Capstead Mortgage Corporation (“Capstead” or the “Company”)
(NYSE: CMO) today announced financial results for the quarter ended
September 30, 2019.
Third Quarter 2019 Summary
- Recognized GAAP net income of $3.2 million, a loss of
$(0.02) per diluted common share
- Generated core earnings of $14.8 million or $0.11 per
diluted common share
- Paid common dividend of $0.12 per common share
- Raised $75 million of common equity capital
- Book value per common share declined $0.33 to $8.60 per
common share
- Agency-guaranteed residential adjustable-rate mortgage (ARM)
portfolio and leverage ended the third quarter at $11.24 billion
and 8.80 times long-term investment capital, respectively
Third Quarter Earnings and Related
Discussion
Capstead reported GAAP net income of $3.2 million, a loss of
$(0.02) per diluted common share for the quarter ended September
30, 2019, compared to a GAAP net loss of $63.5 million or $(0.80)
per diluted common share for the quarter ended June 30, 2019. The
Company reported core earnings of $14.8 million or $0.11 per
diluted common share for the quarter ended September 30, 2019. This
compares to core earnings of $14.8 million or $0.12 per diluted
common share for the quarter ended June 30, 2019.
The difference between GAAP and core results this quarter
primarily relates to the impact of lower prevailing interest rates
on interest rate swap agreements and other derivatives held for
hedging purposes. See the “Non-GAAP Financial Measures” section of
this release for more information.
Portfolio yields averaged 2.76% during the third quarter of
2019, a decrease of six basis points from 2.82% reported for the
second quarter. Yields declined primarily due to the effects of
higher mortgage prepayment levels while coupon interest rates on
the underlying loans were largely unchanged. The average annualized
constant prepayment rate, or CPR, increased to 30.18% CPR in the
current quarter from 26.29% CPR in the prior quarter.
In response to significant declines in longer term interest
rates and associated market volatility during the quarter, the
Company reduced portfolio leverage by replacing a portion of
portfolio runoff and by taking a measured approach to deploying new
common equity capital raised in early August. As a result,
portfolio leverage decreased to 8.80 to one at September 30, 2019
from 9.59 to one at June 30, 2019.
The following table illustrates the progression of Capstead’s
portfolio of residential mortgage investments for the quarter and
nine months ended September 30, 2019 (dollars in thousands):
Quarter Ended
September 30, 2019
Nine Months Ended
September 30, 2019
Residential mortgage investments,
beginning of period
$
11,531,219
$
11,965,381
Portfolio acquisitions (principal
amount)
747,670
2,249,681
Investment premiums on acquisitions
19,827
56,452
Portfolio runoff (principal amount)
(1,041,410
)
(2,764,479
)
Sales of investments (basis)
-
(305,356
)
Investment premium amortization
(18,811
)
(55,210
)
(Decrease) increase in net unrealized
gains on securities classified as available-for-sale
(2,692
)
89,334
Residential mortgage investments, end of
period
$
11,235,803
$
11,235,803
Decrease in residential mortgage
investments during the indicated periods
$
(295,416
)
$
(729,578
)
Rates on Capstead’s $10.29 billion in secured borrowings, after
adjusting for hedging activities, averaged four basis points lower
at 2.31% during the third quarter of 2019, compared to 2.35% for
the prior quarter. Borrowing rates before hedging activities
averaged 2.52% during the third quarter, a decline of 15 basis
points over the prior quarter in large part due to the 25 basis
point decrease in the Federal Funds rate in late July 2019. The
mid-September 25 basis point decrease in Fed Funds had little
effect on third quarter borrowing rates while recent repo market
funding stresses had only a modest impact.
Active management of derivative positions contributed to a 14
basis point reduction to 2.04% in fixed rates on the Company’s
$7.20 billion notional amount of secured borrowings-related
interest rate swaps at September 30, 2019. Average fixed swap rates
declined six basis points during the quarter to 2.14%. This helped
offset the negative effects of declines in variable-rate swap
receipts due to continued declines in three-month LIBOR during the
quarter.
