Capstead Mortgage (CMO) Tops Q4 EPS by 4c

Capstead Mortgage (NYSE: CMO) reported Q4 EPS of $0.15, $0.04 better than the analyst estimate of $0.11.

Fourth Quarter 2019 Summary

• Recognized GAAP net income of $32.7 million or $0.29 per diluted common share
• Generated core earnings of $19.1 million or $0.15 per diluted common share
• Increased fourth quarter dividend by 25% to $0.15 per common share
• Book value per common share increased $0.02 to $8.62 per common share
• Agency-guaranteed residential adjustable-rate mortgage (ARM) portfolio and leverage ended the quarter relatively unchanged at $11.22 billion and 8.77 times long-term investment capital, respectively

Management Remarks

Commenting on current operating and market conditions, Phillip A. Reinsch, President and Chief Executive Officer, said, “In December we announced a 25% dividend increase to $0.15 per common share, equal to our core earnings for the fourth quarter. This follows a 50% dividend increase announced in June. For the year we paid dividends of $0.47 per common share on core earnings of $0.50 per share.

“Much of the improvement in our core earnings in the fourth quarter and for all of 2019 is attributable to lower funding costs as a result of the Federal Reserve’s actions to reduce the Fed Funds rate and actions we took to lower fixed pay rates on swaps held for hedging purposes in response to significantly lower market interest rates. Core earnings also benefited from acquisitions of agency-guaranteed ARM securities at attractive levels. Hampering earnings throughout much of the year was an increase in market volatility that contributed to sharply lower longer-term rates, putting upward pressure on mortgage prepayment rates and negatively affecting mortgage security pricing relative to swap valuations. Additionally, rate pressures in short-term funding markets resulted in elevated borrowing rates relative to declines in the Fed Funds rate and other short-term rates. In response, we took a measured approach to deploying capital during the latter half of the year, with leverage declining in the third quarter and into the fourth quarter before ending the year relatively unchanged from September 30 levels. Future changes in leverage will depend on market conditions.

“Looking forward, we are encouraged by cycle-low unhedged borrowing rates presently available in the funding markets and the continued attractiveness of investment returns. Together with average fixed pay rates on our secured borrowings-related swaps now at or near 30-day borrowing rates, we anticipate showing further improvement in our financing spreads and net interest margins leading to higher earnings in the coming quarters.

“For the last 20 years, Capstead has operated as a cost-effective, internally managed REIT that invests in a leveraged portfolio of relatively short duration agency-guaranteed residential ARM securities with the goal of generating attractive risk-adjusted returns over the long-term. 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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