UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report:
(Date of Earliest Event Reported)
(Exact Name of Registrant as Specified in its Charter)
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(State of Incorporation) |
(Commission File No.) |
(I.R.S. Employer Identification No.) |
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(Address of Principal Executive Offices) |
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(Zip Code) |
Registrant’s Telephone Number, Including Area Code: (
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
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Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425). |
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Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 230.14a-12). |
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Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)). |
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Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)). |
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
Trading Symbols |
Name of each exchange on which registered |
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7.50% Series E Cumulative Redeemable Preferred Stock ($0.10 par value) |
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Indicate by check mark whether the registrant is an emerging growth company as defined in as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter).
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
ITEM 7.01.regulation FD Disclosure
Capstead Mortgage Corporation (“Capstead”, or the “Registrant”) has updated its presentation materials to be used in meetings with the investment community. The materials are attached hereto as Exhibit 99.1 and are incorporated herein by reference and are also available on our website at www.capstead.com.
The information referenced in this Current Report on Form 8-K (including the Exhibits referenced in Item 9.01 below) is being “furnished” under “Item 7.01. Regulation FD Disclosure” and, as such, shall not be deemed to be “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of that Section and shall not be incorporated by reference into any registration statement or other document filed by Capstead pursuant to the Securities Act of 1933, as amended (the “Securities Act”), except as shall be expressly set forth by specific reference in such filing.
ITEM 9.01.FINANCIAL STATEMENTS AND EXHIBITS
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(d) |
Exhibits. |
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Exhibit No. |
Description |
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99.1 |
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104 |
Cover Page Interactive Data File (embedded within the Inline XBRL document) |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
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CAPSTEAD MORTGAGE CORPORATION |
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January 29, 2020 |
By: |
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/s/ Lance J. Phillips |
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Lance J. Phillips |
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Senior Vice President, Chief Financial Officer |
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and Secretary |
Exhibit 99.1
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CONTACT: |
Lindsey Crabbe |
FOR IMMEDIATE RELEASE |
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(214) 874-2339 |
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CAPSTEAD MORTGAGE CORPORATION
ANNOUNCES FOURTH QUARTER 2019 RESULTS
DALLAS – January 29, 2020 – Capstead Mortgage Corporation (“Capstead” or the “Company”) (NYSE: CMO) today announced financial results for the quarter ended December 31, 2019.
Fourth Quarter 2019 Summary
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• |
Recognized GAAP net income of $32.7 million or $0.29 per diluted common share |
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• |
Generated core earnings of $19.1 million or $0.15 per diluted common share |
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• |
Increased fourth quarter dividend by 25% to $0.15 per common share |
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Book value per common share increased $0.02 to $8.62 per common share |
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• |
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 $7.40 billion notional amount of secured borrowings-related interest rate swaps averaged 23 basis points lower at 1.91% during the fourth quarter of 2019,
Page 1 of 10
primarily as a result of efforts to reduce hedging costs by replacing higher rate swaps with new swaps at lower prevailing rates. At December 31, 2019, fixed rates on these swaps averaged 1.77%, a 27 basis point decline from rates in effect on September 30, 2019.
The following table illustrates the progression of Capstead’s portfolio of residential mortgage investments for the quarter and year ended December 31, 2019 (dollars in thousands):
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Quarter Ended December 31, 2019 |
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Year Ended December 31, 2019 |
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Residential mortgage investments, beginning of period |
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$ |
11,235,803 |
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$ |
11,965,381 |
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Portfolio acquisitions (principal amount) |
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989,691 |
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3,239,372 |
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Investment premiums on acquisitions |
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20,336 |
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76,788 |
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Portfolio runoff (principal amount) |
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(988,295 |
) |
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(3,752,774 |
) |
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Sales of investments (basis) |
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– |
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(305,356 |
) |
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Investment premium amortization |
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(18,532 |
) |
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(73,742 |
) |
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(Decrease) increase in net unrealized gains on securities classified as available-for-sale |
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(16,821 |
) |
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72,513 |
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Residential mortgage investments, end of period |
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$ |
11,222,182 |
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$ |
11,222,182 |
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Decrease in residential mortgage investments during the indicated periods |
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$ |
(13,621 |
) |
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$ |
(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
Page 2 of 10
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
Page 3 of 10
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.
