Capstead Mortgage Corp. (NYSE:CMO) Q3 2016 Earnings Conference Call - Final Transcript

Oct 27, 2016 • 09:00 am ET

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Capstead Mortgage Corp. (NYSE:CMO) Q3 2016 Earnings Conference Call - Final Transcript

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Presentation
Operator
Operator

Good morning and welcome to the Capstead Mortgage Third Quarter Earnings Conference Call. [Operator Instructions]. Please also note this event is being recorded.

I'd now like to turn the conference over to Lindsey Crabbe with Investor Relations. Please go ahead.

Executive
Lindsey Crabbe

Good morning thank you for attending Capstead's third quarter earnings conference call. The third quarter earnings release was issued yesterday October 26th and is posted on our Web site at www.capstead.com under the Investor Relations tab. The link for this webcast is also in the Investor Relations section of our Web site, an archive of the webcast will be available for 90 days. A replay of this call will be available through January 18th, 2017. Details for the replay are included in yesterday's release. With me today are Phil Reinsch, President and Chief Executive Officer; and Robert Spears, Executive Vice President and Chief Investment Officer.

Before we get started, I want to remind you that some of today's comments could be considered forward-looking statements pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, and are based on certain assumptions and expectations of management. For a detailed list of all the risk factors associated with our business, please refer to our filings with the SEC, which are available on our website. The information contained in this call is current only as of the date of this call October, 27th 2016. The Company assumes no obligation to update any statements, including any forward-looking statements made during this call.

With that, I will turn it over to Phil.

Executive
Phillip A. Reinsch

Thank you Lindsey, good morning and welcome everyone. I want to mention several items that stand out relative to our third quarter earnings. Then we'll open the call up to questions.

First of all, we recorded a $2.7 million charge in the third quarter equating to roughly $0.03 per share relating to costs associated with the July resignation of Andy Jacobs, our former CEO. By segregating these costs on the income segment into a distinct separation service charge, our remaining operating cost will be more indicative of our business going forward. We expect to remain a leader amongst our mortgage REIT peers in terms of operating cost efficiency.

Secondly, our earnings, excluding the separation of service charge declined by about $0.03 over second quarter results to $0.16 per share, with the primary driver of the decline being higher investment premium amortization, as a result of higher mortgage prepayment levels. Prepayments came in about 11% higher in the third quarter at a CPR of 25.8%, with September expected to be a high watermark for prepays this year. With the bulk of this year's refinancing and the summer selling season behind us, we can expect to see improved portfolio yields and earnings in the coming quarters.

The last point to mention is that, despite the recent prepay headwinds, our strategy of owning agency guaranteed ARM securities is working in our favor, with cash yields increasing as mortgage loans underlying our portfolio continue