(Source: Business Wire)
Capstead Mortgage Corporation (NYSE: CMO):
Third Quarter 2009 Highlights
Earnings of over $42million or $0.56 per diluted common share
Book value increased to $12.21 per common share
Portfolio increased to $7.92billion
Raised $71million in new common equity capital
Portfolio leverage declined modestly to 6.21 times long-term
investment capital
Total financing spreads averaged 2.25%
Capstead Mortgage Corporation (NYSE: CMO) ("Capstead" or the "Company")
today reported net income of $42,085,000 for the quarter ended
September30, 2009 compared to $42,507,000 for the second quarter of
2009. After considering preferred share dividends, the Company earned
$0.56 per diluted common share for the third quarter of 2009, compared
to $0.58 per diluted common share reported for the second quarter of
2009. The Company paid a third quarter dividend of $0.56 per common
share on October20, 2009.
Third Quarter Earnings and Related Discussion
Net income for the third quarter of 2009 was modestly lower than results
for the second quarter primarily because of lower net interest margins
on Capstead's interest-earning assets. Interest-earning assets consist
principally of a core portfolio of residential adjustable-rate mortgage,
or ARM, securities issued and guaranteed by government-sponsored
entities, either Fannie Mae or Freddie Mac, or by an agency of the
federal government, Ginnie Mae. Total financing spreads averaged 2.25%
during the current quarter, a decline of 6 basis points from spreads
achieved during the second quarter. In addition, the $0.02 decline in
earnings per common share reflects additional shares outstanding as a
result of raising $71 million in new common equity capital during the
third quarter.
Yields on the Company's total interest-earning assets averaged 3.90%
during the third quarter of 2009, a decline of 37 basis points from an
average of 4.27% achieved during the second quarter of 2009, reflecting
lower coupon interest rates on ARM loans underlying the portfolio that
reset to more current interest rates, lower yielding portfolio
acquisitions, and higher levels of mortgage prepayments. Mortgage
prepayments remained at favorable levels, with portfolio runoff
averaging an annualized runoff rate of 21.6%, or a 19.9% constant
prepayment rate, despite increasing during the current quarter from
near-record low levels experienced earlier in the year. Prepayment
levels continued to be restrained by the pronounced contraction seen in
residential mortgage lending, largely because of declining home values
and more stringent mortgage loan underwriting standards. Yields on ARM
securities fluctuate with changes in mortgage prepayments and adjust
over time to more current interest rates as coupon interest rates on the
underlying mortgage loans reset.
Interest rates on all interest-bearing liabilities, including the
Company's unsecured borrowings, averaged 1.65% during the third quarter
of 2009, a decline of 31 basis points from an average of 1.96% during
the second quarter of 2009. This decline reflects the current low
short-term interest rate environment and the maturity in August of the
remaining $557million of the Company's relatively high-rate,
longer-dated repurchase arrangements. The Company's borrowings under
repurchase arrangements as of September30, 2009 consisted of
$6.99billion of primarily 30-day borrowings with 16 counterparties at
average rates of 0.37%. Under the terms of interest rate swap agreements
entered into with four large commercial bank counterparties, the Company
pays fixed rates of interest averaging 2.76% on notional amounts
totaling $2.80billion with an average maturity of nine months as of
September30, 2009. Variable payments based on one- and three-month
London Interbank Offered Rate (LIBOR) received by the Company under
these agreements tend to offset a significant portion of the interest
owed on a like amount of the Company's borrowings.
