CMO - Earnings call transcript Q1 2020

Due to licensing restrictions, you must log in to view earnings call transcripts.

Operator

Good day and welcome to the Capstead Mortgage First Quarter 2020 Earnings Conference Call and Webcast. [Operator Instructions]. Please note, this event is being recorded.

I would now like to turn the conference over to Ms. Lindsey Crabbe, Director of IR. ma'am. yours, is floor The

Lindsey Crabbe

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

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

On and and Vice President the Robert Lance call President today Executive Executive Vice are Senior Chief Phil Financial and Reinsch, Spears, Officer; Phillips, Chief President Officer. and Investment Chief Officer;

community pandemic, the global enables To with the have associated we our and remotely. address continuity support and employees employees the health plan COVID-XX risks our wellbeing implemented business of work that to and our

us all answer be please we questions as such, not since patient As together. are with presenters

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

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

to that, With Phil. over it I'll turn

Phillip Reinsch

adversely COVID-XX we'll of An the the recession, heightened will economy fears extremely in levels total Lance of unprecedented credit call all in under came in across the to income quarter, remarks, high of spectrum up my calls selling and redemptions. a Credit firms their occurring unlevered give instances, raise asset liquid After to the size All the financial at levels questions. of income meet due Lindsey. severe Levered and, pricing regardless began recap of March markets. were margin to you, fixed beginning to investors default shutdown pressure, fixed cash and positions leading pandemic derisking U.S. many markets. near derisking affected. to model and destabilizing of open then process business a most the Thank or

mortgage purposes for to are the led held already due liquidity declining derivatives losses margin firms REIT sector, experiencing and drains hedging to rates, treasury on valuation-based In calls. which

of liquidity the to less increased traded on more for of MBS mortgage base portfolio even to volatility. As interest due as to prices Losses equities swaps credit-sensitive were losses REIT values markets liquid lack Mortgage eventually by a sellers greater try book agency trading gains. rates offset The seen. sheer included and agency positions, non-agency from Selling market in as end sharply MBS selling requirements the discounts the crushed. drain buyers. disrupting on result deepened, pronounced was volume were at not and intensified REIT crisis REITs MBS rarely derivatives Mortgage margin realizing valuation became declined. due falling this heightened avoid market of

that March. on has part stable damaged make environment exhaustion that rate the not of agency a number are the agency were going allowed that leveraged buy that massive Fed together agency was in The as the Monday, Capstead severely earnest for on said, size operating calls. announced more credit-oriented MBS with XX, March REITs for late MBS firms, fixed they rate margin to mortgage in of on forward Fed began but of of a not fixed That for near too intervention, firms of focused selling MBS could the such

the March, $XX were we equity. to generating replaced. in in January leverage Acquisitions In became Swaps deteriorating, apparent early February, plans specifically, runoff exceeded common early of continuous March focus and paired using modestly not offering beyond. and shifted our markets raising of executing the in Regarding that common and and and increase million from were was into in rolled were on out in it Capstead liquidity. program. was Repo at-the-market replaced. to not Runoff equity April anticipation portfolio quarter, issued our February, was

speaking, ARM pricing down. in held breaking middle market well fixed traffic rate liquid even as up more comparatively the of the was fairly through March, agency

it throughout on prepare With this our the for to to concluded sell all XX, that projected time, want calls. trading needs. Sunday, emphasize a continuing markets business we actually portion liquidity met non-agency we've future to prudent March margin a of to was deteriorate, culminating I portfolio

Looking and compared with value point. portion With in end, quarter at quarter improvement replaced forward, April X.X:X to currently of the this this X.X:X in end. X% comfortable runoff, relative to leverage portfolio pricing that value we book lag book was recovered having ARM a MBS a to to rate be our up fixed X% at evident at not have is estimated

As Fed XX XXX returns replacing zero. repo largely to are points to borrowing at now XX between funds with most we reduced points, March our dramatically, begin basis rate typically Fed near are costs May And basis rates perhaps importantly, the unhedged the in and having very portfolio attractive. down reinvestment runoff, thanks

we turbulence well than leverage investment we lower believe past. worst attractive up, is our at on employed generate Wrapping is returns have and positioned the in recent portfolio to levels capital of behind the market the us, recent

year, or the our common dividend Looking a rest quarter $X.XX core the forward, current exceed can run that rate. earnings we produce meet will we confident are increasingly for that of

over the Lance. call With I'll to that, turn

Lance Phillips

net loss $XXX.X Phil. diluted of per a quarter this share. you, GAAP We $X.XX Thank reported or million common

diluted our Page billion with We core Our our of X and realized on swap interest on $XX.X common core losses earnings include loss or the a sale $X.X GAAP press on of per share. of the of rate earnings release. earnings agreements, securities. and Core $X.XX were unrealized million portfolio-related exclude along realized reconciliation