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
0.58% for the third quarter of 2019 and 1.11% for the nine months
ended September 30, 2019. As an annualized percentage of total
assets, operating costs averaged 0.06% and 0.10% during these
periods, respectively.
Recent Common Equity Offering
On August 1, 2019 Capstead completed a public offering for nine
million common shares raising $75 million after underwriting
discounts and offering expenses. The proceeds are being deployed
into additional agency-guaranteed residential ARM securities and
used for general corporate purposes.
Book Value per Common Share
Book value per share as of September 30, 2019 was $8.60, a
decrease of $0.33 or 3.7% from the June 30, 2019 book value of
$8.93, primarily reflecting $0.23 in derivative-related declines in
value, $0.06 in initial dilution related to the issuance of
additional common equity and $0.03 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. Fair value is impacted by
market conditions including changes in interest rates, the
availability of financing at reasonable rates and leverage levels,
among other factors.
Management Remarks
Commenting on current operating and market conditions, Phillip
A. Reinsch, President and Chief Executive Officer, said, “Similar
to what we experienced early in the second quarter, in August
interest rates across the yield curve declined putting pressure on
mortgage prepayment rates and mortgage security pricing relative to
swap valuations. In response, we have taken a measured approach to
replacing portfolio runoff and deploying the $75 million in new
common equity capital from our early August capital raise, reducing
portfolio leverage to 8.80:1 from 9.59:1 at June 30th. Future
changes in leverage will depend on market conditions.
“Mortgage prepayment rates on our portfolio were higher by
nearly 15% in the third quarter putting pressure on our portfolio
yields. However, 30-year fixed-rate agency mortgage prepayment
rates were up over 40% for the quarter. Further, our prepayment
rates for October are down 7.25% month over month compared to
30-year fixed-rate prepayment rates increasing another 8.5%. This
comparison is important because ARM prepayment rates, while
typically higher, have not experienced the same relative increases
currently affecting the rest of the mortgage market as is being
widely reported in the financial press.
“Federal Reserve actions to reduce the Fed Funds rate by 25
basis points in late July and again in mid-September are a
significant positive for earnings by contributing to lower
borrowing costs despite recent repo market funding stresses. While
funding remains readily available, borrowing rates remain unusually
high relative to the Fed Funds rate. For example, our unhedged,
primarily 30-day term borrowing rates averaged 2.31% at September
30th compared to average Fed Funds rates of 2.04% for the month
September. While we are now borrowing at considerably lower levels
than the quarter-end average would indicate, rates remain elevated
relative to Fed Funds. Our future borrowing costs will depend on
any further reductions in Fed Funds and actions by the Federal
Reserve to further alleviate funding market stresses.
“Lower one- to three-year rates have given us the opportunity to
reduce future hedging costs by replacing higher rate swaps with a
combination of new two-year swap agreements and a modest amount of
Eurodollar futures contracts at significantly lower rates to the
benefit of future earnings. We will continue to be disciplined yet
flexible in managing our balance sheet to improve our future
performance as market conditions evolve.
“For nearly 20 years, Capstead has operated as a cost-effective,
internally managed REIT that invests in a leveraged portfolio of
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. Core earnings and core earnings
per common share exclude these GAAP adjustments.
Management 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.
Earnings Conference Call Details
An earnings conference call and live audio webcast will be
hosted Thursday, October 24, 2019 at 9:00 a.m. ET. The conference
call may be accessed by dialing toll free (877) 505-6547 in 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 10133446.
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, 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.