Page 4 of 10
CONSOLIDATED BALANCE SHEETS
(in thousands, except ratios, pledged and per share amounts)
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December 31, 2019 |
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December 31, 2018 |
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(unaudited) |
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Assets |
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Residential mortgage investments ($10.83 and $11.57 billion pledged at December 31, 2019 and 2018, respectively) |
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$ |
11,222,182 |
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$ |
11,965,381 |
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Cash collateral receivable from derivative counterparties |
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65,477 |
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31,797 |
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Derivatives at fair value |
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1,471 |
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– |
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Cash and cash equivalents |
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105,397 |
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60,289 |
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Receivables and other assets |
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125,474 |
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129,058 |
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$ |
11,520,001 |
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$ |
12,186,525 |
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Liabilities |
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Secured borrowings |
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$ |
10,275,413 |
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$ |
10,979,362 |
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Derivatives at fair value |
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29,156 |
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17,834 |
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Unsecured borrowings |
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98,392 |
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98,292 |
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Common stock dividend payable |
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14,605 |
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7,132 |
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Accounts payable and accrued expenses |
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28,702 |
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24,842 |
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10,446,268 |
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11,127,462 |
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Stockholders’ equity |
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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 |
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250,946 |
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250,946 |
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Common stock - $0.01 par value; 250,000 shares authorized: 94,606 and 85,277 shares issued and outstanding at December 31, 2019 and 2018, respectively |
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946 |
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853 |
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Paid-in capital |
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1,252,481 |
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1,174,880 |
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Accumulated deficit |
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(444,039 |
) |
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(346,570 |
) |
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Accumulated other comprehensive income (loss) |
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13,399 |
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(21,046 |
) |
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|
|
