Reset ARMs on average reset in approximately 42 months. With an asset duration of approximately 12¼ 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 23 counterparties. We routinely borrow for 30 to 90 days and extend the duration of our borrowings primarily using relatively low-cost two year term, pay-fixed, receive 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 6½ months at quarter-end, resulting in a net duration gap of approximately 5¾ months.
Financing Spreads Cash yields continue to benefit from higher coupon interest rates as mortgage loans underlying our current-reset ARM securities reset to higher rates. Investment premium amortization is driven by mortgage prepayment levels (“CPR”) which 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 as the markets absorbed the effects of seven 25 basis point Federal Funds Rate increases since December 2016 and expectations for future rate increases. Cash yields are based on the cash component of interest income. Investment premium amortization is determined using the interest method which incorporates actual and anticipated future mortgage prepayments. Both are expressed as a percentage calculated on average amortized cost basis for the indicated periods. Unhedged borrowing rates represent average rates on secured borrowings, before consideration of related interest rate swap agreements. Hedged borrowing rates represent the average fixed-rate payments made on interest rate swap agreements adjusted for differences between LIBOR-based variable-rate payments received and unhedged borrowing rates. 2016 2017 2018 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Total financing spreads: Yields on all interest-earning assets 1.49E-2 1.6744443138806513E-2 1.6538044539174877E-2 1.6815378021486818E-2 1.9E-2 2.07E-2 0.02 2.0799999999999999E-2 Borrowing rates on all interest-paying liabilities 0.94 0.98905919200084558 1.1348020394569407 1.2196301189627354 1.34 1.52 1.67 1.87 Total financing spreads 0.55000000000000004 0.67538512187980571 0.51900241446054696 0.46190768318594633 0.56000000000000005 0.55000000000000004 0.33 0.21 Financing spreads on residential mortgage investments, a non-GAAP financial measure: Cash yields on residential mortgage investments 2.5499999999999998E-2 2.601829951035E-2 2.65932394112556E-2 2.7199999999999998E-2 2.7900000000000001E-2 2.8500000000000001E-2 2.93E-2 3.0700000000000002E-2 Investment premium amortization -1.05 -0.9276201189174802 -0.99722995542878301 -1.0344784968147631 -0.88 -0.77 -0.93 -0.99 Yields on residential mortgage investments 1.5 1.6742098321175169 1.6620939856967749 1.6893229147754669 1.91 2.08 200.0000000000000% 2.08 Unhedged secured borrowing rates 0.79 0.89120993516127578 1.0910109354249296 1.328561732233918 1.39 1.64 1.97 2.21 Hedged secured borrowing rates 0.95 0.95657351995620687 1.0779900805029872 1.0983795041158759 1.23 1.35 1.36 1.52 Secured borrowing rates 0.89 0.93451370095067998 1.0829259612566788 1.1683002581666346 1.29 1.47 1.62 1.82 Financing spreads on residential mortgage investments 0.61 0.73969613116683708 0.57916802444009596 0.52102265660883218 0.62 0.61 0.38 0.26 Average constant prepayment rate ("CPR") 25.59 22.929172637324434 24.69 25.77 22.5 19.64 23.82 25.71 akes snes
Historical Interest Rates Affecting Earnings Blue highlighting indicates the summer selling season. One-month LIBOR, a proxy for our borrowing costs, and the primary indices affecting the cash yields of our ARM securities portfolio, have increased largely due to the effects of seven 25 basis point Federal Funds Rate increases since December 2016 and expectations of future rate increases. Ten-year U.S. Treasury rates, a proxy for mortgage interest rates, have not kept pace with these increases in recent quarters, presenting homeowners whose loans are resetting higher in rate with potential opportunities to refinance.
