Capstead Mortgage Corp. has a market cap of $789.4 million; its shares were traded at around $11.39 with a P/E ratio of 5.2 and P/S ratio of 2.5. The dividend yield of Capstead Mortgage Corp. stocks is 17.6%.CMO is in the portfolios of John Buckingham of Al Frank Asset Management, Inc..
Highlight of Business Operations:Capstead finances its investments with its long-term investment capital, which as of March 31, 2010 consisted of $829 million in common stockholders equity together with $179 million of perpetual preferred stockholders equity (recorded amounts) and $100 million of long-term unsecured borrowings (net of related investments in statutory trusts) supported by borrowings under repurchase arrangements with commercial banks and other financial institutions. During the quarter ended March 31, 2010, the Companys long-term investment capital decreased by $6 million to $1.11 billion, due primarily to lower unrealized portfolio gains resulting from runoff associated with buyouts by Freddie Mac of seriously delinquent mortgages from its mortgage guarantee portfolio and declines in interest rate swap valuations caused by lower expectations of rising interest rates than were prevalent at year-end. These declines were partially offset by limited common equity issuances under the Companys at-the-money continuous offering program and contributed to a $0.22 decline in book value per common share during the quarter to $11.77 at March 31, 2010. Portfolio leverage (borrowings under repurchase arrangements divided by long-term investment capital) declined to 6.37 to one at March 31, 2010 from 6.67 to one at December 31, 2009. Prices for ARM Agency Securities at March 31, 2010 were little changed from year-end even as the Federal Reserves $1.25 trillion purchase program concluded in March and the market digested the probable effects of the GSEs seriously delinquent loan buyout programs. The Companys mortgage securities and similar investments portfolio totaled $7.59 billion at March 31, 2010, a decrease of $506 million from year-end.
Capstead reported net income of $40 million or $0.51 per diluted common share for the quarter ended March 31, 2010, compared to $42 million or $0.57 per diluted common share for the same period in 2009. The decrease in earnings can largely be attributed to marginally lower total financing spreads (the difference between yields on interest-earning assets and rates on interest-bearing liabilities), which averaged 214 basis points for the quarter ended March 31, 2010 compared to 216 basis points during the same period in 2009, and to additional common shares outstanding.
During the quarter ended March 31, 2010 Capstead raised $10 million in new common equity capital, after underwriting discounts and offering expenses, by issuing 811,000 common shares at an average price of $12.85 per share through the Companys at-the-market continuous offering program. During 2009 the Company raised $81 million with this program and may raise additional equity capital in future periods using this program or by other means.
The Company currently uses two-year term, one- and three-month LIBOR-indexed, pay-fixed, receive-variable, interest rate swap agreements to mitigate exposure to higher short-term interest rates. Under the terms of the interest rate swap agreements held at March 31, 2010, the Company pays fixed rates of interest averaging 1.34% on notional amounts totaling $2.80 billion with an average maturity of 17 months, including agreements with notional amounts totaling $200 million with average fixed rates of 3.17% that terminate in July 2010. During the first quarter of 2010, $800 million notional amount of new swap agreements with average fixed rates of 1.10% were entered into while $800 million in higher rate agreements expired during the quarter. Variable payments received by the Company under these agreements largely offset interest accruing on a like amount of the Companys 30- to 90-day borrowings leaving the fixed-rate payments to be paid on the swap agreements as the Companys effective borrowing rate, subject to certain adjustments including the effects of measured hedge ineffectiveness and changes in spreads between variable rates on the swap agreements and related actual borrowing rates. After consideration of these swap positions, the Companys portfolio and related borrowings under repurchase arrangements had durations of approximately 9 and 7 1/4 months, respectively, for a net duration gap of approximately 1 3/4 months at March 31, 2010, down from approximately 3 1/4 months at year-end. The Company intends to continue to manage interest rate risk by utilizing suitable derivatives such as interest rate swap agreements as well as longer-dated committed borrowings if available at attractive terms.
In early February 2010 the GSEs announced plans to buyout a backlog of seriously delinquent loans from their mortgage guarantee portfolios. Freddie Mac largely completed its buyout program in February (reflected in March portfolio runoff) and Fannie Mae began its buyouts in March (reflected in April portfolio runoff) and is expected to complete its program over the next few months. Because of the uncertainties surrounding the extent and timing of these buyouts, the Company only partially replaced portfolio runoff during the current quarter resulting in a $490 million (principal amount) decline in the size of the portfolio, which contributed to a decline in portfolio leverage to 6.37 to one at March 31, 2010. Acquisitions totaled $274 million (principal amount) with a net WAC of 3.65% and a purchase yield of 2.65% for the quarter, while portfolio runoff totaled $764 million (principal amount). Portfolio runoff averaged 31.8% on an annualized basis during the first quarter (a 30.0% constant prepayment rate) compared to 20.9% (a 19.1% constant prepayment rate) the previous quarter.
In prior years Capstead had periodically augmented its core investment strategy with investments in credit-sensitive commercial real estate-related assets that could earn attractive risk-adjusted returns. In 2008 management concluded that it would not pursue additional investments in commercial real estate loans in order to focus its efforts on the Companys core portfolio of ARM Agency Securities. With impairment and related charges of $40 million recorded in December 2009 and ongoing collateral sales, the Company has reduced its remaining exposure to these non-core investments to less than $7 million, consisting of collateral associated with two townhome development loans. Unrelated to the Companys commercial real estate lending activities, during 2009 the Company acquired $10 million face amount of AAA-rated senior notes issued by one of its lending counterparties. The following paragraphs discuss the Companys commercial investments in more detail.
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