Q2 2020 Capstead Mortgage Corp Earnings Call

[music].

Good morning, and welcome to the Capstead markets second quarter 2020 topical.

That's a band listen only mode, if you need.

You know a cop, especially if I see the sarkouhi.

After today's presentation, there will be an opportunity. That's question you asked the question you make a star then one on your telephone keypad destroy your question. Please press Star then Tim. Please note. This is actually being recorded I would now like to turn the conference over to my scrap. Please go ahead.

Good morning, they are going to me that second quarter earnings conference call.

Where earnings release issued yesterday July 29, 48 assess it on our website www dot dot dot com.

That's a really good.

So we can this webcast is off the wouldn't be Investor relations section on our website, an archived webcast. A replay of this call will be available through October 2020, Twond. He goes up the replay are included in yesterday's release.

On the call there, it's all right [laughter], Chief Executive Officer, Robert Spears, Executive Vice President and Chief Investment Officer, and late So senior Vice President and Chief Financial Officer.

The support of health and wellbeing of Arclight Canadian address the rent associated with the global pulled at night and data we have implemented our business continuity plan that enabled and our employees were currently accessories indications we have just.

Before we get started I want us to remind you that sometimes they call. It could be considered forward looking statements are feeling the safe Harbor provisions of the private Securities Litigation Reform Act like 95 and are based on certain assumptions and expectations of is it and if it's a certain her you wouldn't call or non-GAAP financial measures reconciliations of what's it provided in the company's earnings release.

We had a company full table work schedules, which have been filed on form 8-K, with yet to see and they also be accessed through the company's website.

Do you have list of all the rest doctors associated with our bid, but please refer to our filings in VIP C, which are available on our website information contained in a college hurling correct only half a day. This call July Thirtyth quite funny. The company has no obligation to update any statements, including any forward looking statements made during this call without also the coal to Phil.

Thank you likely and thanks, everyone for your interesting capsid.

After my remarks last will give a recap of the second quarter and then we'll open the call question.

We're pleased to report excellent results from core.

Earned or 15 cents common dividend run rate by 20%.

Even with significantly lower portfolio balances and less leverage.

Producing an annualized return on common equity 10.8%.

Common dividend itself is unchanged for three quarters, now and our core earnings met or exceeded the dividend in each of these orders were likely the only mortgage read that can make that claim given the market disruptions experienced anymore.

As importantly.

Our portfolio recovered strongly in value over the course, except for contributing the lions share of a 72 cents increase in book value.

79 per common share.

The 11.9% increase together with the common dividend resulted in an economic return for the quarter or 14.3%.

Which we expect to be won the best performances in the sector as well.

Making these returns more compelling we anticipate that our common and preferred dividends for 2020, well be characterized as 100% return to capital due in large part two reductions in our derivative positions last quarter.

Looking forward, we expect to continue adding to our short duration agency only portfolio in coming quarters provided risk adjusted returns remain attractive what's on his repo borrowing rate in and around 25 basis points currently and what swap rates in cycle loans, we should continue to see lower borrowing.

In the coming quarters, even as we absorb higher levels of mortgage pretty bad.

Longer term the fed is made it clear that they intend to remain very accommodating as a country gap grappled with the uncertainties and then.

This means keeping longer term right under control be a treasury and fixed rate agency MBS purchases and short term interest rates low.

As the economy recovers, we would expect reduced support for longer term rates potentially allowing more seamless to the yield curve to the benefit of our business.

Wrapping up we believed that our agency only short duration focus is serving us well and we're well positioned to generate attractive returns at lower leverage levels and we have employed in the recent past.

For investors seeking risk adjusted Levered return with a comparatively higher degree of safety from interest rate and credit risk.

We believe cast it represents a compelling opportunity is difficult to find elsewhere in the market.

With that I'll turn the call overlap.

Thank you Phil.

Reported a GAAP net income of 42.2 million this quarter or 19 cents per diluted common share. Our core earnings were 21 49 million or 18 cents per diluted common share.

Cool core earnings exclude realized and unrealized losses on our portfolio related interest swap agreements.

Seven cents and portfolio related increases in value.

[noise] portfolio yields average, 2.33% during the quarter, a decrease of 16 basis points from the 2.49% we reported in the prior quarter.

Yields declined primarily due to lower cash you as a portion of our our portfolio reset to lower prevailing interest rates and lower coupons on recent acquisitions.