In addition to replacing portfolio runoff, the Company deployed a
significant amount of the new common equity capital raised year-to-date
primarily into acquisitions of current-resetting agency-guaranteed ARM
securities. With the federal government continuing to support the
residential mortgage market, demand has been very strong for seasoned
ARM securities, leading to higher pricing levels. The resulting
improvement in the fair value of the Company's portfolio, along with
improved swap valuations and accretion from capital raises, has resulted
in a 31% increase in the Company's long-term investment capital since
year-end and a decline in portfolio leverage to 6.21 to one at
September30, 2009. The following table progresses the Company's
portfolio of mortgage securities and similar investments:
Quarter Ended September 30, 2009 Nine Months Ended September 30, 2009
Mortgage securities and similar investments, beginning of period $ 7,605,202 $ 7,499,249
Portfolio acquisitions (principal amount) at purchased yields of 2.85% and 2.99%, respectively 723,101 1,322,561
Investment premiums on acquisitions 18,111 28,109
Portfolio runoff (principal amount) (448,305 ) (1,065,497 )
Investment premium amortization (8,311 ) (20,456 )
Impairment charge related to commercial loans -- (750 )
Improvements in fair value of securities held available-for-sale 30,680 157,262
Mortgage securities and similar investments, end of period $ 7,920,478 $ 7,920,478
-------------------------------------------------------------------------------
Third Quarter Common Equity Issuances
During the third quarter of 2009 Capstead raised $71million in new
common equity capital, after underwriting discounts and offering
expenses, by issuing 5,147,000 common shares at an average price of
$13.85 per share, net of expenses, under the Company's continuous
offering program. Year-to-date the Company has raised $80million under
this program through the issuance of 5,835,000 common shares at an
average price of $13.66 per share, net of expenses. The Company may
raise more capital in future periods subject to market conditions and
blackout periods associated with the dissemination of earnings and
dividend announcements and other important company-specific news.
Book Value per Common Share
Substantially all of the Company's 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. The fair value of these positions is
impacted by market conditions, including changes in interest rates and
the availability of financing at reasonable rates and leverage levels.
The Company's investment strategy attempts to mitigate these risks by
focusing almost exclusively on investments in agency-guaranteed
residential mortgage securities, which are considered to have little, if
any, credit risk and are collateralized by ARM loans that have 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 that contain a
significant amount of non-agency and/or fixed-rate mortgage securities.
This generally results in a more stable book value per common share over
time. The following table progresses book value per common share
outstanding (calculated assuming liquidation preferences for the Series
A and B preferred stock):
Quarter Ended September 30, 2009 Nine Months Ended September 30, 2009
Book value, beginning of period $ 11.48 $ 9.14
Accretion attributed to capital transactions 0.17 0.38
Dividend distributions in excess of earnings (0.02 ) --
Earnings in excess of dividend distributions -- 0.01
Improvements in value of mortgage securities classified as available-for-sale 0.44 2.28
Improvements in value of interest rate swap agreements designated as cash flow hedges 0.14 0.40
Book value, end of period $ 12.21 $ 12.21
Increase in book value for the indicated period $ 0.73 $ 3.07
-------------------------------------------------------------------------------
Management Remarks
Commenting on current operating and market conditions, Andrew F. Jacobs,
President and Chief Executive Officer, said, "Conditions have improved
considerably during 2009 for investors in agency-guaranteed residential
securities. We have experienced significant pricing gains in our ARM
portfolio and the availability of financing at attractive interest rates
has dramatically improved. For the quarter, our investment portfolio
grew to $7.92 billion as a result of portfolio acquisitions in excess of
runoff and the aforementioned pricing gains. Additionally, during the
third quarter we were successful in raising $71 million in new common
equity under our continuous offering program, all of which was accretive
to our book value, while contributing to a modest decline in leverage at
the end of the quarter. Even as yields on our current-reset ARM
securities continued resetting to more current interest rates this
quarter, the effects on our financing spreads were largely offset by
declining interest rates on our short-term borrowings. Overall, the
impact of lower financing spreads and lower leverage on net interest
margins was substantially offset by the growth of the portfolio
primarily attributable to the deployment of a significant amount of the
capital raised during the quarter.
"Recent statements by the Federal Open Market Committee have reiterated
its view 'that economic conditions were likely to warrant an
exceptionally low level of the federal funds rate for an extended
period.' Should this prove to be the case, we anticipate that yields on
our portfolio will continue declining throughout much of 2010, with
these declines offset to a large degree by lower interest rates on our
borrowings as we continue to benefit from the low overall rate
environment and from the termination of our higher-rate swap positions.
These terminating swap positions include $900million that terminate
late in the fourth quarter and an additional $800 million that terminate
during the first quarter of 2010.
