CMO - Earnings call transcript Q1 2019

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Operator

Good day, and welcome to the Capstead Mortgage Corporation First Quarter 2019 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would like to now turn the conference over to Lindsey Crabbe, Manager of Investor Relations. ahead. go Please

Lindsey Crabbe

you call. Thank Capstead's quarter first Good for conference earnings morning. attending

The and yesterday the was is release webcast first earnings quarter the in issued The to replay release. available of XX, our through our Investor webcast at is XXXX. archive also are tab. this yesterday's posted of Details of An website April section www.capstead.com replay call the Relations under Investor link this on and XX, included July in Relations this for website. a will be

today's certain remind Reform Before Litigation could we assumptions and want pursuant Provisions I forward-looking get Harbor management. to on Securities Private Act considered expectations started, of of you of to that the the Safe XXXX some of and be statements based comments are

current of of no our information only this over The forward-looking For with filings our obligation including turn this to is information statements SEC, that, factors call. the all refer as assumes I'll statements XXXX. XX, call please a any With to website. risk Phil. detailed the any on business, available of it company during our call associated list in This which this update April are the to the contained – made date with

Phil Reinsch

or call prior our Thank annualized Both increased return quarter value a up results. the on remarks, and then for you, the with recap X.X% We're first brief open earnings quarterly Lindsey. quarter give we'll questions. producing After Lance economic our of up over basis. an will a few of and the quarter core our a book X.X% pleased

priced this levels common guaranteed our the ARMs at XX%. stock the did quarter, ROEs instead capital into to in estimated securities With seen redeploy stock opting not attractively nearly run-off fourth repurchase from recovery price of from agency we in depressed any quarter welcomed

lower to that Fed X.XX just at it this and to hold X.XX to over portfolio eventually on modestly X than inflation, increasingly opportunity financing prospects. continue we higher be increased may acquisitions bullish stabilizing and $XXX spur X Fed borrowing we year-end. year, run-off, our we the increasingly this replacing evident quarter need to by will further million in With even of in resets. the the the past leverage through from Going portfolio to this spreads, With increased over rates on to year the now rate Fed have have funds diminished funds to become and coupons yields course recover increases

current XX the our ARMs and end neighborhood available X.X%, years With ARMs refinancing at that longer with only to cash quarter WACs do together given in to fully to indexed X.X% the on not growth are securities rates refinancing averaging rates current have exposure past and of reset of we around WAC much basis securities our points no as as averaging growth in of XX-year current north reset about reach X.X%.

declined With initial in several prepaying previously reset fast periods Lance. relatively the that to through seasoned current call coupons their below next high see pre-payment coming improvements contributing our mortgage a we optimism. Further, This value to the in have to bonds expect As do we our prepayment in portfolio quarters. increase not to appreciably the to over years. and I'll expectations, the in value is over due turn opportunity market rates book as that, result,

Lance Phillips

hedge our accounting agreements a start of reporting couple on you, financial updates I stopped earnings with our using evening. release like and in we noted would by repo Thank swap yesterday We highlighting important Phil. associated to financing. that our

common earnings, introduced staying operations on a accounting, change through to in have core sheet as our related we that to and As statement core also metrics peers. in with a and on share. believe result, operating future. and those compare on beginning opposed the portfolio that our book earnings Related metric per swap more to expenses flexibility in of future run the managing March performance X, in value balance allow It change also investors evaluate fair the the of We will hedging This AOCI. new saves changes these program. effectively allow in in non-GAAP agreements our more administrating the our

million As incurred in our quarter, negative that, or results. in Having common should $X.XX per a in of this all diluted any GAAP of share. GAAP viewed a non-GAAP net as we be said and metric, supplement with loss conjunction $X.X this

resetting for between fair were fourth time of the swaps to an basis of we our the mortgage de-designation. since Our during $XX.X the yields accounting core consist mark-to-market averaged GAAP quarter, at of of $X.XX portfolio million loans in Yields core from de-designation net earnings in gains the and or rates. earnings million difference quarter. AOCI of the million changes swaps XX hedge of in Portfolio the X.XX% and share. value $XX.X and from amortization The higher common $X underlying diluted included per reported points benefited increase X.XX% our