$X.XX value the losses losses. in share quarter, first $X.XX rate Book our agreements, due realized decreased interest per which primarily in at were per $X.XX of to common during $X.XX ending swap share,

we the realized sale a of securities. on of the Additionally, incurred $X.XX loss

realized is quarter, nontaxable XXXX capital. to losses expected that activities from the dividend this With return as and and it will all XXXX characterized hedging preferred common in distributions be

result to Portfolio the portfolio XX reported yields yields prepayment of rates primarily averaged of lesser to lifetime quarter, cash reset Yields a our X.XX% prevailing portion the a lower an declined increase in extent, X.XX% prior our a and, estimates. interest decrease a points we during the ARM basis due lower in as to from of quarter. as

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

at them rates During agreements, in repo on the agreements the in out quarter, $X.X new offset partially in billion declines we book swap replacing with were rates. of benefits receive paired billion lower and X.XX%, should on rate together swap unhedged rates, basis and of fixed swap derivatives the from a these our future lower The swap XX OIS by on balances, decline lower December LIBOR $X.X was fixed and a lower with effect based fixed lower rates pay rates. rates points At of book notional on These our benefit XX, XX. earnings. leg March lower X-month

we will that, open to questions. up With call the

Operator

have first And question will JMP Instructions]. the Steve from Securities. [Operator come of we Delaney

Steven Delaney

there you I March, where of to in in. a things of but wondering eye was like think I the moving given know living we're kind in settled of and are were pieces, storm you're the backdrop - lot I to guys - that glad today, the hear that they sound all you have

go dividend. stability just you Xx. the drop curious of kind down exactly, are Just guys up if the we equity, - maybe hedging part the if curious, obviously And levered the whether move is Xx to don't that - returns strategy. we were to something like looking you and be know there? would on I'm you looking of your of or forward, entails Phil, see that of commented on range stability, expected to how What

Phillip Reinsch

Yes.

So are X.X:X May not as and we're now April replacing around I after runoff, mentioned, we runoff. replacing

[indiscernible] [indiscernible]. view boosting well so reasonable - leverage of going mezzanine common is our the can We're - And from we and exceeding well what frankly, you strong. Xx quarter are exceeding So to than with experienced. exceeding equity our a figure one at all-in, be it's platform, we - capital kind heavier a clock mezzanine is that. the it equity was with of to of returns ago And the the as ratio - there's terms common

So look future great. returns

now. base out and portfolio looking margin Now XX-plus-percent some at nice we're returns really right we're but at ROEs - the kicking is the on new acquisitions, reinvesting,

Steven Delaney

there fit anything queue, is prefs, on that is X-year your there's fixed are - in of to it that, out on fixed benefit And there, is could rate anything coming those, market? right, any I And can might if period which you and you that the above what up call dig a floating? have a but

Phillip Reinsch

You're talking about preferreds? our

Steven Delaney

Oh, yes.

side. preferreds Your

Phillip Reinsch

today, it's can a borrowings $XXX be... maturity or got And Our Series pref and E preferred is coupon. our million callable unsecured X.X of

Steven Delaney

yes It drops,

Phillip Reinsch

a that at very they're all... wouldn't floating rate LIBOR over decent that, Given be

Steven Delaney

add Wouldn't much.

opportunity next So here the markets quarters. upon couple equity the the how depending might of Series REIT be over down settle an E mortgage

all quarantine comes be here the thanks for Texas and ahead. Well, Okay. in of folks, you weeks the comments, safe out as

Operator

Eric have KBW. of Hagen we And next,

Eric Hagen

And wishes you to best my well. as

talking balance One to of of just TBAs. off was peers about being some sheet your the with fund able benefits of

just in moves to just rate your into that at the Just any funding, accelerates that or cycle. thoughts fixed potentially we points move saw just talked the space, sheet the just opening can on very guys off-balance order which valuable certain whether last in market the in and you funding like quarter remarks, about be from access really the pressure across

Phillip Reinsch

businesses March. nicely balances. I occurred That's counterparties market repo for a a don't that availability had their of all we We interesting And problem. - having of repo being because hungry in our The of retail characterize might the as the behaving here. very - reduced when have significantly in them delevering book is see view as

they're any not haircuts higher So with like for them back to or that, hard of anything of kind plenty reasons pushing rates. on and push not

financing That to at got TBAs. look said, with you also

the up to all with carrying risk that. so consider are a really position, you levering with kind great start associated of you're You that

TBA - for taking to of reason any part in at that's of us exposure be thing this that see we're don't not XX-year fixed the be One kind I our playing strategy market. So really point. we'd not

Eric Hagen

sale give in bucket you that spread pricing Okay. us ask a expect what a - Can the year. once reset longer current this you versus I today? ARMs feel maybe And prompted reset just you longer the just yes, for then reset reset? Can in like snapshot current I bucket versus the

Phillip Reinsch

that. to speak Robert let will I Yes.