"As market conditions evolve over the remainder of 2009 and into 2010,
we intend to continue opportunistically growing our investment
portfolio, but will remain mindful of the market's recent history in
determining the appropriate amount of leverage and liquidity required to
prudently manage our portfolio. We remain confident our core investment
strategy of managing a conservatively leveraged portfolio of
agency-guaranteed residential ARM securities can produce attractive
risk-adjusted returns over the long term while reducing, but not
eliminating, sensitivity to changes in interest rates."
Earnings Conference Call Details
An earnings conference call and live audio webcast will be hosted
Thursday, October29, 2009 at 9:00a.m. ET. The conference call may be
accessed by dialing toll free (877)407-8033 in the U.S. and Canada or
(201) 689-8033 for international callers. A live audio webcast of the
conference call can be accessed in 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 November12,
2009 by dialing toll free (877) 660-6853 in the U.S. and Canada or
(201)612-7415 for international callers and entering account number 286
and conference ID 334458.
About Capstead
Capstead Mortgage Corporation, formed in 1985 and based in Dallas,
Texas, is a self-managed real estate investment trust for federal income
tax purposes. Capstead's core investment strategy is managing a
leveraged portfolio of residential mortgage pass-through securities
consisting almost exclusively of ARM securities issued and guaranteed by
government-sponsored entities, either Fannie Mae or Freddie Mac, or by
an agency of the federal government, Ginnie Mae. Agency-guaranteed
residential mortgage securities carry an implied AAA credit rating with
limited, if any, credit risk.
Forward-looking Statements
This document contains "forward-looking statements" (within the meaning
of the Private Securities Litigation Reform Act of 1995) that inherently
involve risks and uncertainties. Capstead's actual results and liquidity
can differ materially from those anticipated in these forward-looking
statements because of changes in the level and composition of the
Company's investments and other factors. As discussed in the Company's
filings with the Securities and Exchange Commission, these factors may
include, but are not limited to, changes in general economic conditions,
the availability of suitable qualifying investments from both an
investment return and regulatory perspective, the availability of new
investment capital, the availability of financing at reasonable levels
and terms to support investing on a leveraged basis, fluctuations in
interest rates and levels of mortgage prepayments, deterioration in
credit quality and ratings, the effectiveness of risk management
strategies, the impact of differing levels of leverage employed,
liquidity of secondary markets and credit markets, increases in costs
and other general competitive factors. In addition to the above
considerations, actual results and liquidity related to investments in
loans secured by commercial real estate are affected by borrower
performance, changes in general as well as local economic conditions and
real estate markets, increases in competition and inflationary
pressures, changes in the tax and regulatory environment including
zoning and environmental laws, uninsured losses or losses in excess of
insurance limits and the availability of adequate insurance coverage at
reasonable costs, among other factors.
CAPSTEAD MORTGAGE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except ratios and per share amounts)
September 30, 2009 December 31, 2008
(unaudited)
Assets
Mortgage securities and similar investments
($7.40 billion pledged under repurchase arrangements) $ 7,920,478 $ 7,499,249
Cash collateral receivable from interest rate swap counterparties 35,966 53,676
Interest rate swap agreements at fair value 43 --
Cash and cash equivalents 168,496 96,839
Receivables and other assets 80,797 76,481
Investments in unconsolidated affiliates 3,117 3,117
$ 8,208,897 $ 7,729,362
Liabilities
Repurchase arrangements and similar borrowings $ 6,992,755 $ 6,751,500
Unsecured borrowings 103,095 103,095
Interest rate swap agreements at fair value 20,472 46,679
Common stock dividend payable 38,695 22,728
Accounts payable and accrued expenses 27,149 44,910
7,182,166 6,968,912
Stockholders' equity
