Capstead Mortgage Corp. (NYSE:CMO) Q3 2019 Earnings Conference Call - Final Transcript
Oct 24, 2019 • 09:00 am ET
We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Eric Hagen with KBW. Please go ahead.
Hi, thanks. Good morning. At what point did you guys reduce leverage during the quarter? It looks like there was a fair amount of nominal spread widening, which would suggest that you might actually want that leverage to capture the return available to you in a relatively more attractive spread environment. I'm just trying to get a sense for the timing and kind of the nature of reducing leverage. Thanks.
Lance J. Phillips
Sure. I mean we made a conscious decision during the quarter to take our leverage down just given what was going on in the market at that point in time. Obviously, we raised $75 million in capital. We didn't feel the need to completely deploy that at that point in time, prepayments were running high and there was disarray in the repo markets. So we just thought there might be some better entry points. And if you look at where we are now in the fourth quarter, spreads haven't snapped back. So we have some dry powder to deploy if we see some year-end selling. Having said that, given where spreads are right now, we can deploy that in the 8.75 times to 9 times [Phonetic] area and get returns. They're comparable to what we were getting at 9.5 times leverage a few months ago, as you alluded to, because of the spread widening. So we just think it's prudent at this point in time, given what's going on in the repo markets and prepays to keep our leverage a little low.
Okay. So the capital raise in July was not used directly for delevering. It was -- the delevering took place after -- separate [Speech Overlap].
Lance J. Phillips
No, we were -- we continued to buy bonds throughout the quarter, we just didn't buy as many as we could have because we made a conscious decision to take our leverage down, irrespective of the capital that we raise.
Phillip A. Reinsch
Yes. August[Phonetic] saw a lot of the return of -- some of what we experienced in the second quarter with rates dropping and market volatility picking up and that helped inform our decision-making.
Okay. That makes sense. I guess -- could you have also captured in a sense that the same goal of reducing risk on the balance sheet by buying back some of your preferred stock with the common that you raised in July? I guess the risk looks somewhat high that if prepays remains somewhat elevated in your book value, remains under a little bit of pressure because of pay downs that the preferred in your capital structure will just continue to consume a larger proportion of your overall equity base. And you guys have a fairly large chunk of preferred that's costing you more than your overall return on equity? And I guess there's no free lunch. I realize that there's the potential for that to hit book value