Q3 2020 Capstead Mortgage Corp Earnings Call
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Opportunity to ask questions.
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I would now like to turn the conference over to Ms. Lindsey Crabbe Investor Relations manager Ms. Crabbe. Please go ahead.
Good morning. Thank you for attending <unk> third quarter earnings Conference call. The third quarter earnings release was issued yesterday October 28, 2020, and its posted on our website at www Dot got that done well under the Investor Relations tab.
The link to this webcast is also in the Investor Relations section of our website and our head of Investor webcast and a replay of this call will be available through January 20, 2021 details for the replay are included in yesterday's release.
On the call today are Phil Rice, President and Chief Executive Officer, Robert Spears, Executive Vice President and Chief Investment Officer, and Atlanta, <unk>, Senior Vice President and Chief Financial Officer.
Before we get started I want to remind you that some of today's comments could be considered forward looking statements pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 90, 95 and are based on certain assumptions and expectations of management.
In addition, certain hurdles used in this call are non-GAAP financial measures reconciliations of which are provided in the company's earnings release and accompanying tables or schedules, which have been filed on form 8-K with the efficacy and they also be <unk>.
Accessed through the Companys website for a detailed list of all the risk factors associated with our business. Please refer to our filings with the SEC, which are available on our website <unk>.
Maybe I can take it on this call is current only as of the date of this call October 29, 25. The company assumes no obligation to update any statements, including any forward looking statements made during this call with that I will turn it over to Phil.
Wendy and thanks, everyone for your interest in Capstead mortgage after my remarks, Lance I'll give a recap of the third quarter and then we'll open the call question.
We're pleased to report another strong and steady quarter that serves to illustrate the effectiveness of our short duration agency only investment strategy.
Of course spaces, we once again outperformed or 15 cents common dividend run rate producing an annualized return of 9% on common equity we accomplish this with leverage and portfolio balances consistent with the prior quarter, but considerably lower than a pre pandemic periods commentary.
I'm in itself was unchanged for four quarters now.
And our core earnings met or exceeded the dividend each of these quarters. Despite the market disruptions experienced in March we are the only mortgage riet that can make that claim in fact looking at fears in the residential mortgage REIT space on average their dividends currently stands at less than 50% of what they were in the fourth quarter.
A stark contrast to cast a steady performance.
As importantly, our book value was up slightly this quarter after a decent recovery in the second quarter contributing to a 2.4% economic return for the third quarter and 17% since March.
Looking forward, we are optimistic we did not see a repeat of the market disruptions experienced in March given the lower leverage levels in the market and the fed bond buying programs.
Mortgage prepayments should moderate in the coming quarters, right. So mortgages underlying the portfolio reduced by common coupon reset and add some portfolios replenish at current market rates.
Seasonality will also play a role with the end of the summer home buying season and the upcoming holidays.
Borrowing costs should decline with repo rates currently in the low twentys and when swap rates in cycle lows.
With leverage at less than 7.6 times, our long term investment capital the opportunities that increase profitability by adding to our portfolio agency arm securities over and above the run off.
Early and mortgage prepayments begin receding.
Wrapping up we believe that our agency always short duration focus is serving our stockholders will and we are well positioned to generate attractive returns.
Related borrowing costs after adjusting for hedging activities averaged <unk>, 0.67% during the third quarter 42 basis points lower than in the prior quarter, leading to a seven basis point decline in our net interest spreads as a result of higher rate fixed swap expirations and pair.
During the quarter at September Thirtyth.
The fixed pay rate on our swap book was 69 point, 69% a decline of 58 basis points from rates in effect on June Thirtyth. These.
These lower fixed rates going forward should benefit future earnings.
With that we will open the call up to questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad. If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at.
At this time I will pause momentarily to assemble our roster.
The first question comes from the line of Jason Stewart with Jones trading. Please go ahead.
Hi, good morning, Thanks for taking the question, we saw a little bit of a backup in rates since September Thirtyth and I was wondering if you could give us some color on how the hybrid arm market reacted whether we saw a pickup in production or any color there would be helpful.
Sure since.
At the end of the quarter short rates are fairly stable. So most of the move.
The movement in the yield curve has been.
Keeping with five to 10 year range or not much more than two to three year rates.
So really.
Our arm prices generically is really fairly unchanged.
From in the quarter or not obviously, you've seen some spread tightening in the fixed rate sector predominately in lower coupon TV age, but arms are pretty much straight into their empirical duration since quarter end, so not not a lot of change since then.
