CMO - Earnings call transcript Q4 2020

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Operator

Hello and welcome to the Capstead Mortgage Corporation fourth quarter 2020 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today’s presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. please then question, your withdraw press two. star To being note today’s is event Please recorded. like conference turn Crabbe, now to I would the IR. Manager over of Lindsey to Ms. Crabbe, please go ahead.

Lindsey Crabbe

call. Capstead’s Thank link yesterday, issued to Relations tab. www.capstead.com replay XXXX on section quarter this for webcast the of under release. website. morning. posted XX, included quarter attending this is website Good the earnings release is you available of a January conference in in An The XXXX. our the be webcast The and will Investor was the fourth earnings and Relations XX, fourth at Details of also call archive yesterday’s April replay our through for Investor are

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

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

and provided addition, the financial measures, the website. with the are are also accessed terms company’s may used be non-GAAP have In of or through which company’s earnings on in call reconciliations schedules, tables Form X-K certain this the release which filed company in been SEC and

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

Phil Reinsch

we’ll quarter After a Capstead and a Thank recap of for remarks, interest for I fourth give will and some the quick going us current the to Mortgage. you thanks provide everyone color, call Lance in your with open brief then up Robert is make Lindsey, few market questions.

steady of our report on another high advantage dividend, as to to On X.XX% common basis, rates portfolio a continue to a lows take earned continued home. earnings producing $X.XX again or mortgage borrowing annualized Americans in pleased purchase mortgage costs we We’re the common generational with prepayments equity. quarter yields return effects refinance offsetting of have on new core lower

unchanged we our accomplished market the common March. XXXX, met earned of of despite all The with measure. and each returns lower experienced disruption dividend For itself this for these was leverage post-pandemic. quarters in by or five these the now quarters, We portfolio dividend balances exceeded and earnings in X% core

are only the can mortgage make We that REIT claim. that

average XX% the In contrast our currently about their at what on REIT at and stand steady looking they peers space, of mortgage fact, a were stark to performance. pre-pandemic, residential in dividends that’s

a $X.XX XX% or is which, about of XXXX, changed, book annualized. in $X.XX Thus value in economic an book value together a share. end, in year fixed return a X.X% down Our value income book on return an pandemic-induced disruption Since basis. or in with a is annualized in X.X% economic March fourth three-month quarter through common together $X.XX dividend, which, of the in and the $X.XX down up resulted dividends, XX% to resulted $X.XX penny was far common with little

buying mortgage programs; remain repeat not the attractive is March of out however, having levels. from made lowering reinvest the run-offs making no the portfolio capital forward, returns in disruptions heavy are Fed’s small available part in in high continued levels crowding bond and the of that experienced and to leverage the lower it optimistic due to see in involvement Looking prepayments the market capital, the a market we at at we’ll given levels This private Fed’s harder effect markets.

We the bonds. and currently of paying with newer expect is production, rates run-off with as on slower holdings, over our moderate with existing resetting time lower seasoning replaced to prepays coupon interest

conditions, flexibility opportunities as Lance being liquidity, that, to judicious market call our the advantage over turn quarters. in of take building Given deploying potentially in coming I’ll the we’re they these Robert. and With to unfold

Lance Phillips

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

$XX.X were share. earnings per core Our $X.XX common or diluted million

as to quarter, in X.XX% interest existing We points coupon $X.XX current our rates, for decreased quarter, being due yield Book ending prior GAAP fourth per continuing to exclude at $X.XX a yields declines as core during realized run-offs. basis offset $X.XX during the reconciliation earnings on mortgage and include derivative of to interest common our premium to earnings press due rate related a lower largely the related unrealized we reset per with in related by that reported rates the adjustments loans decrease core our a $X.XX levels Portfolio of on reminder, Yields X.XX% agreements. value on and losses XX prevailing X the prepayments. averaged from As well share of portfolio amortization higher declined investment share due lower of interest to our release. on high swap quarter. of acquisitions increased Page portfolio

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

in points fixed during the of pair swap September Robert? decline from future benefit going on forward XX, rates at on rate outs quarter As our book a will result rates These XX earnings. a December pay was lower X.XX%, effect fixed the XX. of basis

Robert Spears

product XX point. significantly quarter the is taking yields points out. originators applications with in Many however was about transition ARM during disruption fourth to quarter and originations new in XX-year [indiscernible]. issue SOFR to positive quit There a LIBOR Thanks the the Lance. term short SOFR basis curve two-year RMBS get a The didn’t declined increasing LIBOR Longer from while rolled early trend indexes. yields this yield due steepened term, valuations for but basis

of was downside [indiscernible] the same of $X was lowest an and shapes selling that As light year very fourth on the coupon, newest new to time, extremely sizes tighten the skewed level for roughly caused quarter. be all strong at a ARMs was issue secondary result, spreads perceived At billion. the from at paper to Also, dramatically quarter to is and immune prepays. lowest the production the in

crosscurrents, more we’re a As to seasoned space of the issues. these as new seeing value in elevated. ARM currently Prepayments remain opposed result

to several next continue the expect trend We months. for this

has move remained XXXX, As yield the into steepening we curve trend intact.

