Capstead Mortgage Corporation Announces Second Quarter 2013 Results
Capstead Mortgage Corporation Announces Second Quarter 2013 Results
Second Quarter 2013 Highlights
- Completed offering of $170 million face amount of 7.50% Series E perpetual preferred shares using proceeds and cash on hand to redeem higher-cost perpetual preferred shares
- Generated core earnings of $0.27 per diluted common share (excluding certain one-time effects of the preferred capital transactions)
- Book value ended the second quarter at $12.80 per common share, lower by 2.1% due to the preferred capital transactions, and 3.8% due to portfolio pricing changes net of hedges as well as other operational factors
- Realized financing spreads on residential mortgage investments of 1.00% and incurred operating costs as a percentage of average long-term investment capital of 0.68%
- Fully replaced portfolio runoff and did not sell any assets while maintaining $13.8 billion agency-guaranteed adjustable-rate mortgage ("ARM") portfolio with leverage ending the second quarter at 8.44 times long-term investment capital
Capstead reported net income of $29.9 million and core earnings per diluted common share of $0.27 for the quarter ended June 30, 2013. This compares to net income of $34.9 million or $0.31 per diluted common share for the quarter ended March 31, 2013. Core earnings per diluted common share is a non-GAAP financial measure that excludes certain one-time effects on net income available to common stockholders of this quarter's preferred capital transactions - see pages three and nine for further information. Net income per diluted common share (the related GAAP measure which includes these one-time items) was $0.04 for the quarter ended June 30, 2013. The Company paid a second quarter 2013 dividend of $0.31 per common share on July 19, 2013.
Second Quarter Earnings and Related Discussion
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. This focus on agency-guaranteed ARM securities that reset to more current interest rates within a relatively short period of time allows for the recovery of financing spreads diminished during periods of rising interest rates and smaller fluctuations in portfolio values compared to fixed-rate mortgage securities.
For the quarter ended June 30, 2013, the Company reported net interest margins of $32.7 million compared to $37.9 million for the quarter ended March 31, 2013. Financing spreads on residential mortgage investments averaged 1.00% during the second quarter of 2013, a decrease of 15 basis points from financing spreads earned during the first quarter of 2013. Financing spread on residential mortgage investments is a non-GAAP financial measure based solely on yields on residential mortgage investments, net of borrowing rates on repurchase arrangements and similar borrowings, adjusted for currently-paying interest rate swap agreements held for hedging purposes - see page ten for further information.
Yields on Capstead's residential mortgage investments averaged 1.53% during the second quarter of 2013, a decrease of 20 basis points from yields reported for the first quarter of 2013 primarily reflecting increased investment premium amortization charges resulting from higher levels of mortgage prepayments experienced in the current quarter. Investment premium yield adjustments averaged 99 basis points during the second quarter compared to 84 basis points during the first quarter. Mortgage prepayments expressed as an annualized constant prepayment rate, or CPR, averaged 22.74% during the second quarter of 2013, compared to an average CPR of 19.65% during the first quarter of 2013. The following table illustrates the progression of the Company's portfolio of residential mortgage investments for the quarter and six months ended June 30, 2013 (dollars in thousands):
|Residential mortgage investments, beginning of period||$||13,854,405||$||13,860,158|
|Decrease in unrealized gains on securities|
classified as available-for-sale
|Portfolio acquisitions (principal amount) at average lifetime|
|purchased yields of 2.13% and 2.11%, respectively||949,977||1,753,386|
|Investment premiums on acquisitions||43,641||80,115|
|Portfolio runoff (principal amount)||(934,090||)||(1,743,636||)|
|Investment premium amortization||(33,643||)||(62,028||)|
|Residential mortgage investments, end of period||$||13,811,497||$||13,811,497|
Interest rates on repurchase arrangements and similar borrowings, adjusted for portfolio financing-related and currently-paying interest rate swap agreements, averaged 0.53% during the second quarter of 2013, a decrease of five basis points over borrowing rates incurred during the first quarter of 2013. This decline reflects lower prevailing market rates for repurchase arrangements and the replacement of higher-rate swap agreements that matured during the first and second quarters with additional swap agreements at significantly lower rates. At June 30, 2013 repurchase arrangements and similar borrowings totaled $12.62 billion, consisting primarily of 30-day borrowings with 24 counterparties at rates averaging 0.37%, before consideration of related currently-paying swap agreements. Portfolio financing-related swap agreements held by the Company at quarter-end totaled $6.70 billion notional amount with average maturities of 20 months. These swap agreements consisted of (a) $3.70 billion notional amount of currently-paying swap agreements requiring fixed rate interest payments averaging 0.61% for average remaining interest-payment terms of 12 months, and (b) $3.00 billion notional amount of forward-starting swap agreements with an average expiration of 29 months that will begin requiring fixed rate interest payments averaging 0.46% for two-year periods that commence on various dates between September 2013 and April 2014. Variable payments that are received by the Company under portfolio financing-related swap agreements typically are based on one-month LIBOR and offset a significant portion of the interest owed on a like amount of the Company's borrowings under repurchase arrangements.