And even though we're talking about a modest steepening of the curve, it's not incentivizing any increase production there.
It should we had seen.
October production was a decent month, one thing that's kind of interesting right now from a production standpoint.
As you probably know Fannie and Freddie are going to stop guaranteeing.
LIBOR based arms after December and quit purchasing as opposed to LIBOR arms. So the originators are transitioning from whiteboard us over and there is kind of a gap right now.
Where sprint does Saudi originators, just stop originating fly more arms, but haven't rolled out so for yet and starting next month in November I think we'll start seeing both some light or add silver production and so it's kind of a transition period and the show.
Short run that hurting supply new supply a little bit but in the long run a steeper curve will obviously be positive for increasing supply in the arm market.
Okay that makes sense and then pulling some of those comments together it sounds like as you reinvest and take leverage up a little bit.
Reinvestment yields are on par with what you're seeing in the third quarter today, maybe a little bit better.
We're kind of looking at it Levered returns the paper buying kind of in the mid nines right now.
Which I think is I know there are some higher numbers of TV age and whatnot, but using like an eight times leverage assumption I think mid mid nines to 10 is kind of the area, where we're looking to reinvest.
Great. Thanks for taking the questions appreciate it.
Again, if you have a question. Please press Star then one.
The next question is from the line of Jim Duffy with.
Private Investor. Please go ahead.
Hi, Phil Robert Jim Delisle, how are you.
Good news.
Hey.
That's my knowledge that doesn't.
Aware of the fed having bought any PVA arms or anything and in the arm space as part of their quantitative easing.
Are you are there.
Legislative reason first of all am I correct second of all are there like legislative reasons or structure reason third of all live.
I am correct and there are no particular reasons is there ever any talk that they might.
The the.
The fed didnt buying the the heart of the market, which is the fixed rates in order to have.
Hi, good Bang for their Buck and.
I'm not aware of any.
Regulatory legislators.
Constraints on them buying arms, but Ah.
Does that have the greatest effect they they stepped into the fixed income market.
Okay and are pulling their capital that way.
Yes, I think a lot of into they probably that they didnt buy agency arms. They also that by agency Cmos.
And I, just don't think it from their standpoint, they view those.
Areas of the mortgage market is being really.
In the hands of Levered players, probably more stable not as our front end like not as big of a driver as the other products I mean, I think its arms had much bigger share of the overall MBS market they'd be buying and so I think that could happen at some point in time. It just didnt happen during this cycle.
Oh, just it just hasn't happened during this cycle call me Crazy, but I think like a few a few score of billions worth the fed buying in the arm market might turn it into a a coupon that would be very very competitive for incremental and incremental borrowers and fixed right all.
All right guys, great keeping track of you had a good quarter.
Thanks, Jeff.
We have a follow up question from the line of Jason Stewart with Jones trading. Please go ahead.
Hi, Thanks for taking the follow up on the on the funding side I was wondering if you'd taken anything over year end, yet and what you're seeing in terms of cost availability there in terms of funding.
Yeah right now, we're not really seeing a lot of your end funding pressure generically. If you look at repo rate column in the 20 to 22 basis point area, you're maybe seen a two to three basis point premium and in some cases not at all to go over yearend. So there's very little at this point.
Yeah.
A year there's.
Less pressure on the year end turn than we've seen in a long time. So there is a lot of availability of repo out there right now.
Great and then the IDE forgive me if I missed it but the there was a nice $500 million 12 months secured borrowing that you entered into did you disclose the rate on that.
I'm, sorry could you repeat that Jason.
It looks like it was it was a nice $500 million 12 months secured borrowing agreements you entered into.
I didn't hear if you disclosed the rate on that.
You know we didn't we entered into that trade.
Over a month ago.
Yeah, basically as a proxy for pricing when we did that trade to go out a year, we paid four basis points more than where we were reporting while all the time. So once again the term structure of repo is very flat right now and that's why we thought it made sense to go out on some of our bar.
Borrowings and we May do more of that if it is the term structure say as flat as it is.
Great. That's it that seems to make a lot of sense. Thanks for the color there appreciate it.
This concludes our question and answer session I would like to turn the conference back over to mislead see crabbe for any closing remarks.
Thanks again for joining us today, if you have further questions. Please give us a call. We look forward to speaking with you next quarter.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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