result basis acquisitions, prepayment $X.XX less mortgage our an per at quarter. XX offset existing borrowing is Unfortunately, quarter XXXX, with of rate our book value our Coupled estimates. the for funds hedges. swap lower changes during as our X.X% $X.XX result pricing prepayment did return $X.XX. cost while dividend, portfolio in rate of nearly quarter, secured or points share. the the activity and partially $X.XX value agreements perspective, Federal rates, increase prior declined ending of of the in largely $X.XX quarter over common we XX saw basis increased We share as borrowing increase levels in produced an down a value incurred economic during first amortization the also increase December our This premium by declining our by value increased we Book on recent in the common from X.X% Breaking per our annualized. the

related and reduction $X.XX divided activity. call up was that, partially the which to questions. With $X.XX open a we with will compensation exceeded by to earnings Our stock offset our core due

Operator

Thank you.

We Please session. go KBW. question Eric first the Hagen [Operator question-and-answer of now will Instructions] ahead. today begin from Our comes

Eric Hagen

Good morning. thanks. Hey morning Good guys.

So, typically in its during in have an observed on wondering prepayment Thanks. made that's change with departure? Capstead the the amortized way conjunction case premium you has if the guys to still just amortize or the premium accounting portfolio I'm period. the accounting speeds the hedge your you based

Phil Reinsch

premiums. Thanks prepayment Eric. changed investment this in No, accounting our of changes we did some on make methodology though. haven't quarter estimates amortization We

Eric Hagen

Okay.

So, what for the the estimate prepayment is portfolio? forward

Phil Reinsch

-- with haven't ever we disclosure. detail that of public kind don't our We gotten really into

it. I find have So, to might

Eric Hagen

itself? the number that my feel Okay. disclosed has decade think What the I model, least. -- looking was at first I that just for number I the premium quarter? What quarter amortization mean in that last period at was the for Capstead every

Phil Reinsch

know I XX-Q Well, we have don't release. have that our in certainly. public that press in the it We'll

Eric Hagen

Okay.

your so -- of the for alluded guys for you overall give the a for remarks What in opening okay how last out -- think cash the cash space refinance out activity activity percentage few years? sense have it the I And Okay. about hybrid ARMs. -- call over

Lance Phillips

But entire up securities generally XXs et years. XX% say want if drift cash memory far trends. some -- only me month rate they've XX% significantly prevalent as kicked kicked speeds It's point are population few right. cetera. out we instance and the saw think in for albeit gone the Last were Cash up I last or speed outs I as prepays a ARM number's lower up. the -- as speeds, to up over to issue outs last type that more go, Fannie to close continued about level so, serves about positive XX%. will fixed up to I newer from ARMs

slowdown starting speeds. seasoned -- some you're actually see so saw to very And we in cohorts

resting And things seeing mortgage seasoned see are on paper, borrowers some actually points. seasoned And into right far their September/October, that year. XX last take our about their aren't those talking up as their go more in will been going in we've it of rates decreases basis anymore, rates guys not now the the you it's if you above as get hold rates from about starting so once think And up very portfolio. to borrowers

that some done see So, between securities. more starting activity and slowdown they we're easing, seasoned think signaling and prepay I the that the to Fed potentially of are and

Eric Hagen

Okay.

you comments. Thank the great. for Okay,

Operator

question JMP go next of Please ahead. comes from Securities. Steve Delaney Our

Steve Delaney

Thanks. there's with in terms seems but was that flux of some start And is what hedge actually to LIBOR. haircuts to me repo nice what Hearing to repo. where heard to -- of comments three-month want negative -- not agency in. a I some like favorable spread. And see repo funds six rebound it just in cetera that demand or things et than in ago. spread of maybe seeing in lack a now earnings guys. XX there is coming some availability, led maybe in curious there we're I've just is now that And And were a solid the with months market relative especially think there terms the is market less that if maybe was