Preferred stock - $0.10 par value; 100,000 shares authorized:
$1.60 Cumulative Preferred Stock, Series A, 188 and 197 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively ($3,085 aggregate liquidation preference) 2,630 2,755
$1.26 Cumulative Convertible Preferred Stock, Series B, 15,819 shares issued and outstanding at September 30, 2009 and December 31, 2008 ($180,025 aggregate liquidation preference) 176,705 176,705
Common stock - $0.01 par value; 250,000 shares authorized:
69,098 and 63,135 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively 691 631
Paid-in capital 1,055,114 975,893
Accumulated deficit (356,154 ) (358,155 )
Accumulated other comprehensive income (loss) 147,745 (37,379 )
1,026,731 760,450
$ 8,208,897 $ 7,729,362
Long-term investment capital (Stockholders' equity and Unsecured borrowings, net of related investments in statutory trusts) (unaudited) $ 1,126,709 $ 860,428
Portfolio leverage (borrowings under repurchase arrangements divided by long-term investment capital) (unaudited) 6.21:1 7.85:1
Book value per common share (calculated assuming liquidation preferences for the Series A and B preferred stock) (unaudited) $ 12.21 $ 9.14
-------------------------------------------------------------------------------
CAPSTEAD MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
Quarter Ended Nine Months Ended
September 30 September 30
2009 2008 2009 2008
Interest income:
Mortgage securities and similar investments $ 74,695 $ 99,205 $ 243,641 $ 302,888
Other 69 346 419 1,932
74,764 99,551 244,060 304,820
Interest expense:
Repurchase arrangements and similar borrowings (26,802 ) (60,032 ) (98,385 ) (184,357 )
Unsecured borrowings (2,186 ) (2,186 ) (6,560 ) (6,560 )
(28,988 ) (62,218 ) (104,945 ) (190,917 )
45,776 37,333 139,115 113,903
Other revenue (expense):
Miscellaneous other revenue (expense) 16 (45 ) (893 ) (1,469 )
Incentive compensation expense (1,058 ) (300 ) (3,435 ) (4,820 )
General and administrative expense (2,713 ) (2,306 ) (8,313 ) (6,187 )
(3,755 ) (2,651 ) (12,641 ) (12,476 )
Income before equity in earnings of unconsolidated affiliates 42,021 34,682 126,474 101,427
Equity in earnings of unconsolidated affiliates 64 64 194 194
Net income $ 42,085 $ 34,746 $ 126,668 $ 101,621
Net income available to common stockholders:
Net income $ 42,085 $ 34,746 $ 126,668 $ 101,621
Less cash dividends paid on preferred shares (5,058 ) (5,062 ) (15,180 ) (15,189 )
$ 37,027 $ 29,684 $ 111,488 $ 86,432
Net income per common share:
Basic $ 0.56 $ 0.52 $ 1.74 $ 1.65
Diluted 0.56 0.52 1.71 1.63
Weighted average common shares outstanding:
Basic 65,392 56,318 63,763 51,991
Diluted 75,436 56,737 73,798 61,998
Cash dividends declared per share:
Common $ 0.560 $ 0.550 $ 1.700 $ 1.660
Series A Preferred 0.400 0.400 1.200 1.200
Series B Preferred 0.315 0.315 0.945 0.945
-------------------------------------------------------------------------------
CAPSTEAD MORTGAGE CORPORATION
MARKET VALUE ANALYSIS
(in thousands, unaudited)
September 30, 2009 December 31, 2008
Principal Balance Premiums Basis/Notional Amount Market Value Unrealized Gains (Losses) Unrealized Gains (Losses)
Mortgage securities held available-for-sale: (a) (b)
Agency-guaranteed securities:
Fannie Mae/Freddie Mac:
Fixed-rate $ 200 $ 1 $ 201 $ 220 $ 19 $ 19
Current-reset ARMs 5,268,114 70,000 5,338,114 5,411,460 73,346 (29,287 )
Longer-to-reset ARMs 1,962,587 28,730 1,991,317 2,080,304 88,987 38,962
Ginnie Mae:
Current-reset ARMs 344,877 1,864 346,741 351,823 5,082 478
$ 7,575,778 $ 100,595 $ 7,676,373 $ 7,843,807 $ 167,434 $ 10,172
Interest rate swap positions (c) $ 2,800,000 $ (20,429 ) $ (19,356 ) $ (46,318 )
-------------------------------------------------------------------------------
(a) Unrealized gains and losses on mortgage securities
classified as available-for-sale are recorded as a component of
Accumulated other comprehensive income (loss) in Stockholders' equity.
Gains or losses are generally recognized in earnings only if sold.
Mortgage securities classified as held-to-maturity with a cost basis
of $10.9million, unsecuritized investments in residential mortgage
loans with a cost basis of $12.3million and commercial loans with a
carrying amount of $53.4million (after consideration of an allowance
for possible loan losses totaling $1.0 million) are not subject to
mark-to-market accounting and therefore have been excluded from this
analysis.