Our portfolio related borrowing costs after adjusting for our hedging activities averaged 1.09% during the second quarter 63 basis points lower than in the prior quarter, leading to a 48 basis point improvement in our net interest spreads.

The benefits of lower unhedged repo rates and lower fixed rate on our swap book were partially offset by the declines in the receive lay that these derivatives based on lower three month LIBOR floor and the OAI S rates at June Thirtyth.

The fixed pay radar swap book was 1.27% a decline of 17 basis points from raised in effect on March 31st.

These lower fixed rate should benefit future earnings.

With that we will open the call up to questions.

Just a question you May press Star then one on your telephone keypad, if you're getting a speakerphone. Please pick up your handset pricing, making such on your question. Please press Star then Tim.

My first question comes from Jason Stewart Jones training.

Hi, guys. Good morning, nice work navigating a tough environment I was hoping you could share your thoughts on mortgage credit availability and how you think it factors into model prepay speeds.

Well one thing that's become pretty apparent is that the originators aren't having as much trouble closing loans, whether revised or not.

It during this pandemic like folks were speculating all spraying law.

So prepays are running pretty hot now with a mortgage rates.

Fairly low at the same time underwriting standards are pretty tight.

And you do have folks that may be having trouble.

Qualifying given their personal circumstances.

Got it makes sense and it did you if I missed it early on please forgive me did you share incremental or are we numbers.

Where do you think the market is today.

Oh on purchases at the margin right now we're looking at.

Kind of a 10% type returns on 11 basis between seven and a half an eight times I'm in short duration products that we're focusing on.

Got it thanks for taking the questions appreciate it.

Thanks, Jason.

Your next question is from Steve Delaney JMP Securities.

Hey, good morning, everyone and congrats on a great quarter <unk> on book value you beat us by about 20 cents you know you've got much better visibility into arms than we do just curious Robert how you're seeing arms trend here is we're almost one month into the third quarter have they been stable or trended higher what are you seeing.

Recent there they're trading very very well see there's a really strong bank debt out there for both new issue and season arms and so they continue to trade well. If you think about it I mean with a fixed rate universe price you know in aggregate well north of one.

Hi.

Arms in the while floors are somewhat compelling to the banks in particular, so they have continued to grind down a touch up into the quarter post quarter end and I think supply sticking up which is a good thing new issue supply I think that's even helping more because uh huh.

Arms and can be kind of funny that actually increased volume can improve liquidity and guide can can buy paper inside so the sure sure.

Still very positive from standpoint, the valuations going forward.

So yeah I'm just curious what do you supply I mean.

Gosh, given where new rates or are you I think we were were had fallen down to like 5%, 5% to 6% or the market are you actually seeing new production volume picking up in arms. Despite the low record low 30, but senior rates.

Yes, I mean, there's still a necessity that didn't occur where production is starting to increase and actually second quarter do our production level from the first as though.

Yeah, do new issue seven ones or are being originated with rather slack and.

Upper twos as opposed to Ah you know a lot of.

Refinanced right that there are no cost basis are still around three in order for fixed rate bonds is as seen in the yield curve is definitely help and you know lots on the rates could as long as people try to reach for as long as yields they can so.

From that standpoint were very positive on a new issue secondary selling.

With a lot less in the second quarter, obviously, but we're very optimistic as far as being.

Acquired bombs going forward.

Great and I'm just.

Looking at your swap book I mean, he's got trying to figure out you know you're gonna have faster speeds and I assume it you know that Lance is probably already adjusted do you know the lifetime assumption given to.

The curb that exist today so.

You can't get any <unk> fed can't go any lower on the short end right. So it would seem to me that you're the improvement you you've got I hope you're swap run off you know helps offset some of the a the pressure on your Ah on your spread that you see from the from the faster speeds.

So it looks like you know you have 400000, Oh excuse me 400 million run off here and the second half this year, averaging about 180. Good obviously weve got was what was 25 basis points I'm looking at the the scheduled the number that jumps out it's just two and a half billion and if there is about a year from now third quarter or 21.

At 125 basis points, you know any any thoughts about that there may be done some swap termination and already but what are your thoughts about that specific swap position and whether you would trade out of that.

Yeah. I mean, we are we looking data on a regular basis and there's a decent profitability that we get a termination shorter durations losses go out hurt a little bit ER.

Quite frankly, right now were able to.

Actually if you think about on.

To your money cheaper than weekend 30 day Reid.

I think we're very very cognizant of what's going on there and there's a decent probabilities we do some.