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1,073,733 |
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|
|
1,059,063 |
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|
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$ |
11,520,001 |
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$ |
12,186,525 |
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Long-term investment capital (consists of stockholders’ equity and unsecured borrowings) (unaudited) |
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$ |
1,172,125 |
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$ |
1,157,355 |
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Portfolio leverage (secured borrowings divided by long-term investment capital) (unaudited) |
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8.77:1 |
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9.49:1 |
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Book value per common share (based on shares of common stock outstanding and calculated assuming liquidation preferences for preferred stock) (unaudited) |
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$ |
8.62 |
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$ |
9.39 |
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Page 5 of 10
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
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Quarter Ended December 31 |
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Year Ended December 31 |
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2019 |
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2018 |
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2019 |
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2018 |
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Interest income: |
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|
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Residential mortgage investments |
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$ |
73,617 |
|
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$ |
72,902 |
|
|
$ |
320,217 |
|
|
$ |
274,891 |
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Other |
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|
666 |
|
|
|
626 |
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|
|
2,753 |
|
|
|
1,689 |
|
|
|
|
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74,283 |
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|
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73,528 |
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|
|
322,970 |
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|
|
276,580 |
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Interest expense: |
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|
|
|
|
|
|
|
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|
|
|
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Secured borrowings |
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(51,688 |
) |
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|
(59,321 |
) |
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(246,212 |
) |
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(206,976 |
) |
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Unsecured borrowings |
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(1,910 |
) |
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|
(1,910 |
) |
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(7,611 |
) |
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|
(7,611 |
) |
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|
|
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(53,598 |
) |
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|
(61,231 |
) |
|
|
(253,823 |
) |
|
|
(214,587 |
) |
|
|
|
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20,685 |
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|
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12,297 |
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|
|
69,147 |
|
|
|
61,993 |
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Other income (expense): |
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|
|
|
|
|
|
|
|
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Gain (loss) on derivative instruments (net) |