So, help could the I guess, would Robert us the hand of side understand Thanks. to that balance you anything appreciated. share be right sheet

Robert Spears

down there expected LIBOR there that are surprised now, there. little I few that to is haven't around rates not. but a right now, would relative repo actually I spot around I have We're think further they things is it's Sure. by one-month on. are a going have come few XX-day and mean, a XXX And repo XXX. think We to and actors XXX be than

are be in At on their have disclosing in about a rate -- the I their the time, and lot if book pool. different higher in issuance going that think we've to used think lot you them a same bonds and percentage now what's fixed those of percentage there repo of all get to of funded fixed in is rate seen people significant guys continues to of form of getting bill a market. securities TBA or the lot a own much specified market, a

if to wasn't about think lot XX% be a in availability. in So that think now there's specified, a just don't was the I and past. And apply or it MBSs that a lack he's if that XX% there's -- number of will now that, TBA a it repo, guy you shortage of

that is is little guys a the FICC have, that maybe markets. to And there than looking I -- keeping provide should and pricing and guys also discrepancies think it their to some advantage think actually are repo stuff wider that through are I be. where that using again, the funding spread at

curve, it's think including they're and So going have bills. the We're said about all to indicated obviously They positive I now those various talking also combination that points have essentially along facility. a all from They're -- that repo portfolio to buy saying. things. they're treasury-only establishing in a the Fed's what a of though going of

of repo So I couple rates we back hold, than they down drop right to think a should once levels see programs those now. are normalized take more

Steve DeLaney

helpful. That's

seeing So you're in saying XXXs? the you're current that quotes

Robert Spears

with XXX XXX, you three-month LIBOR LIBOR at one-month like at -- XXX. mentioned About

For a nickel. to plus proxy, funding most of years, you use if of wanted the last closer we LIBOR were a LIBOR for to couple

be So you would think XXX. we'd closer to

Steve DeLaney

Go it.

Thank you borrowers could actually All your about -- Okay. the And any maybe -- a calendar the to last a in of we and moved from the of And sort have that move and comments issue of saw XX, But range see interesting, helpful. seasonality. some we right. quarter lower. That's year, second summer reason rates reset half type that's a you. XX-ish shouldn't spring more where that that the first XX. than for year this

next the be XX a as good So this middle far but year, much as just to part do so level speeds? model or the year not for of think XX year into you thinking to would us for

Robert Spears

Yes. think, mean, were in of quarter, if I speeds think, will up I first probably. in I XX pick kind you the

chance to positive a I like, ARMs to slower. the at one same to going little fixed I for though, think point this a But are. trend, there's be be They XX% percentage rates, seem going think, up at most get up to the rates mid-XXs. up going forecasts don't like decent instance, the into seem still have, The XX%. fixed

yes, So have I don't don't with quibble any at I -- thesis all. really that

Steve DeLaney

me. Okay. And last XX% then mentioned Phil, the thing marginal you ROE for opportunity.

embedded kind down math asset wondering as understand that that how that? leverage algebra. as will far is at, that in looking much little to you're the helpful just be Just if It could bit you Thanks. basic of guys break yield a

Phil Reinsch

got we We're in be To was won't… what Yes. clear, quarter. that not we first the --

Steve DeLaney

yes. Absolutely,

Phil Reinsch

that the let down break for see for of the …probably year. rest you. that I'll Robert

Robert Spears

we more hedge of basis Yes. Actually, taken at months notice swap gap inverted, on that been duration a fall. lot Steve, -- longer XXX on year and reset from XX have swap. is one, three-year XXX are versus we've and where that kind purchasing if we've at curve those our of a four too, to the bonds a three-year zero you carry particularly looking whatever the down on to us, of And end swaps. for part And the a using is duration shifted we're basis. two-year number of kind XX And points when -- area a three-year those two to we're

And so out curve much of the we three-year of think don't the to going part is mismatch.