new see ARMs out [indiscernible]. to coming SOFR starting We’re

we’ve supply of million [Indiscernible] SOFR paper, new fact, in starting of come out matter seen high already fact that paper spreads a relatively $XXX over the to is this As are on this With [indiscernible]. more and is far fashion March. volume as a around the normalized for as I we’ll in call nonetheless. would positive expect normalized more up questions. production much open market the become that, to January

Operator

today DeLaney instructions] comes from Steve [Operator JMP question Securities. The with first

Steve DeLaney

morning you? everyone. are How Hey, good

Phil Reinsch

Morning.

Steve DeLaney

and for market help sense the sounds the tightness back, good supply is last and night. invest change you for that minimum of but get the today, between, does a ROE us comments and just like cash duration market see as Thanks like release minimum a your current hurdle reset in - Robert, the and of - the longer you demand, fresh lot a us give talked new that or paper? how range what that to say, an of sounds you’ve it paper, idea hurdle, stepped kind about

Robert Spears

sure. Yes,

return, are X.X, we so not going in anywhere think--just about unless there at right a so invest are thinking out leverage minimum level get we to at X I of preferred seeing and from it, X.XX we now can we times. X% have to just an

though, mainly seasoned is returns market, trading and inside space. With but but now ARMs obviously vacuum. fixed in wildcard would of is production don’t as up, rates expect tightened picks now, that that’s those We’re bogey. even trade right the as just in The production where parts seeing to have X% right spreads well. I I it’s and a in the some is are new side so they normalize, be that to the how lot times, to new then that’s we’re the bid paper tighter stay long not guys next months, think away, on But--so space. back going probably one super the bank A the of those going heavy first lasts. active wildcards. in the quarter issue couple of of

Right out through year, credits. given the some far, into that of think change $XX block-sized stick move in April new or the million, short of much very two seasoned now, and that the what of compelling. are we’ve next trades though, months, overly million so so not about along we $XX as curve, the over month not already--I bonds optimistic paper optimistic seeing and going the year already, so we’re we’re with March first because slope to putting that originators is few [indiscernible] probably out fixed paper. more to in [indiscernible] issue the the so coming the months, the it’s could over We’re mean, we’re and run We the seen larger

Steve DeLaney

one Got for Thank helpful. you. it, that’s you. Lance,

it’s on swap quarter, only think of rid let’s swaps; that XX contract? here in say got you’ve swaps. basis one Should pay looking expanded for point, I you’ve just think interpret table at say I OIS net is spread that received versus rate and Your switched of as kind December your X/XX, fixed cost disclosures, third on you fair quarter I disclosure but of these your higher some when gotten an a between much particular value XXXX normally obviously would averaged what days versus that of swap to maturities you’ve just and also, fixed any this

Lance Phillips

fixed actually that’s pay. average our No,

Steve DeLaney

That’s your fixed pay? average

Lance Phillips

maturing ones in period. the that For

Steve DeLaney

basically you’re point? basis so saying paying you’re one Right,

Lance Phillips

swap notional rate that basis of of third quarter one fixed billion Yes, example, so average using point. $X.X an that has amount

Steve DeLaney

Okay.

Robert Spears

on is in up so now. two-year about current right points, that, that basis swaps at one money follow to the eight [Indiscernible] are OIS those [indiscernible]

Steve DeLaney

modeling two, do thanks. in with the follow-up clear day Lance, comments, for the you, going or guys. a Thanks Okay, just for on to I’m make to that sure I’m purposes. next

Operator

from Stewart Thank question next The comes you. Jones Trading. Jason with

Jason Stewart

a morning, and good on Hey, congratulations XXXX. great

of good kudos a that level then tough for the possible, have quarter. it, performance in sort fourth in you for could quantify if the again on if set there. first anything set expectations I would the and a adjustment numbers the maybe good Lance, occur think that a in question yield year. quarter, I if

Lance Phillips

On the seven adjustment, pretty yield haven’t consistent year. adjustments, the but the we to basis want the second quarter been disclose--? say fourth the of been breakdown it last of disclosing I it’s that, half in yield We point was--do over

kind term. no that, there’s first on traditionally but We earnings. and more basis do for We’ve the we that in a speeds a they reminder, as basis last the couple in our done quarter, years requirement least a then on quarter, of peers going look that this the what look longer little I to adjust that’s again the speeds, how life and pretty annual look, of and first core out regular back at life expect we’re some year. For but of it at that’s of over try to at past an

higher and others what call the chance those would break up, prepayments, if the would move in out say adjustment, speed we the we’d just impacts that you. certainly for first a disclose catch-up, do, disclose but quarter speeds would obviously what With we we the that there’s that life we and or