Robert Spears

Part reason sure, the the reset simple as was securities Yes, of decision larger sold Eric. as - the shorter buyers. we

wanted remaining looking where of combination Having you quarter, we've We at been. - it's - for Mae If that that, longer and Ginnie Guys this it reset paper. versus reset decent point nutshell. a looking that to kind was there XX% we recently really runway a resetting shorter our because paper. were reset were it's It's XX% larger time. in And of for in specifically pre-reset that to kind XX-XX the shorter ARMs, do expect that of mix still demand not been another. portfolio, shorter That of reset. a outside et buyers mainly ARMs, was cetera, size at looking for sold said

Eric Hagen

like Can there? And in Okay. on give look And now? while a hedging the snapshot us those side one what the do that. just then of buckets each you on prices right

And your for direction longer certain reason going of the duration feel is - on running the that duration on what kind you concentrated the guys that do is I comfortable is in or this that - was environment? in quarter gap, gap balancing? mean a curve? the some duration yield its in Just where

Robert Spears

reset X.X in Sure. price. quarter, to performance in if I securities They point a the were to the a mean look underperformed degree. over you at quarter down shorter some

Our securities longer in a up were price. point reset

that. seeing both took we you're to our in segments alluded duration Phil gap, nicely longer this with unhedged position, of less environment X of months, the with at look comfortable or swap remaining more of our covers we're very you post which earlier, end, Fed out our The the $X.X shorter to resets. recover billion, our essentially we're our spreads book. in if gap position it reset where quarter on As bulk the is, and And

inside on And coupon of X.X book, our two now, the our so where longer right resets kind of reset closer probably year longer our in see probably we're risk of really, exposure, given we to looking still years, an the area two years. in actually,

we're And that. so mindful of

fixed have the came they mind keep in rate it to market part was mind because in the XXrd of and did basically, directly, agency not on you and basically in if take - ARMs that the - the Fixed at look agency they rates, also underperformed. ARMs And Fed bought CMOs. and you that buy

as for now there's get banks. ARMs fixed quarter so have bid much you so And risen end, that nice a really from rates predominantly over

a of the even first rates because feel that points, ARMs like widened prices up, room of that, we so so spreads for slip. lot there's And XX if or so and go probably not basis have to much

and spreads those we're running rate spreads because So comfortable we tighten in in. now environment, are would right back wider, think up longer an a little

XXX got you X.Xs a book right the now, XXX our at XX you if handle. just don't and - so mean we've entire And ARM mean I with we marked I with look or where handle trading have got -

you so that of the where kind sell tighten mindset to we're given soon. hedge is we Fed it just prices as right would the not if if now those And anytime where spreads interpolate makes to going not and of are, rates off, much think go sense

of we're few months of next XX% going and the run be we'll to think side liabilities the to next the - to few our I had probably from prior where for hedged, have hedged. to And opposed liabilities we we longer now, this, right So probably as in that's closer our XX% months.

Operator

Derek of Bank America. question Hewett we come of will from next have The

Derek Hewett

everyone is on call doing late. hopped I hopefully, a the And well. little

it, low of what for the have is us could So near-term but your rate at speeds I you missed point might remind kind outlook prepayment given environment? this

Robert Spears

that. take I'll Sure.

rates look right from securities now, XX% at fixed the generically, XX%. about you kicked months, If and prior ARM up up last month, about kicked ARM speeds

of the I were and think generically, the mid-XXs so were kind And fixed ARMs in high in rates XXs.

to in the down in couple current forbearance very down conflicting XX-year we our will disarray right think well our and more refinance with to - primary shorter And WAC. our years, resets X%, And right? - now, which to forward. refinances our are the Given to same are book, originated Rates pressure with will between going the book on be rates around along the speed loans stories and the book. going - up. should mortgage gross continue higher story very time, so resets going it's reset slightly be closer longer WAC a of reset those reset market, Most have the you of speed we we'll at be X.X, no-cost that newly in all think a down that, that speeds to are compelling our is in contained such gross last have the and that's so

be very probably, virus feel over going pieces to than forecast everything so if slower or to So X months. speeds obviously months. the take be together, having going speeds we contained just you that, said our good the all And and the rate in have few next putting we the they're else, interest are into well account think going didn't really next and forward would about generic X what

Operator

any closing conference Well, I sir, further the remarks. Lindsey would questions going time. now today's turn at Crabbe to to conclude no over like Ms. back this for session. call question-and-answer to Ma'am? We're

Lindsey Crabbe

for today. joining again us Thanks

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

Operator

has this to a everyone. you you, management conference now today. we lines. time, concluded. for Take time your the team, disconnect And The you rest of thank ma'am and great the care again, have At Thank your day. also may and call

Capstead Mortgage (CMO) 30 Apr 202020 Q1 Earnings call transcript