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15,142 |
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– |
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(90,578 |
) |
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– |
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Loss on sale of investments (net) |
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– |
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|
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– |
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(1,365 |
) |
|
|
– |
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Compensation-related expense |
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(2,050 |
) |
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|
(2,238 |
) |
|
|
(8,197 |
) |
|
|
(7,759 |
) |
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Other general and administrative expense |
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|
(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 |
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|
(4,842 |
) |
|
|
(4,842 |
) |
|
|
(19,368 |
) |
|
|
(19,368 |
) |
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Net income (loss) to common stockholders: |
|
$ |
27,830 |
|
|
$ |
4,142 |
|
|
$ |
(54,706 |
) |
|
$ |
30,704 |
|
|
|
|
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Net income (loss) per common share: |
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Basic |
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$ |
0.30 |
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$ |
0.05 |
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$ |
(0.62 |
) |
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$ |
0.34 |
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Diluted |
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0.29 |
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|
0.05 |
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(0.62 |
) |
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|
0.34 |
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Weighted average common shares outstanding: |
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|
|
|
|
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|
|
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|
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Basic |
|
|
93,991 |
|
|
|
87,884 |
|
|
|
88,722 |
|
|
|
91,114 |
|
|
Diluted |
|
|
94,293 |
|
|
|
88,006 |
|
|
|
88,722 |
|
|
|
91,230 |
|
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Cash dividends declared per share: |
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|
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|
|
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Common |
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$ |
0.15 |
|
|
$ |
0.08 |
|
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$ |
0.47 |
|
|
$ |
0.49 |
|
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Series E preferred |
|
|
0.47 |
|
|
|
0.47 |
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|
|
1.88 |
|
|
|
1.88 |
|
Page 6 of 10
QUARTERLY STATEMENTS OF OPERATIONS AND SELECT OPERATING STATISTICS
(in thousands, except per share amounts, percentages annualized, unaudited)
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|
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2019 |
|
|
2018 |
|
||||||||||||||
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Q4 |
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Q3 |
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Q2 |
|
|
Q1 |
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|
Q4 |
|
|||||
|
Quarterly Statements of Operations: |
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|
|
|
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|
|
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|
|
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|
|
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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 |
|
|
|
12,065,084 |
|
|
|
12,169,106 |
|
|
|
12,442,410 |
|
|
Average secured borrowings |
|
|
10,195,180 |
|
|
|
10,481,080 |
|
|
|
11,193,335 |
|
|
|
11,156,608 |
|
|
|
11,439,646 |
|
|
Average long-term investment capital (“LTIC”) |
|
|
1,172,897 |