kind out Going for of is. us beyond that

And Fed that almost decreases. market is of inversion. now advantage so, in two have we the taken Obviously, pricing

repo. at via think the And sense funding the value adding swap we're current market this in time makes much spot a just point reset. we cheaper book so, And little book than at our margin in that the protection and

Steve DeLaney

No, certainly does. it

so, net at? MBS sort after would basis carry, looking your And XX amortization of on be what of yield you points

Robert Spears

of Kind the…

Steve Delaney

Just side. on the asset

Robert Spears

once earlier purchases the Well, part a then of taking XXX And, three. a bonds of a proxy and bought yields obviously, there to year-end lot decent XX some to quarter January just supply. XX some and low in that. in the was and lot of and But that the we had a dealers just again -- basis points higher were amount still February add as loaning because of paper those where advantageously overhang were you from

then. it little think since come I a that has in bit

Steve Delaney

Great. guys. That’s Thank you all helpful color.

Robert Spears

Sure.

Operator

of go Please ahead. Shoals next Our comes Capital. Poggi question from Gabe Instructions] [Operator

Gabe Poggi

morning guys. of prepay forward increase XX change from point much A yield. the on good increase that How estimated came XX basis basis Hey, question point in your in speeds?

Phil Reinsch

spreadsheet our haven't We really earning down in that broken release.

Gabe Poggi

take? or …give

Phil Reinsch

me? Excuse

Gabe Poggi

a of of… chunk the gauge decent point? it Was I'm get XX basis a to size trying

Phil Reinsch

yeah It was. it was. Yeah,

Gabe Poggi

speeds changing curve set going And of you're pivoted obviously, and still your the is But are estimates. thinking as very you guys so the is forward, flat.

a that XQ as to get changes And gauge of to of was so how much estimated just… to just trying due increase from compared

Phil Reinsch

decline point of on estimated Well, And balance a than in overall prepayment sheet X% just not past and changes. been have lower this year an portfolio. acquisitions the coming quarter. to basis at had We for the the rates preexisting

of combination and that including prepayment resulted half of increase a basis So XX yields. over changes estimates point in things in

Gabe Poggi

make Steve more XQ, one question just about it. and to speeds right. asked I Got heard I And into then XQ. want sure just going

things are You XX-ish pick comfortable in range. the the process up in XX, that guys thought

guys where speeds Just looking at shaking historical are relative seasonality and there what that coming we out actual you and ballpark? in estimating, is to are that the

Phil Reinsch

the think Well, months It question. reaches Whether than that I estimate high quibble we over that. we to not were with Steve's it be on indicated part. summer another could that going better is that

Gabe Poggi

whatever one And made last you. reason, If Got has obviously, for pivot. it. a for Fed

be re-pivot think impact back how would on activity For do were about the were whatever increasing what guys to are again, thinking rates estimated they you speeds? economic up reason to forward to that pick and potentially you

Phil Reinsch

of the reacts. market center some don't got the around I know, that? Probably rates thoughts how Robert, you on rest going

Robert Spears

steepens if tightening the worried for the obviously, it Fed loan mean, market and and if curve Fed changes for I they're tightening that starts then the because flatten would be instance curve not up a direction invert that if about be positive or a causes positive. to go rates prepays. -- the the If tightening would

totally slope -- curve occur. that really it it view So on your does depends the if of the upon

Gabe Poggi

Got it.

curve. It's of helpful. of the of kind function the the that's Okay, steepness

appreciate I Okay, guys thanks much. it. very

Robert Spears

Sure.

Operator

closing back I for This Lindsey conference would to any to over turn remarks. session. Crabbe concludes like our question-and-answer the

Lindsey Crabbe

us Thanks for joining today. again

to We look quarter. forward please If you next questions, give with you us a further call. speaking have

Operator

now attending The you concluded. Thank conference has today’s presentation. for

disconnect. now may You

Capstead Mortgage (CMO) 25 Apr 192019 Q1 Earnings call transcript