Capstead's long-term investment capital, which consists of common and perpetual preferred stockholders' equity and long-term unsecured borrowings (net of related investments in statutory trusts), declined 6.0% during the second quarter of 2013 to $1.50 billion at quarter-end reflecting portfolio pricing declines net of related hedges and the effects of the preferred capital transactions. Portfolio leverage (related borrowings divided by long-term investment capital) increased to 8.44 to one at June 30, 2013 compared to 8.06 to one at March 31, 2013.
Operating costs as a percentage of average long-term investment capital totaled 0.68% during the second quarter of 2013. This compares to 0.77% during the first quarter of 2013, and was lower primarily because of lower compensation-related expense, a significant portion of which is performance-based.
Issuance of 7.50% Series E and Redemption of Series A and B Perpetual Preferred Shares
On May 16, 2013 Capstead completed a public offering of 6.8 million shares ($170.0 million face amount) of its 7.50% Series E Cumulative Redeemable Preferred Stock, liquidation preference $25.00 per share (NYSE: CMOPRE). Proceeds of the offering, after underwriting fees and other costs, totaled $164.3 million and together with $42.7 million of cash on hand were used to fund the June 13, 2013 redemption of all outstanding shares of the Company's Series A and B perpetual preferred shares. The Company paid redemption preferences on the Series A and B preferred shares aggregating $207.0 million, a total of $19.9 million in excess of these shares' recorded amounts on the Company's balance sheet. This redemption preference premium is reflected as a $0.21 per common share reduction in net income available to common stockholders and is excluded from core earnings available to common stockholders. Also excluded from core earnings is $0.02 per common share related to Series A and B dividends accruing from the issue date of the Series E preferred shares to the redemption date. As a result of these transactions, net income available to common stockholders will benefit from $8.3 million in lower preferred dividend requirements on an annualized basis, or nearly $0.09 per diluted common share.
Book Value per Common Share
Nearly all of Capstead's residential mortgage investments and all of its interest rate swap agreements are reflected at fair value on the Company's balance sheet and are therefore included in the calculation of book value per common share (total stockholders' equity, less the $170 million aggregate liquidation preference for the newly-issued Series E preferred shares, divided by common shares outstanding). The fair value of these investments is impacted by market conditions, including changes in interest rates, and the availability of financing at reasonable rates and leverage levels, among other factors. The Company's investment strategy attempts to mitigate these risks by focusing on investments in agency-guaranteed residential mortgage pass-through securities, which are considered to have little, if any, credit risk and are collateralized by ARM loans with interest rates that reset periodically to more current levels. Because of these characteristics, the fair value of Capstead's portfolio is considerably less vulnerable to significant pricing declines caused by credit concerns or rising interest rates compared to portfolios containing a significant amount of non-agency and/or fixed-rate mortgage securities. The following table illustrates the progression of the Company's book value per common share for the quarter and six months ended June 30, 2013:
|Book value per common share, beginning of period||$||13.60||$||13.58|
|One-time effects of preferred capital transactions:|
|Redemption preference premiums paid on|
|Series A and B preferred shares, net of effects of|
|eliminating related liquidation preference premiums||(0.19||)||(0.19||)|
|Dilution from Series A and B preferred share conversions||(0.01||)||(0.01||)|
|Series E preferred share liquidation preference premium||(0.06||)||(0.06||)|
|Dividends on Series A and B preferred shares during|
|redemption period excluded from core earnings||(0.02||)||(0.02||)|
|Other capital transactions:|
|Dividend distributions in excess of core earnings||(0.04||)||(0.04||)|
|Accretion from common share repurchases||-||0.01|
|Increase related to stock awards||0.01||0.01|
|Change in unrealized gains and losses on mortgage|