|
|
|
1,146,916 |
|
|
|
1,149,388 |
|
|
|
1,161,815 |
|
|
|
1,188,553 |
|
|
Constant prepayment rate (“CPR”) |
|
|
29.39 |
% |
|
|
30.18 |
% |
|
|
26.29 |
% |
|
|
20.62 |
% |
|
|
22.37 |
% |
|
Total financing spreads |
|
|
0.57 |
|
|
|
0.31 |
|
|
|
0.34 |
|
|
|
0.42 |
|
|
|
0.22 |
|
|
Yields on residential mortgage investments |
|
|
2.67 |
|
|
|
2.76 |
|
|
|
2.82 |
|
|
|
2.75 |
|
|
|
2.34 |
|
|
Secured borrowing rates (a) |
|
|
1.97 |
|
|
|
2.31 |
|
|
|
2.35 |
|
|
|
2.23 |
|
|
|
2.07 |
|
|
Financing spreads on residential mortgage investments |
|
|
0.70 |
|
|
|
0.45 |
|
|
|
0.47 |
|
|
|
0.52 |
|
|
|
0.27 |
|
|
Operating costs as a percentage of LTIC (b) |
|
|
1.07 |
|
|
|
0.58 |
|
|
|
1.09 |
|
|
|
1.32 |
|
|
|
1.15 |
|
|
Quarterly economic return (change in book value plus dividends) |
|
|
1.98 |
|
|
|
(2.35 |
) |
|
|
(4.03 |
) |
|
|
1.28 |
|
|
|
(0.11 |
) |
|
Return on common equity capital (c) |
|
|
6.89 |
|
|
|
4.95 |
|
|
|
4.98 |
|
|
|
5.33 |
|
|
|
1.96 |
|
|
|
(a) |
Secured borrowing rates exclude the effects of amortization of the net unrealized gains (losses) included in AOCI on de-designated derivative instruments and include net interest cash flows on non-designated derivative instruments to better compare the components of financing spreads on residential mortgage investments. See “Reconciliation of GAAP Measures to Non-GAAP Measures” for details on the impact of non-designated derivative instruments. |
|
|
|
(b) |
First quarter 2019 excludes the effects of adjustments to 2018 incentive compensation accruals totaling $(949,000) due to the Company’s 2018 outperformance relative to its peers. |
|
|
|
(c) |
Calculated using core earnings less preferred dividends on an annualized basis over average common equity for the period. |
|
Page 7 of 10
RECONCILIATION OF GAAP MEASURES TO NON-GAAP MEASURES
(in thousands, percentages annualized, unaudited)
The Company defines core earnings as GAAP net income (loss) excluding (a) unrealized (gain) loss on derivative instruments, (b) realized loss (gain) on termination of derivative instruments, (c) amortization of unrealized (gain) loss of derivative instruments held at the time of de-designation (March 1, 2019) and (d) realized loss (gain) on securities. The following reconciles GAAP net (loss) income and net (loss) income per diluted common share to core earnings and core earnings per common share:
|
|
|
2019 |
|
|
2018 |
|
|||||||||||||||||||||||||||||
|
|
|
Q4 |
|
|
Q3 |
|
|
Q2 |
|
|
Q1 |
|
|
Q4 |
|
||||||||||||||||||||
|
|
|
Amount |
|
Per Share |
|
|
Amount |
|
Per Share |
|
|
Amount |
|
Per Share |
|
|
Amount |
|
Per Share |
|
|
Amount |
|
Per Share |
|
||||||||||
|
Net income (loss) |
|
$ |
32,672 |
|
$ |
0.29 |
|
|
$ |
3,196 |
|
$ |
(0.02 |
) |
|
$ |
(63,460 |
) |
$ |
(0.80 |
) |
|
$ |
(7,746 |
) |
$ |
(0.15 |
) |
|
$ |
8,984 |
|
$ |
0.05 |
|
|
Unrealized (gain) loss on non-designated derivative instruments |
|
|
(51,017 |
) |
|
(0.54 |
) |
|
|
(16,952 |
) |
|
(0.19 |
) |
|
|
59,388 |
|
|
0.70 |
|
|
|
26,237 |
|
|
0.31 |
|
|
|
– |
|
|
– |
|
|
Realized loss on termination of non-designated derivative instruments |
|
|
39,312 |
|
|
0.42 |
|
|
|
31,673 |
|
|
0.35 |
|
|
|
24,202 |
|
|
0.28 |
|
|
|
– |
|
|
– |
|
|
|
– |
|
|
– |
|
|
Amortization of unrealized gain, net of unrealized losses on de-designated derivative instruments |
|
|
(1,858 |
) |
|
(0.02 |
) |
|
|
(3,119 |
) |
|
(0.03 |
) |
|
|
(6,715 |
) |
|
(0.08 |
) |
|
|
(3,020 |
) |
|
(0.04 |
) |
|
|
– |
|
|
– |
|
|
Realized loss on sale of investments |
|
|
– |
|
|
– |
|
|
|
– |
|
|
– |
|
|
|
1,365 |
|
|
0.02 |
|
|
|
– |
|
|
– |
|
|
|
– |
|
|
– |
|
|
Core earnings |
|
$ |
19,109 |
|
$ |
0.15 |
|
|
$ |
14,798 |
|
$ |
0.11 |
|
|
$ |
14,780 |
|
$ |
0.12 |
|
|
$ |
15,471 |
|
$ |
0.12 |
|
|
$ |
8,984 |
|
$ |
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following reconciles total financing spreads to financing spreads on residential mortgage investments:
|
|
|
2019 |
|
|
2018 |
|
||||||||||||||
|
|
|
Q4 |
|
|
Q3 |
|
|
Q2 |
|
|
Q1 |
|
|
Q4 |
|
|||||
|
Total financing spreads |
|
|
0.57 |
% |
|
|
0.31 |
% |
|
|
0.34 |
% |
|
|
0.42 |
% |
|
|
0.22 |
% |
|
Impact of yields on other interest-earning assets* |
|
|
0.01 |
|
|
|
– |
|
|
|
0.01 |
|
|
|
– |
|
|
|
– |
|
|
Impact of borrowing rates on other interest-paying liabilities* |