CAPSTEAD MORTGAGE
CORPORATION
CONSOLIDATED BALANCE
SHEETS
(in thousands, except ratios,
pledged and per share amounts)
September 30, 2019
December 31, 2018
(unaudited)
Assets
Residential mortgage investments ($10.84
and $11.57 billion pledged at September 30, 2019 and December 31,
2018, respectively)
$
11,235,803
$
11,965,381
Cash collateral receivable from derivative
counterparties
83,511
31,797
Derivatives at fair value
1,267
–
Cash and cash equivalents
68,204
60,289
Receivables and other assets
145,902
129,058
$
11,534,687
$
12,186,525
Liabilities
Secured borrowings
$
10,292,924
$
10,979,362
Derivatives at fair value
35,515
17,834
Unsecured borrowings
98,367
98,292
Common stock dividend payable
11,702
7,132
Accounts payable and accrued expenses
24,423
24,842
10,462,931
11,127,462
Stockholders’ equity
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 September 30, 2019 and
December 31, 2018
250,946
250,946
Common stock - $0.01 par value; 250,000
shares authorized:
94,606 and 85,277 shares issued and
outstanding at September 30, 2019 and December 31, 2018,
respectively
946
853
Paid-in capital
1,251,807
1,174,880
Accumulated deficit
(457,662
)
(346,570
)
Accumulated other comprehensive income
(loss)
25,719
(21,046
)
1,071,756
1,059,063
$
11,534,687
$
12,186,525
Long-term investment capital
(consists of stockholders’ equity and unsecured borrowings)
(unaudited)
$
1,170,123
$
1,157,355
Portfolio leverage (secured
borrowings divided by long-term investment capital) (unaudited)
8.80:1
9.49:1
Book value per common share (based
on shares of common stock outstanding and calculated assuming
liquidation preferences of preferred stock) (unaudited)
$
8.60
$
9.39
CAPSTEAD MORTGAGE
CORPORATION
CONSOLIDATED STATEMENTS OF
OPERATIONS
(in thousands, except per
share amounts)
(unaudited)
Quarter Ended
September 30
Nine Months Ended
September 30
2019
2018
2019
2018
Interest income:
Residential mortgage investments
$
77,693
$
67,649
$
246,600
$
201,989
Other
1,065
350
2,087
1,063
78,758
67,999
248,687
203,052
Interest expense:
Secured borrowings
(62,800
)
(54,393
)
(194,524
)
(147,655
)
Unsecured borrowings
(1,910
)
(1,910
)
(5,701
)
(5,701
)
(64,710
)
(56,303
)
(200,225
)
(153,356
)
14,048
11,696
48,462
49,696
Other (expense) income:
Loss on derivative instruments (net)
(9,221
)
–
(105,720
)
–
Loss on sale of investments (net)
–
–
(1,365
)
–
Compensation-related expense
(566
)
(1,913
)
(6,147
)
(5,521
)
Other general and administrative
expense
(1,123
)
(1,184
)
(3,389
)
(3,320
)
Miscellaneous other revenue
58
81
149
233
(10,852
)
(3,016
)
(116,472
)
(8,608
)
Net income (loss)
3,196
8,680
(68,010
)
41,088
Less preferred stock dividends
(4,842
)
(4,842
)
(14,526
)
(14,526
)
Net (loss) income to common
stockholders
$
(1,646
)
$
3,838
$
(82,536
)
$
26,562
Net (loss) income per common
share:
Basic and diluted
$
(0.02
)
$
0.04
$
(0.95
)
$
0.29
Weighted average common shares
outstanding:
Basic
90,945
91,206
86,946
92,202
Diluted
90,945
91,346
86,946
92,317
Cash dividends declared per
share:
Common
$
0.12
$
0.11
$
0.32
$
0.41
Series E preferred
0.47
0.47
1.41
1.41
CAPSTEAD MORTGAGE
CORPORATION
QUARTERLY STATEMENTS OF
OPERATIONS AND SELECT OPERATING STATISTICS
(in thousands, except per
share amounts, percentages annualized, unaudited)
2019
2018
Q3
Q2
Q1
Q4
Q3
Quarterly Statements of
Operations:
Interest income:
Residential mortgage investments
$
77,693
$
85,100
$
83,807
$
72,902
$
67,649
Other
1,065
600
422
626
350
78,758
85,700
84,229
73,528
67,999
Interest expense:
Secured borrowings
(62,800
)
(67,945
)
(63,779
)
(59,321
)
(54,393
)