|securities classified as available-for-sale||(0.72||)||(0.79||)|
|Change in unrealized gains and losses on interest rate|
|swap agreements designated as cash flow hedges of:|
|Borrowings under repurchase arrangements||0.14||0.19|
|Book value per common share, end of period||$||12.80||$||12.80|
Decrease in book value per common share during the
Commenting on the preferred capital transactions, operations and current market conditions, Andrew F. Jacobs, President and Chief Executive Officer, said, "We are very pleased to have completed the preferred capital transactions this quarter which eliminated substantially higher-cost preferred capital in favor of a smaller amount of new lower-cost perpetual preferred capital that can be redeemed any time after five years from issuance. The 2.1%, or $0.28, decrease in book value per common share resulting from these transactions will be fully recovered in approximately three years through reduced preferred dividend requirements of nearly $0.09 per diluted common share on an annualized basis.
"The second quarter was also notable for an abrupt shift in the market to significantly higher long-term interest rates in large part due to concerns regarding the timing of the Federal Reserve reducing and ultimately ending its bond buying program. While we are not immune to this volatility, pricing for our portfolio of short-duration and well-seasoned ARM securities has held up reasonably well compared to pricing for longer duration ARM or fixed-rate mortgage securities. Consequently, we experienced a relatively modest book value decline through quarter-end of 3.8%, or $0.52 per common share, related to our portfolio net of interest rate hedges and other operational factors.
"By replacing portfolio runoff and not selling any assets this quarter, we maintained the size of our portfolio at $13.81 billion. In doing so we increased our portfolio leverage to 8.44 to one, which we believe represents an appropriate and prudent use of leverage considering the characteristics of our portfolio. We did experience higher quarter over quarter mortgage prepayment levels resulting in an additional $5.3 million in investment premium amortization due largely to low mortgage interest rates available to homeowners during much of the quarter. But with the recent transition to substantially higher prevailing mortgage interest rates, we anticipate mortgage prepayment rates will decline considerably beginning in August, lessening investment premium amortization levels to the benefit of future earnings.
"We continue to see modest declines in market rates for our borrowings under repurchase arrangements, which averaged 39 basis points during the second quarter before considering swap positions, and ended the quarter averaging 37 basis points. This compares to average rates of 41 basis points during the first quarter and 45 basis points during the fourth quarter of 2012. We also anticipate continued improvement in overall borrowing rates during the third and fourth quarters as higher-rate swaps continue to mature and are replaced with forward-starting swaps entered into prior to quarter-end with significantly lower rates. During the second quarter we increased our portfolio financing-related swap positions by a net $400 million notional amount to $6.70 billion, and in the process lengthened average maturities by two months to 20 months. We accomplished this through the addition of $1.10 billion notional amount of forward-starting swaps with average fixed rates of 0.46% and average maturities of 31 months which improved our ability to manage further increases in market interest rates at a reasonable cost.
"In summary, the preferred capital transactions we executed during the second quarter significantly reduced the cost of our preferred capital to the benefit of future earnings and the relative performance of our investment portfolio against a backdrop of sharply higher long-term interest rates also bodes well for future results. We remain confident in our investment strategy of managing a conservatively leveraged portfolio of agency-guaranteed residential ARM securities that can produce attractive risk-adjusted returns over the long term while reducing, but not eliminating, sensitivity to changes in interest rates. With this strategy, Capstead is widely recognized as the most defensively-positioned residential mortgage REIT from an interest rate and credit risk perspective."