|
|
0.05 |
|
|
|
0.05 |
|
|
|
0.05 |
|
|
|
0.05 |
|
|
|
0.05 |
|
|
Impact of amortization of unrealized gain, net of unrealized losses on de-designated derivative instruments |
|
|
(0.07 |
) |
|
|
(0.12 |
) |
|
|
(0.24 |
) |
|
|
(0.11 |
) |
|
|
– |
|
|
Impact of net cash flows received on non-designated derivative instruments |
|
|
0.14 |
|
|
|
0.21 |
|
|
|
0.31 |
|
|
|
0.16 |
|
|
|
– |
|
|
Financing spreads on residential mortgage investments |
|
|
0.70 |
|
|
|
0.45 |
|
|
|
0.47 |
|
|
|
0.52 |
|
|
|
0.27 |
|
|
* |
Other interest-earning assets consist of overnight investments and cash collateral receivable from interest rate swap counterparties. Other interest-paying liabilities consist of unsecured borrowings and, at times, may consist of cash collateral payable to interest rate swap counterparties. |
Page 8 of 10
FAIR VALUE AND SWAP MATURITY DISCLOSURES
(in thousands, unaudited)
|
|
|
December 31, 2019 |
|
December 31, 2018 |
|
|||||||||||||||||||
|
|
|
Unpaid Principal Balance |
|
|
Investment Premiums |
|
|
Basis or Notional Amount |
|
|
Fair Value |
|
|
Unrealized Gains (Losses) |
|
|
Unrealized Gains (Losses) |
|
||||||
|
Residential mortgage investments classified as available-for-sale: (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fannie Mae/Freddie Mac securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current-reset ARMs |
|
$ |
4,036,944 |
|
|
$ |
142,939 |
|
|
$ |
4,179,883 |
|
|
$ |
4,213,456 |
|
|
$ |
33,573 |
|
|
$ |
48,091 |
|
|
Longer-to-reset ARMs |
|
|
4,591,712 |
|
|
|
119,354 |
|
|
|
4,711,066 |
|
|
|
4,718,333 |
|
|
|
7,267 |
|
|
|
(66,326 |
) |
|
Ginnie Mae securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current-reset ARMs |
|
|
1,020,803 |
|
|
|
36,758 |
|
|
|
1,057,561 |
|
|
|
1,060,260 |
|
|
|
2,699 |
|
|
|
4,433 |
|
|
Longer-to-reset ARMs |
|
|
1,193,644 |
|
|
|
33,126 |
|
|
|
1,226,770 |
|
|
|
1,228,498 |
|
|
|
1,728 |
|
|
|
(13,444 |
) |
|
|
|
$ |
10,843,103 |
|
|
$ |
332,177 |
|
|
$ |
11,175,280 |
|
|
$ |
11,220,547 |
|
|
$ |
45,267 |
|
|
$ |
(27,246 |
) |
|
Derivative instruments: (b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreements: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured borrowings-related |
|
|
|
|
|
|
|
|
|
$ |
7,400,000 |
|
|
$ |
(6,383 |
) |
|
$ |
(2,712 |
) |
|
$ |
24,033 |
|
|
Unsecured borrowings-related |
|
|
|
|
|
|
|
|
|
|
100,000 |
|
|
|
(29,156 |
) |
|
|
(29,156 |
) |
|
|
(17,834 |
) |
|
Eurodollar futures contracts |
|
|
|
|
|
|
|
|
|
|
500,000 |
|
|
|
738 |
|
|
|
– |
|
|
|
– |
|
|
|
(b) |
Unrealized Gains (Losses) are amounts included in AOCI related to these positions as of the indicated dates. The following reflects Capstead’s secured borrowings-related swap positions, sorted by quarter of swap contract expiration. Average fixed rates reflect related fixed-rate payment requirements. |
|
|
Period of Contract Expiration |
|
Swap Notional Amounts |
|
|
Average Fixed Rates |
|
||
|
First quarter 2020 |
|
$ |
600,000 |
|
|
|
2.07% |
|
|
Second quarter 2020 |
|
|
200,000 |
|
|
|
2.56 |
|
|
Third quarter 2020 |
|
|
200,000 |
|
|
|
1.64 |
|
|
Fourth quarter 2020 |
|
|
200,000 |
|
|
|
2.04 |
|
|
Second quarter 2021 |
|
|
800,000 |
|
|
|
1.95 |
|
|
Third quarter 2021 |
|
|
1,700,000 |
|
|
|
1.60 |
|
|
Fourth quarter 2021 |
|
|
2,400,000 |
|
|
|
1.60 |
|
|
Second quarter 2022 |
|
|
800,000 |
|
|
|
2.25 |
|
|
Fourth quarter 2022 |
|
|
500,000 |
|
|
|
1.39 |
|
|
|
|
$ |
7,400,000 |
|
|
|
|
|
Eurodollar futures contracts currently represent a series of quarterly $500 million notional amount contracts extending to June 2020.
After consideration of secured borrowings-related derivative instruments, Capstead’s residential mortgage investments and related secured borrowings had durations as of December 31, 2019 of approximately 15 months and 14¼ months, respectively, for a net duration gap of approximately ¾ months. Duration is a measure of market price sensitivity to changes in interest rates. A shorter duration generally indicates less interest rate risk.
Page 9 of 10
RESIDENTIAL ARM SECURITIES PORTFOLIO STATISTICS
(as of December 31, 2019)
(in thousands, unaudited)
|
ARM Type |
|
Amortized Cost Basis (a) |
|
|
Net WAC (b) |
|
|
Fully Indexed WAC (b) |
|
|
Average Net Margins (b) |
|
|