Yeah, I mean, there's just for your swaps. The same is roughly the same answer to your swap. So I mean, you've got a lot of flexibility it would seem there.

And one final thing just you know air Master when you roll Downs.

Right around 2% on on you know one on one year resets as that is that what you're saying I guess, it's a range more of what probably like 190 to 210.

Yeah, I think about our our margins are.

On your line of work.

You know kind of get.

Thank you for short reset bucket.

Positive thing about data, obviously coupon going lower yeah, it's slightly negative but positive is.

Hey, guys resetting now yeah mortgages in the <unk> [laughter], two or three quarters area. So, they're probably not going to be as prime to refine and were seen yet problem right now the previous pressure that were really seen right now or on our new were issued five yep Yep. That's for the last couple of.

Years are are shorter season book is pretty thing very very well right now it's I think that trends point you Ah you know even into that she said one originate two years ago is 50 to 75 basis points in the money right now and clean credit. So I think that trend will continue for the next year.

Well, that's where we had better speed performance out of our season short resets that we do our longer reset bucket.

Well nice job and thanks to the comments.

Thank you see.

[noise] next question is something I take any KBW.

Hey, good morning, good to hear from you guys.

And with the only mortgage agree with its somewhat meaningful gennine portfolio I feel like <unk>.

Your thoughts could be really valuable on the pace of BYOD activity.

Result of higher delinquencies and its impact on prepay speeds and your portfolio.

Sure I mean last month.

Sure most people are whereas the ginnie space.

So on a huge spike in C across the board fixed rate arms and it was buyout related and so we're kind of early in the process.

The question on my math is.

Does it behooves, its service or buyout and they're they're looking at being able to re securitized was eventually what things it cost us like I say.

Was initially 90 day for parents love could be bought out and immediately refuel and to deviate collateral. So I think a lot of people took advantage of that window to buy as much as they could take it immediately re securitized going forward.

I want to hold on to that paper for six those ones for six months. So the decision internally and then come down to bank that had a lot of capital back maybe more from the buyout loans and then a non bank originators that don't have less capital may not want to buy online so.

Buyout definitely drove a big spike in speech last month that could continue for another month or two but I think long term ultimately Jenny will start slowing down right now, it's pretty nasty getting mad.

And we don't have as many as we see we sold a decent chunk back any in the first quarter, but even very seasoned bonds. You can tell you can look at the service is that even some of the seed and stuff you could pick out a couple of banks. Francis said, obviously had big ER delinquent buyout programs in place over the last couple of months.

Picked out some sites on the next few months.

As most of your Ginnie portfolio service by banks are non banks well. So the really seasons paper you back and today well is the biggest competitor season journey builder issue that has shifted more to the non bank originators the.

But the quick is the freedoms et cetera, so really the line at demarcation it kind of like if you go back.

Well the originated more than six or seven years ago, It's primarily bank servicers. The newer issue is primarily nonbank servicers.

Yeah.

What's really interesting color. Thank you for that.

Yeah, one of your here it looks as if you look at our portfolio really we got a.

2% in.

Agencies that are that are bank service. If you will there are no current reset classification. This season, and then a another 8% or so.

That's a longer reset newer issue Jamie.

So fairly modest people into our portfolio these days.

That's really interesting yeah. Thank you again for that so that's interesting color. One of your peers was just talking about the term premium for repo, having flatten considerably over the last few months. It is the idea to keep rolling 30 day repo or could you put onto funding further up the curve.

Almost like a that that's exactly correct me 30 day repos pretty much the same 90 day re pedal.

With most of our lenders and so we are Oh, yeah, and it depends upon the lender and what we're used to with their behavior. So poor. So we are doing more 90 day retirement and then we have in the past or we had really extended beyond that but yes, it becomes more phase.

Bubble, we wouldn't have fallen going out beyond that 90 day at this point has been primarily night.

We you know we saw our didnt take it out from day one.

Interesting okay. Thanks again.

Thank you.

I am I going to ask a question press Star then one on telephone keypad.

Our next question is somehow Granger, great quarter me Sach.

Thank you for taking my question.

Congratulations on a strong increase in your book value of 11.9% during the quarter.

True $6.79 can you give us a sense of where your book value is now.

It's it's fairly flat to the quarter in at this juncture.

Okay. Thank you.

This concludes our question and answer session I'd like to turn the conference back up at the management for closing remarks.

Thanks again for joining yesterday you have further question.

Yes for anything looking for.

The conference has now concluded thank you for attending today's presentation MMR Okay.