Earnings Conference Call Details
An earnings conference call and live audio webcast will be hosted Thursday, July 25, 2013 at 9:00 a.m. ET. The conference call may be accessed by dialing toll free (888) 317-6016 in the U.S., (855) 669-9657 for Canada, or (412) 317-6016 for international callers. A live audio webcast of the conference call can be accessed via the investor relations section of the Company's website at www.capstead.com, and an audio archive of the webcast will be available for approximately 60 days. A replay of the call will be available through September 24, 2013 by dialing toll free (877) 344-7529 in the U.S. or (412) 317-0088 for international callers and entering conference number 10031104.
Cautionary 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.
Forward-looking statements are based largely on the expectations of management and are subject to a number of risks and uncertainties including, but not limited to, the following:
- changes in general economic conditions;
- fluctuations in interest rates and levels of mortgage prepayments;
- the effectiveness of risk management strategies;
- the impact of differing levels of leverage employed;
- liquidity of secondary markets and credit markets;
- the availability of financing at reasonable levels and terms to support investing on a leveraged basis;
- the availability of new investment capital;
- the availability of suitable qualifying investments from both an investment return and regulatory perspective;
- changes in legislation or regulation affecting Fannie Mae, Freddie Mac and similar federal government agencies and related guarantees;
- deterioration in credit quality and ratings of existing or future issuances of Fannie Mae, Freddie Mac or Ginnie Mae securities;
- changes in legislation or regulation affecting exemptions for mortgage REITs from regulation under the Investment Company Act of 1940; and
- increases in costs and other general competitive factors.
In addition to the above considerations, actual results and liquidity are affected by other risks and uncertainties which could cause actual results to be significantly different from those expressed or implied by any forward-looking statements included herein. It is not possible to identify all of the risks, uncertainties and other factors that may affect future results. In light of these risks and uncertainties, the forward-looking events and circumstances discussed herein may not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements. 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 and per share amounts)
|June 30, 2013||December 31, 2012|
|Residential mortgage investments|
|($13.28 and $13.45 billion pledged under repurchase arrangements|
|at June 30, 2013 and December 31, 2012, respectively)||$||13,811,497||$||13,860,158|
|Cash collateral receivable from interest rate swap counterparties||16,314||49,972|
|Interest rate swap agreements at fair value||8,396||169|
|Cash and cash equivalents||207,431||425,445|
|Receivables and other assets||138,008||130,402|
|Investments in unconsolidated affiliates||3,117||3,117|
|Repurchase arrangements and similar borrowings||$||12,624,572||$||12,784,238|
|Cash collateral payable to interest rate swap counterparties||750||-|
|Interest rate swap agreements at fair value||11,097||32,868|
|Common stock dividend payable||30,541||29,512|
|Accounts payable and accrued expenses||19,290||22,425|
|Preferred stock - $0.10 par value; 100,000 shares authorized:|
|$1.60 Cumulative Preferred Stock, Series A,|
|-0- and 186 shares issued and outstanding at June 30, 2013|
|and December 31, 2012, respectively||-||2,604|
|$1.26 Cumulative Convertible Preferred Stock, Series B,|
|-0- and 16,493 shares issued and outstanding at June 30, 2013|
|and December 31, 2012, respectively||-||186,388|
|7.50% Cumulative Redeemable Preferred Stock, Series E,|
|6,800 and -0- shares issued and outstanding ($170,000 aggregate|
|liquidation preference) at June 30, 2013 and December 31,|
|Common stock - $0.01 par value; 250,000 shares authorized:|
|95,761 and 96,229 shares issued and outstanding at|
|June 30, 2013 and December 31, 2012, respectively||957||962|
|Accumulated other comprehensive income||247,265||293,910|
|Long-term investment capital (Stockholders' equity and unsecured borrowings net of investments in related unconsolidated affiliates) (unaudited)||$||1,495,396||$||1,597,103|
|Portfolio leverage (Repurchase arrangements and similar borrowings divided by long-term investment capital) (unaudited)||8.44:1||8.00:1|
|Book value per common share (based on common shares outstanding and calculated assuming liquidation preferences for preferred stock) (unaudited)||$||12.80||$||13.58|
CAPSTEAD MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
Six Months Ended
|Residential mortgage investments||$||51,572||$||65,787||$||110,040||$||131,520|
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