Jason Stewart

Okay, little so of a in thanks. a quarter Then the whipsaw far. first obviously in bit rates we’ve seen

it has bit little we’ve given If performed way a the seen just traded appreciate so extension, far you walking the issue, rates. has wouldn’t legacy just of on short portfolio but in new how and terms through duration comments that of mind of the in I the duration, what the nature in happen and us

be think helpful. that I would

Robert Spears

Sure.

As Friday, last last Phil of you close pretty is of mentioned, close essentially the and at was our penny much down as of a two three-year business--marked if book so to mark, the unchanged. which look as at value of of part our the curve, is business curve

lower a some as although own paper a general, paper is--comparable the by it of out our not coupon of better story. the so your those much and just we just really question? coupon in improve right now is going ARM of XXX.XX, on lot, the of issue as prices environment, really it’s so a market, of ARM play moved see the very compression seasoned a spreads most point. between Most there’s rate like this movement lot on there what’s far. of trading right speed that the right a quarter is we’ve or newer coupon XXX.XX fixed To paper fixed tightened, In good lower of seen market fairly a have performing now. other is you in newer and rate, lowest paper like either lot so flat, now, categorize book, somewhere because duration paper a paper answer price Does and on speed with hasn’t Given kind

Jason Stewart

context portfolio Yes, thank that’s way moving helpful, rates, the is that performing, with super to in performance stratify helpful. I terms it’s and of the that the just think you. helpful the longer portfolio that’s so term

Robert Spears

Sure.

Operator

The question you. next from with Thank SG Evans comes Jon Capital.

Jon Evans

I Yes, in dividend, to can your you about--I’m the REIT curious, by only frustrated the etc. sure bit was you cut being the a little guys that talk valuation relative mortgage stock, didn’t just just you’re

stock the to levels? down book. start of bringing to XX% potentially of deploy at about trading You’re here you’re capital you do these leverage, buy look some that Since back and down

Phil Reinsch

question. great a that’s Yes,

multiple we performed we a trading well obviously, and at that we’re lower perspective. agency think deserve, we have cash considering from are book, XXX% a and We flow than

of bit the run leverage quarter, the to leverage to coming place would deploy lower good buybacks that Robert the down or don’t lot if the With so described, see and probably capital, that that a quarter flexibility dynamics how at end of capital. have supply manoeuvres other by plays out; in us been that even first we we the gives demand but look opportunities to potentially that little use we’ll fourth with in see a

to our for certainly open that regard. doing We’re best stockholders in what’s

Jon Evans

you have book for to of different, call, on about getting is Can potentially etc., the how relative they they other closer etc. in we’re question getting is AGNC their that some your see but on Okay. Then know to give talking the I think us kind burnout there’s were what I that refis market? and ARM you insights refis to that, you into any

Robert Spears

Sure.

throughout burnout, you ARMs that, so has are to of going refied, MBS prepayments remain in next not out this exhibit will I are regard. market much and elevated. could everybody the to like think time, most nine over the months after the different get over elevated segments that that look pretty of I year then be and think have a start to to would now where point that there dynamics right six speeds and most

think a of in I resetting reset rate start securities book, this you an downward, short yield. the and see burnout, borrower burnout we will difference this as could see a for fully coupons months nine we nice starting first for to paper rates too different reset that the moderate. have, the to no that, to seasoned indexed our in while. of get we not remain ARM portfolio. book of But some versus is year, about [indiscernible] to fast a That’s probably and cohorts fast now in are terms all, speeds after going than well. somewhat lower should but on in The you through ARM exhibited. fixed Those Also, if are they have down A be to after guys remain feature the around six fixed so X.X%, we would that those necessarily think it’s reset higher all think as we three that loans instance. slow

Jon Evans

and--yes, I’m sorry. Okay, go ahead?

