Capstead Mortgage Corporation

GAAP net income was $18.9 million, or $0.15 per diluted common share. Core earnings were $17.4 million, or $0.13 per diluted common share, versus the $0.15 quarterly dividend referenced by management. Book value ended at $6.66 per common share, down $0.10, or 1.4%, from the prior quarter. Portfolio yields averaged 1.38%, down 17 basis points from 1.55% in the prior quarter, and management said $2.3 million of additional premium amortization cut yield by about 12 basis points. The average portfolio balance was down approximately $500 million from the previous quarter, and the company bought about $400 million in the first quarter versus almost $900 million of runoff. Looking ahead, management said it is already well ahead of the first-quarter purchase pace, but did not quantify second-quarter purchases or give explicit EPS guidance.

Phil Reinsch said Capstead has continued to cover its dividend through the pandemic until this quarter, but that higher prepayment speeds and a smaller portfolio pressured results. He emphasized that prepayment rates are likely cresting and should fall as mortgage rates have risen and refinancing activity cools. Strategically, he said the company is finding better reinvestment opportunities as ARM supply picks up, while staying mindful of longer duration risk in newer issue paper.

Lance Phillips walked through the quarter’s reported numbers and the drivers behind the decline in earnings power. He said GAAP net income was $18.9 million and core earnings were $17.4 million, with the quarter affected by $2.3 million of additional premium amortization tied to revised lifetime prepayment speed assumptions. He also noted book value of $6.66 per share, down $0.10, and said the average portfolio balance fell by about $500 million because the company did not fully replace runoff.

Analysts focused on why core earnings dropped to $0.13 and whether the shortfall versus the dividend was temporary. Management said the $0.02 decline was directly attributable to the $2.3 million of additional amortization, though a smaller portfolio also hurt earnings, and Phil described the speed adjustment as a one-off-type event rather than something that happens often. Questions also centered on whether the company would grow the portfolio and how hedges would change; management said the duration gap is a little over three months now, should stay fairly flat, and that hedging will be adjusted as newer, longer-duration paper is added.