(b) 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") (18 months or less for
"current-reset" ARM securities, and greater than 18 months for
"longer-to-reset" ARM securities). As of September 30, 2009
average months-to-roll for current-reset and longer-to-reset ARM
securities were five months and 29 months, respectively. Once an
ARM loan reaches its initial reset date, it will reset at least once a
year to a margin over a corresponding interest rate index, subject to
periodic and lifetime limits or caps.
(c) The Company uses two-year term, one- and three-month
LIBOR-indexed, pay-fixed, receive-variable, interest rate swap
agreements or longer-term committed borrowings, if available at
attractive rates and terms, help mitigate exposure to higher short-term
interest rates. Swap positions are carried on the balance sheet
at fair value with related unrealized gains or losses arising while
designated as cash flow hedges for accounting purposes reflected as a
component of Accumulated other comprehensive income (loss) in
Stockholders' equity. At September 30, 2009 these swap positions
had an average maturity of nine months and an average fixed-rate of
2.76%. After consideration of these swap positions, the Company's
portfolio and related borrowing under repurchase arrangements had
durations of approximately eight and four months, respectively, for a
net duration gap of approximately four months. Duration is a
measure of market price sensitivity to interest rate movements. For
instance, a 12 month duration infers that a position should change in
value by one percent with a one percent change in interest rates,
subject to other market variables and changes in market conditions.
Exception caught in main.
(a) Basis represents the Company's average investment before
unrealized gains and losses and allowance for possible loan losses. Average
asset yields, runoff rates, borrowing rates and resulting financing
spread are presented on an annualized basis.
(b) Effective January 1, 2009 the Company curtailed interest
accruals on its investments in commercial real estate loans in light of
deteriorating commercial real estate market conditions and the past due
status of these loans. During the third quarter of 2009, the
Company acquired as a strategic investment $10.0 million in AAA-rated
senior notes issued by one of its lending counterparties.
(c) Other interest-earning assets consist of overnight
investments and cash collateral receivable from interest rate swap
agreements.
(d) Unsecured borrowings consist of junior subordinated notes
with original terms of 30-years that were issued in 2005 and 2006 by
Capstead to statutory trusts formed to issue $3.1million of the trusts'
common securities to Capstead and to privately place $100.0million of
preferred securities to unrelated third party investors. Capstead
reflects its investment in the trusts as unconsolidated affiliates and
considers the unsecured borrowings, net of these affiliates, a component
of its long-term investment capital.
CAPSTEAD MORTGAGE CORPORATION
RESIDENTIAL ARM SECURITIES PORTFOLIO STATISTICS
(as of September 30, 2009)
(unaudited)
ARM Type Basis (a) Net WAC (b) Fully Indexed WAC (b) Average Net Margins Average Periodic Caps Average Lifetime Caps Months To Roll
Current-reset ARMs:
Agency Securities:
Fannie Mae/Freddie Mac $ 5,338,114 3.77 % 2.54 % 1.81 % 3.37 % 10.46 % 5.2
Ginnie Mae 346,741 4.22 1.91 1.53 1.00 10.01 5.3
Residential mortgage loans 8,558 4.41 2.67 2.05 1.53 11.13 4.5
5,693,413 3.80 2.50 1.80 3.22 10.44 5.2
Longer-to-reset ARMs:
Agency Securities:
Fannie Mae/Freddie Mac 1,991,317 6.15 2.58 1.66 1.97 11.57 29.1
$ 7,684,730 4.41 2.52 1.76 2.90 10.73 11.4
-------------------------------------------------------------------------------
(a) Basis represents the Company's investment (unpaid
principal balance plus unamortized investment premium) before unrealized
gains and losses. As of September30, 2009, the ratio of basis to
related unpaid principal balance for the Company's ARM securities was
101.33. This table excludes commercial loan investments,
fixed-rate residential investments, and collateral for structured
financings.
(b) Net WAC, or weighted average coupon, is presented net of
servicing and other fees. Fully indexed WAC represents the coupon
upon one or more resets using interest rate indexes and the applicable
net margin as of September30, 2009.
A service of YellowBrix, Inc.