Average Periodic Caps (b) |
|
|
Average Lifetime Caps (b) |
|
|
Months To Roll (c) |
|
|||||||
|
Current-reset ARMs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fannie Mae Agency Securities |
|
$ |
2,834,919 |
|
|
|
3.85 |
% |
|
|
3.61 |
% |
|
|
1.67 |
% |
|
|
2.70 |
% |
|
|
5.35 |
% |
|
|
6.3 |
|
|
Freddie Mac Agency Securities |
|
|
1,344,964 |
|
|
|
3.89 |
|
|
|
3.70 |
|
|
|
1.75 |
|
|
|
2.08 |
|
|
|
5.04 |
|
|
|
7.4 |
|
|
Ginnie Mae Agency Securities |
|
|
1,057,561 |
|
|
|
3.59 |
|
|
|
3.10 |
|
|
|
1.51 |
|
|
|
1.04 |
|
|
|
4.69 |
|
|
|
7.0 |
|
|
Residential mortgage loans |
|
|
530 |
|
|
|
4.15 |
|
|
|
4.69 |
|
|
|
2.09 |
|
|
|
1.72 |
|
|
|
11.24 |
|
|
|
6.3 |
|
|
(47% of total) |
|
|
5,237,974 |
|
|
|
3.81 |
|
|
|
3.53 |
|
|
|
1.66 |
|
|
|
2.21 |
|
|
|
5.14 |
|
|
|
6.7 |
|
|
Longer-to-reset ARMs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fannie Mae Agency Securities |
|
|
3,045,809 |
|
|
|
3.08 |
|
|
|
3.56 |
|
|
|
1.60 |
|
|
|
3.72 |
|
|
|
5.00 |
|
|
|
46.3 |
|
|
Freddie Mac Agency Securities |
|
|
1,665,257 |
|
|
|
3.09 |
|
|
|
3.64 |
|
|
|
1.67 |
|
|
|
3.99 |
|
|
|
5.04 |
|
|
|
52.4 |
|
|
Ginnie Mae Agency Securities |
|
|
1,226,770 |
|
|
|
3.49 |
|
|
|
3.09 |
|
|
|
1.50 |
|
|
|
1.01 |
|
|
|
5.01 |
|
|
|
43.6 |
|
|
(53% of total) |
|
|
5,937,836 |
|
|
|
3.16 |
|
|
|
3.48 |
|
|
|
1.60 |
|
|
|
3.24 |
|
|
|
5.01 |
|
|
|
47.5 |
|
|
|
|
$ |
11,175,810 |
|
|
|
3.46 |
|
|
|
3.51 |
|
|
|
1.63 |
|
|
|
2.76 |
|
|
|
5.07 |
|
|
|
28.5 |
|
|
Gross WAC (rate paid by borrowers)(d) |
|
|
|
|
|
|
4.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
Amortized cost basis represents the Company’s investment (unpaid principal balance plus unamortized investment premiums) before unrealized gains and losses. At December 31, 2019, the ratio of amortized cost basis to unpaid principal balance for the Company’s ARM holdings was 103.06. This table excludes $1.1 million in fixed-rate agency-guaranteed mortgage pass-through securities, residential mortgage loans and private residential mortgage pass-through securities held as collateral for structured financings. |
|
|
|
(b) |
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 the indicated date. 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 as of the indicated date. Average net margins represent the weighted average levels over the underlying indices that the portfolio can adjust to upon reset, usually subject to initial, periodic and/or lifetime caps on the amount of such adjustments during any single interest rate adjustment period and over the contractual term of the underlying loans. ARM securities with initial fixed-rate periods of five years or longer typically have either 200 or 500 basis point initial caps with 200 basis point periodic caps. Additionally, certain ARM securities held by the Company are subject only to lifetime caps or are not subject to a cap. For presentation purposes, average periodic caps in the table above reflect initial caps until after an ARM security has reached its initial reset date and lifetime caps, less the current net WAC, for ARM securities subject only to lifetime caps. At quarter-end, 74% of current-reset ARMs were subject to periodic caps averaging 1.77%; 19% were subject to initial caps averaging 2.60%; 6% were subject to lifetime caps averaging 6.40%; and less than 1% were uncapped. |
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|
|
(c) |
Capstead classifies its ARM securities based on the average length of time until the loans underlying each security reset to more current rates (“months-to-roll”) (less than 18 months for “current-reset” ARM securities, and 18 months or greater for “longer-to-reset” ARM securities). After consideration of any applicable initial fixed-rate periods, at December 31, 2019 approximately 92%, 4% and 3% of the Company’s ARM securities were backed by mortgage loans that reset annually, semi-annually and monthly, respectively, while approximately 1% reset every five years. Approximately 81% of the Company’s current-reset ARM securities have reached an initial coupon reset date. |
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|
|
(d) |
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 the indicated balance sheet date. |
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