Agency Mortgage Prepayment Speeds ARMs tend to prepay faster than fixed-rate MBS and are priced accordingly. ARM and fixed-rate speeds have diverged in recent years in a rising mortgage rate environment, reducing refinancing opportunities for fixed-rate mortgagers. 2nd and 3rd qtr. 2018 prepayments reflect seasonal factors as well as refinancing activity primarily centered on homeowners whose mortgages are resetting higher. Blue highlighting indicates the summer selling season.
ARM Portfolio Characteristics The 86 basis point spread at September 30, 2018 between the Net WAC and Fully-Indexed WAC on our current-reset ARMs is indicative of the opportunity to earn higher cash yields over the course of 2018. With an average of 42 months to roll, prepayment rates on our longer-to-reset ARMs can be expected to be benign given a lack of rate incentive for these homeowners to refinance. 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 September 30, 2018. 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 the 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 September 30, 2018. Excludes $2 million in legacy portfolio of fixed-rate investments. As of September 30, 2018 (dollars in thousands, unaudited) Principal Balance Investment Premiums Amortized Cost Basis Fair Market Value Net WAC Fully-Indexed WAC Average Net Margins Months to Roll Current-reset ARMs: Fannie Mae Agency Securities $3,557,666 $,116,915 $3,674,581 103.2862837601956 $3,719,415 3.6799999999999999E-2 4.4499999999999998E-2 1.6799999999999999E-2 6.1 Freddie Mac Agency Securities 1,511,597 53,902 1,565,499 103.56589752427399 1,581,506 3.63 4.6399999999999997 1.78 7.2 Ginnie Mae Agency Securities 1,263,412 41,614 1,305,026 103.29377906811079 1,309,598 3.12 4.0999999999999996 1.51 5.6 Residential Mortgage Loans 1,045 6 1,051 100.57416267942583 1,063 4.04 4.7 2.11 5.3 (51% of total) 6,333,720 ,212,437 6,546,157 103.35406364664053 6,611,582 3.56 +0.86 4.42 1.67 6.2 Year-end 2017 3.05 +0.57 3.62 Longer-to-reset ARMs: Fannie Mae Agency Securities 2,840,426 70,266 2,910,692 102.47378386199817 2,857,642 2.85 4.51 1.59 40 Freddie Mac Agency Securities 1,396,013 36,320 1,432,333 102.60169496988925 1,403,150 2.79 4.5599999999999996 1.64 37.700000000000003 Ginnie Mae Agency Securities 1,795,158 37,774 1,832,932 102.10421589631665 1,807,660 3.2 4.09 1.5 48.9 (49% of total) 6,031,597 ,144,360 6,175,957 102.39339597788116 6,068,452 2.94 +1.46 4.4000000000000004 1.58 42.1 Year-end 2017 2.81 +0.81 3.62 $12,365,317 $,356,797 $12,722,114 102.88546585582885 $12,680,034 3.26 +1.15 4.41 1.62 23.7 Year-end 2017 2.93 +0.69 3.62 Gross WAC (rate paid by borrowers) 3.85
Stockholder Friendly Structure 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. 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. Additionally, we are not conflicted regarding repurchasing shares when appropriate.
Appendix
Quarterly Income Statements See page 17 for further information regarding this non-GAAP financial measure.
Annual Income Statements – Five Years Ended 2017 See page 17 for further information regarding these non-GAAP financial measures. Excludes the effects of first quarter 2017 adjustments to annual incentive compensation accruals of $938,000. 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).
Comparative Balance Sheets
Non-GAAP Financial Measures 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 Our top four executive officers have over 75 years of mortgage finance industry experience. Phillip A. Reinsch – President and Chief Executive Officer Appointed President, CEO and Director in July 2016 after serving as Chief Financial Officer since 2003 Served in other executive positions at Capstead since 1993 Robert R. Spears – Executive Vice President, Chief Investment Officer 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 Lance J. Phillips – Senior Vice President, Chief Financial Officer and Secretary Joined Capstead in October 2017 Has 20 years experience in the accounting and finance industry, most recently as Vice President and Principal Accounting Officer for InfraREIT, Inc.