Phil Reinsch

press to year a portfolio, the the reset Well we sentence how about on a increase or last quick relative the our will a resetting of in disclosure point had request to our real current so aside to release. that we Robert’s just added page bonds to effect coming those so,

Jon Evans

Thirty-six percent right? next six months? Thirty-six the percent,

Phil Reinsch

following XX% occur XX% the amount in to We average will--that remaining quarter the third that another indicate additional disclosure next after and then XX% which months that, there, months. there. the of be improved but in XX% will on again the six some the would gave in time, reset quarter, there’s disclosure that Yes, reset we quarter, the six over

Jon Evans

yield it’ll there going will though, as it’s investors, because refi, reset, As likely obviously not but correct? won’t just the most be to ramifications, as positive think about we should run-off come down, that

Phil Reinsch

That their have years already folks because portfolio referring to to already of know, certainly they the incentive of fixed coupon coupon bonds a have of that It Robert when be get resets a coupon their that to was won’t it. should about anticipation to, know they whole going go, refinance those or anything after without do their but mortgage they’re down. that than part of Yes, coupon will will to payment slower with something the happen, paying is down. a reset lower out lot a will so they refinance it in goes bonds, having on affirmation just necessarily

Jon Evans

Got could I-- it, and

Robert Spears

[indiscernible] math, in does than the think and higher more lower on into detriment up speed now, yield than in at all, what in kind throw coupon offset seasoned all of coupon a that getting paper the so very of I a may decline drop are so speeds loss. without [Indiscernible] levered bond speeds the the it the would

Jon Evans

it. significantly ask see a for seen just what eventually portfolio. bigger standpoint? ARMs have a you little picture, your rate in what explode XXs, before talked mechanical into of about LIBOR if we start Got for just to should issue, from a mortgages a this need I SOFR, really steepening the kind and was to we’ve happen? versus production talk going ramifications obviously are bit in could that’s maybe Then just which Can what about You we on rooting to but fixed positive

Robert Spears

steepness increase. originators, increase steepness alone versus fixed, rate forward. say, production much a ARM than we’re big seeing from I they’re what so originators we’ve if now, there X.X in better. hearing guys would ARMs That level. XX-year that steepened In further, of the only supply steepness cheaper think, are environment liquidity pick-up as gets going and we’re big seen, Well from of a that with, supply, at it from there low it market, fourth contact optimistic is with causing very Any the difference ARM and quarter, as in the out already with attractiveness, three-eighths from a we’re about albeit an in the only are

Jon Evans

Okay. I hope stock appreciate I the Thank back. you for you really buy it, questions. of much so some answering my and

Phil Reinsch

you. Thank

Operator

comes with of Bank from America. The next question Derek Hewett

Derek Hewett

everyone. morning Good

think the on the near back lower Given those and and near buy issue term in any we should about should around near yields dividend? normalize start lower, QX things expectations what presumably headwinds Are and are the of new beyond, you to term, the portfolio the modestly in sustainability these the how term stock in trending leverage current and if headwinds don’t those or trends?

Phil Reinsch

of back don’t core our earnings. We disrupt hold something ROEs, But have goes. steepens, through that’s capital lot say levels you There’s lot in temporary looks this we and talking we moving dividend factors it whether a our to pattern on lot it capital, we of buy decline a ordinarily curve if A we’re to about any, be of powder parts, than buying of dry optionality do so of at bonds from perspective where leverage There’s and if to lot want It’s we dividends in as do at, right, unknowns decent prepared more the year. that don’t, in down onto to or terms were what be earnings depend the of can if will we probably we road. otherwise. how could uncertain really what we might an strive whole we about, some more--it’s just a do whole do lot it quarters it our yield not stage, maintain of or level we’re a at if where can own transitory. this we the deploy the for a those keep with much

Derek Hewett

you. Okay, great. Thank

Operator

you. again, to Hagen star press from would a Thank if next BTIG. you comes Once question with please question. ask then one like The Eric

Eric Hagen

ARMs. follow-up caps and product the Can light guys. and offered you to shed just morning the some on margins on borrowers? rolling floors originators good SOFR itself, Thanks, are what being A

Robert Spears

Sure.

and space, it XXX margins or So old of--net out in far, margins difference SOFR the X.X plus out come LIBOR had X% the paper been margins newer has if most so is of of you can so. what’s twice, the the has that’s come X.X that. XXX. it The will, then after reset X% and at a every six around had cap It’s reset first structure, because months resets theoretically up X.X

off so index over If at XX-plus what the a trading than margin how it’s people with the materially fair points roughly not a adjustment of basis would is it’s It’s time versus really you at. look LIBOR adjustment. a trade trading ARM trading different LIBOR, far, assuming similar SOFR coupon basically

Eric Hagen

really color. well. are Great, interesting Thank you. you that’s Hope guys

Robert Spears

Sure, thank you.

Operator

Thank you.

the closing question, As I’d return for Crabbe any last that the floor to like was Lindsey to comments.

Lindsey Crabbe

joining Thanks today. again for us

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

Operator

answer Thank you. as Thank for and attending the call. concludes This question as presentation. well the today’s session you

You may now lines. disconnect your

Capstead Mortgage (CMO) 28 Jan 212020 Q4 Earnings call transcript