Unsecured borrowings
(1,910
)
(1,900
)
(1,891
)
(1,910
)
(1,910
)
(64,710
)
(69,845
)
(65,670
)
(61,231
)
(56,303
)
14,048
15,855
18,559
12,297
11,696
Other (expense) income:
Loss on derivative instruments (net)
(9,221
)
(74,842
)
(21,657
)
–
–
Loss on sale of investments (net)
–
(1,365
)
–
–
–
Compensation-related expense
(566
)
(1,972
)
(3,609
)
(2,238
)
(1,913
)
Other general and administrative
expense
(1,123
)
(1,138
)
(1,128
)
(1,207
)
(1,184
)
Miscellaneous other revenue
58
2
89
132
81
(10,852
)
(79,315
)
(26,305
)
(3,313
)
(3,016
)
Net income (loss)
$
3,196
$
(63,460
)
$
(7,746
)
$
8,984
$
8,680
Net (loss) income per diluted common
share
$
(0.02
)
$
(0.80
)
$
(0.15
)
$
0.05
$
0.04
Average diluted common shares
outstanding
90,945
84,934
84,894
88,006
91,346
Core earnings
$
14,798
$
14,780
$
15,471
$
8,984
$
8,680
Core earnings per diluted common share
0.11
0.12
0.12
0.05
0.04
Select Operating and Performance
Statistics:
Common dividends declared per share
0.12
0.12
0.08
0.08
0.11
Book value per common share
8.60
8.93
9.43
9.39
9.48
Average portfolio outstanding (cost
basis)
11,266,776
12,065,084
12,169,106
12,442,410
13,026,636
Average secured borrowings
10,481,080
11,193,335
11,156,608
11,439,646
11,957,518
Average long-term investment capital
(“LTIC”)
1,146,916
1,149,388
1,161,815
1,188,553
1,258,367
Constant prepayment rate (“CPR”)
30.18
%
26.29
%
20.62
%
22.37
%
25.71
%
Total financing spreads
0.31
0.34
0.42
0.22
0.21
Yields on residential mortgage
investments
2.76
2.82
2.75
2.34
2.08
Secured borrowing rates (a)
2.31
2.35
2.23
2.07
1.82
Financing spreads on residential mortgage
investments
0.45
0.47
0.52
0.27
0.26
Operating costs as a percentage of LTIC
(b)
0.58
1.09
1.32
1.15
0.98
Quarterly economic return (change in book
value plus dividends)
(2.35
)
(4.03
)
1.28
(0.11
)
(2.64
)
Return on common equity capital (c)
4.95
4.98
5.33
1.96
1.69
(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.
CAPSTEAD MORTGAGE CORPORATION RECONCILIATION
OF GAAP MEASURES TO NON-GAAP MEASURES (in thousands, percentages
annualized, unaudited)
The Company defines core earnings as GAAP net (loss) income
excluding (a) unrealized loss (gain) 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 common share to core earnings and
core earnings per common share:
2019
2018
Q3
Q2
Q1
Q4
Q3
Amount
Per Share
Amount
Per Share
Amount
Per Share
Amount
Per Share
Amount
Per Share
Net income (loss)
$
3,196
$
(0.02
)
$
(63,460
)
$
(0.80
)
$
(7,746
)
$
(0.15
)
$
8,984
$
0.05
$
8,680
$
0.04
Unrealized (gain) loss on non-designated
derivative instruments
(16,952
)
(0.19
)
59,388
0.70
26,237
0.31
–
–
–
–
Realized loss (net) on termination of
derivative instruments
31,673
0.35
24,202
0.28
–
–
–
–
–
–
Amortization of unrealized gain, net of
unrealized losses on de-designated derivative instruments
(3,119
)
(0.03
)
(6,715
)
(0.08
)
(3,020
)
(0.04
)
–
–
–
–
Realized loss on sale of investments
–
–
1,365
0.02
–
–
–
–
–
–
Core earnings
$
14,798
$
0.11
$
14,780
$
0.12
$
15,471
$
0.12
$
8,984
$
0.05
$
8,680
$
0.04
The following reconciles total financing spreads to financing
spreads on residential mortgage investments:
2019
2018
Q3
Q2
Q1
Q4
Q3
Total financing spreads
0.31
%
0.34
%
0.42
%
0.22
%
0.21
%
Impact of yields on other interest-earning
assets*
–
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
(0.12
)
(0.24
)
(0.11
)
–
–
Impact of net cash flows received on
non-designated derivative instruments
0.21
0.31
0.16
–
–
Financing spreads on residential mortgage
investments
0.45
0.47
0.52
0.27
0.26
* 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.
