Capstead Mortgage (CMO) Misses Q4 EPS by 1c

Capstead Mortgage (NYSE: CMO) reported Q4 EPS of $0.05, $0.01 worse than the analyst estimate of $0.06.

• Generated earnings of $9.0 million or $0.05 per diluted common share
• Paid common dividend of $0.08 per common share
• Repurchased 5.8 million shares of common stock for $43.3 million, generating book value accretion of $0.14 per share
• Book value per common share declined 0.9% or $0.09 to $9.39 per common share, which together with the fourth quarter dividend generated an economic return of -0.1%
• Agency-guaranteed residential adjustable-rate mortgage (ARM) portfolio and leverage ended the quarter at $11.97 billion and 9.49 times long-term investment capital, respectively

Commenting on current operating and market conditions, Phillip A. Reinsch, President and Chief Executive Officer, said, “With the benefit of higher cash yields on our agency-guaranteed ARM portfolio and seasonally lower mortgage prepayment rates, our financing spreads and net interest margins improved modestly this quarter even as we absorbed higher borrowing costs and funded common stock repurchases with capital made available from portfolio runoff. Borrowing costs continued trending higher during the quarter due largely to increases in the Fed Funds Rate in September and, to a lesser extent, in December as well as other transitory year-end funding pressures.

“Looking forward, we anticipate further increases in cash yields through acquisitions and coupon resets and will continue to be disciplined and opportunistic in deploying capital from portfolio runoff. We are also encouraged that the Federal Reserve appears less inclined to continue increasing the Fed Funds Rate at its previous pace of 25 basis points per quarter. This should result in more stability in borrowing costs and afford us the opportunity over time to recover financing spreads diminished by previous increases in borrowing rates. However, with recent declines in available mortgage interest rates and seasonality, mortgage prepayments are expected to trend higher this spring which may act as at least a partial offset to higher cash yields.

“For nearly 20 years Capstead has operated as a cost-effective, internally managed REIT that invests in a leveraged portfolio of short duration agency-guaranteed residential ARM securities with the goal of generating attractive risk-adjusted returns over the long-term. A consequence of our lower risk strategy is that our dividend yield will often be lower than the dividend yields of other residential mortgage REITs that invest in higher-yielding mortgage assets with more interest rate risk, more credit risk, or both.

“We believe it is appropriate to focus not just on current dividends, but also on the risk of loss of capital. This more holistic view is embodied in total economic returns (dividends plus changes in book value). Capstead’s economic returns for a very volatile fourth quarter and for all of 2018 – periods negatively affected by five 25 basis point increases in the Federal Funds Rate since December 2017 – are certainly not indicative of what we anticipate returning over the full course of an interest rate cycle. That said, we believe our total economic returns will compare favorably with the returns of many higher dividend yielding investment alternatives due to significant losses of capital incurred by these alternatives during these periods.

“For investors seeking risk-adjusted levered returns with a comparably higher degree of safety from interest rate and credit risk, we believe Capstead represents a reasonably compelling opportunity that is difficult to find elsewhere in the markets.”

For earnings history and earnings-related data on Capstead Mortgage (CMO) click here.

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