Capstead Mortgage Corp. (NYSE:CMO) Q2 2020 Earnings Conference Call - Final Transcript
Jul 30, 2020 • 10:00 am ET
Phillip A. Reinsch
return for the quarter of 14.3%, which we expect to be one of the best performances in the sector as well. Making these returns more compelling, we anticipate that our common and preferred dividends for 2020 will be characterized as 100% return of capital due in large part to reductions in our derivative positions last quarter.
Looking forward, we expect to continue adding to our short-duration agency-only portfolio in the coming quarters, provided risk-adjusted returns remain attractive. With unhedged repo borrowing rates in and around 25 basis points currently and with swap rates at cycle lows, we should continue to see lower borrowing rates in the coming quarters even as we absorb higher levels of mortgage prepayments.
Longer term, the Fed has made it clear that they intend to remain very accommodating as the country grapples with the uncertainties of the pandemic. This means keeping longer-term rates under control via treasury and fixed-rate agency MBS purchases and short-term interest rates low. As the economy recovers, we would expect reduced support for longer-term rates, potentially allowing more steepness to the yield curve to the benefit of our business.
Wrapping up, we believe that our agency-only short-duration focus is serving us well, and we are well positioned to generate attractive returns at lower leverage levels than we have employed in the recent past. For investors seeking risk-adjusted leveraged returns with a comparably higher degree of safety from interest rate and credit risk, we believe Capstead represents a compelling opportunity that is difficult to find elsewhere in the market.
With that, I'll turn the call over to Lance.
Lance J. Phillips
Thank you, Phil. We've reported a GAAP net income of $22.7 million [Phonetic] this quarter or $0.19 per diluted common share. Our core earnings were $21.9 million or $0.18 per diluted common share. Our core earnings exclude realized and unrealized losses on our portfolio-related interest swap agreements. We include a reconciliation of GAAP and core earnings on Page 9 of our press release.
As Phil mentioned, book value increased $0.72 or 11.9% per share during the second quarter, ending at $6.79 per common share, primarily due to $0.67 in portfolio-related increases in value. Portfolio yields averaged 2.33% during the quarter, a decrease of 16 basis points from the 2.49% we reported in the prior quarter. Yields declined primarily due to lower cash yields as a portion of our ARM portfolio reset to lower prevailing interest rates and lower coupons on recent acquisitions.
Our portfolio-related borrowing costs after adjusting for our hedging activities averaged 1.09% during the second quarter, 63 basis points lower than in the prior quarter, leading to a 48 basis point improvement in our net interest spreads. The benefits of lower unhedged repo rates and lower fixed rates on our swap book were partially offset by the declines in the received leg of these derivatives based on lower three month LIBOR and OIS rates. At June 30, the fixed pay rate on our swap book was 1.27%, a decline of 17 basis points