CAPSTEAD MORTGAGE
CORPORATION
FAIR VALUE AND SWAP MATURITY
DISCLOSURES
(in thousands,
unaudited)
September 30, 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
$
4,212,855
$
146,967
$
4,359,822
$
4,399,881
$
40,059
$
48,091
Longer-to-reset ARMs
4,175,662
109,994
4,285,656
4,299,195
13,539
(66,326
)
Ginnie Mae securities:
Current-reset ARMs
1,079,773
38,146
1,117,919
1,122,205
4,286
4,433
Longer-to-reset ARMs
1,373,182
35,267
1,408,449
1,412,653
4,204
(13,444
)
$
10,841,472
$
330,374
$
11,171,846
$
11,233,934
$
62,088
$
(27,246
)
Derivative instruments: (b)
Interest rate swap agreements:
Secured borrowings-related
$
7,200,000
$
(57,440
)
$
(854
)
$
24,033
Unsecured borrowings-related
100,000
(35,515
)
(35,515
)
(17,834
)
Eurodollar futures contracts
500,000
775
–
–
(a)
Unrealized gains and losses on residential
mortgage securities classified as available-for-sale are recorded
as a component of AOCI. Residential mortgage securities classified
as held-to-maturity with a cost basis of $1.0 million and
unsecuritized investments in residential mortgage loans with a cost
basis of $840,000 are not subject to fair value accounting and
therefore have been excluded from this analysis. Capstead
segregates its residential ARM securities based on the average
length of time until the loans underlying each security reset to
more current rates.
(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
Fourth quarter 2019
$
700,000
1.72 %
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
First quarter 2022
1,500,000
2.50
Second quarter 2022
1,300,000
2.30
$
7,200,000
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 each had durations as of September 30,
2019 of approximately 14½ months for a net duration gap of
approximately zero months. Duration is a measure of market price
sensitivity to changes in interest rates. A shorter duration
generally indicates less interest rate risk.
CAPSTEAD MORTGAGE
CORPORATION
RESIDENTIAL ARM SECURITIES
PORTFOLIO STATISTICS
(as of September 30,
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
$
2,939,659
4.07
%
3.65
%
1.68
%
2.61
%
5.09
%
6.2
Freddie Mac Agency Securities
1,420,163
4.03
3.73
1.76
2.04
4.89
7.6
Ginnie Mae Agency Securities
1,117,919
3.71
3.26
1.51
1.05
4.55
6.2
Residential mortgage loans
717
3.89
4.66
2.06
1.76
11.09
5.4
(49% of total)
5,478,458
3.99
3.59
1.66
2.15
4.93
6.6
Longer-to-reset ARMs:
Fannie Mae Agency Securities
2,909,176
3.10
3.55
1.60
3.51
5.00
44.5
Freddie Mac Agency Securities
1,376,480
3.10
3.63
1.66
3.71
5.06
49.7
Ginnie Mae Agency Securities
1,408,449
3.49
3.25
1.50
1.00
5.00
45.7
(51% of total)
5,694,105
3.19
3.49
1.59
2.94
5.01
46.0
$
11,172,563
3.58
3.54
1.62
2.55
4.97
26.8
Gross WAC (rate paid by borrowers)(d)
4.18
(a)
Amortized cost basis represents the
Company’s investment (unpaid principal balance plus unamortized
investment premiums) before unrealized gains and losses. At
September 30, 2019, the ratio of amortized cost basis to unpaid
principal balance for the Company’s ARM holdings was 103.05. This
table excludes $1.2 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, 76% of current-reset ARMs were subject to periodic
caps averaging 1.78%; 18% were subject to initial caps averaging
2.33%; 6% were subject to lifetime caps averaging 6.24%; and less
than 1% were uncapped.
(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 September 30, 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 82% of the Company’s current-reset ARM
securities have reached an initial coupon reset date.
(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.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20191023005804/en/
Lindsey Crabbe (214) 874-2339
Capstead Mortgage (NYSE:CMO)
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