Lindsey Crabbe - Investor Relations Officer Phillip Reinsch - President and Chief Executive Officer Robert Spears Jr. - EVP and Chief Investment Officer.

Eric Hagen - KBW Steve Delaney - JMP.

Good day and welcome to the Capstead Mortgage Third Quarter 2017 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Lindsey Crabbe, Manager of Investor Relations. Please go ahead..

Good morning. Thank you for attending Capstead's Third Quarter Earnings Conference Call. The third quarter earnings release was issued yesterday, October 25th, and was posted on our website at www.capstead.com under the Investor Relations tab.

The link to this webcast is also in the Investor Relations section of our website and an archive of the webcast will be available for 90 days. A replay of this call will be available through January 26th, 2018. Details of the replay are included in yesterday’s release.

With me today are Phil Reinsch, President and Chief Executive Officer, Robert Spears, Executive Vice President and Chief Investment Officer; and Lance Phillips, Senior Vice President and Chief Financial 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 26th, 2017.

The Company assumes no obligation to update any statement including any forward-looking statements made during this call. With that, I will turn it over to Phil..

Good morning and welcome everyone. I’ll make a few brief comments then we will open the call up to questions. We reported EPS of $0.13 for the third quarter down a penny from the second quarter.

Earnings in recent quarters have been hampered by stubbornly high levels of mortgage prepayments on our portfolio of agency guaranteed ARM security and rising borrowing cost.

High prepayments have been largely responsible for [low unrealizable] [ph] gains which together with swap maturities contribute $0.09 per share for the quarter and $0.14 year-to-date and book value declines as well.

Through these challenging operating environments thus far this year we’ve produced an economic return of 2.95% for our common stockholders. Mortgage prepayments averaged 25.75 CPR during the third quarter about 1 CPR higher than in the second third quarter which negatively affected portfolio yield by three basis points and EPS by roughly 1.3 cents.

Looking forward we expect to begin benefiting from lower prepayments fee in the coming quarters. For instance October prepays fell to 22.75 CPR a roughly 12% improvement.

This is due to a number of factors including seasonality with the end of December selling season and so called portfolio burnout with more loans underlying the portfolio having already reset to higher rates.

And, with recent increases in longer term interest rates, homeowners are beginning to now see less attractive refinancing options than what was available to them as recently as last month. Back to third quarter results.

Borrowing rates average nine basis points higher than in the second quarter, as we dealt with the effects with the mid June 25 basis points Fed rate hike, the third such increase since last December.

These higher borrowing rates were partially offset by six basis points of higher cash yields as mortgage loans underlying our currently resetting agency ARMs continued resetting higher reflecting higher current rates. This key differentiating feature of our short duration ARM strategy, i.e.

the opportunity over time to recover financing spreads diminish by rising short term interest rate through ARM coupon reset, should continue to benefit cash yields in the coming quarters. Third quarter results also benefited from lower operating cost primarily due to adjustments to performance based compensation accruals.

At well inside a 100 basis points on capital, actually 64 basis points this quarter and 73 basis points year-to-date we are a leader in the mortgage REIT industry from a peer operating cost efficiency standpoint.

And, another 10 basis points on total assets, actually six basis points this quarter and seven basis points year-to-date our cost structure is highly competitive with a wide variety of high yielding investment vehicles. As for capital resources, the financing markets remain robust with strong demand for agency repo.

This quarter we took the opportunity to issue over $42 million a new Series [B] [ph] preferred stock much bit late in the quarter using our at-the-market continuous offering program. This brings year-to-date issuances to over $52 million at a net issue price of 24.77 a share.

One final note, I’m extremely pleased to introduce to our investors and analyst, Mr. Lance Phillips who joined us just this week as our new CFO. Lance comes to us with over 20 years of financial executive experience, most recently with the external manager of InfraREIT Inc, a member of the Ray L. Hunt family of companies right here in Dallas.

We’re excited to have Lance join us and look forward to working with him in the years ahead. With that, I’ll open the call up to question..

We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Eric Hagen with KBW. Please go ahead..

Thanks. Thanks, good morning, guys. I’m hoping you can share some detail around the dollar price for bonds in your current reset ARM on portfolio.

We can see where the aggregate market is, but how does the dollar price differ from bonds that are about to hit their first reset, ones that are about a year or two beyond their initial reset and the super season paper which has experienced more than one reset? Thanks..

Sure Eric, this is Robert I’ll take that.

If you just look at where new bonds are resetting for the first time where that kind of papers trading, I would say just from a handle standpoint, depending on the coupon anywhere from upper 101 to upper 102s, if you go to very season post reset non-IO LIBOR paper that’s still trading in the mid 105 very season post reset, CMP paper is still trading in the 105 as well.

So, depending on the vintage, the seasoning, post reset with an IO component is probably trading in the mid 104, so depending on the seasoning bucket, vintage IO versus non-IO, I mean, you’re looking at range generically anywhere from 102 to 105 and three quarters..

Perfect. That’s really helpful answer.

So, the negative mark on the asset side this past quarter was from the longer-reset bucket or the current-reset bucket?.

Yes, little bit of both, I mean, I would say ARM prices were basically flat, but if you look at for instance new issue 51s, yes, they’re down a couple of [fixed] [ph] in our seasoned bucket, they were flat to down a couple of [fixed] [ph] as well.

So, obviously on the quarter ARMS underperformed fixed rate pass-throughs which [type] [ph] substantially between the [Indiscernible] and speeds being a little on the fast side ARM underperformed this quarter, but they worked really well, material move in dollar prices in our portfolio..

Right, thanks Robert, that’s helpful. You guys also break out the marks for both Ginnie paper and GSC paper, I guess, going one step beyond that I’m curious what explains a difference in prepayments piece for each of those buckets and what your outlook is for prepays on both Ginnie and GSC paper going forward? Thanks..

I think we have some, well, first of all very season Ginnie paper which we own a decent amount of that is some of the slowest paying paper in the ARM world, I mean, you have some of those bonds are paying ACPR, newer issue longer-reset Ginnie has been on the hot side recently particularly 31Ginnie they are backed predominantly by VA paper, we are starting to see some improvements, we don’t own a lot of that but we started to see some improvements on the newer issued Ginnie speeds, I think we are seeing some heat on some of the VA originators who are churning their books, I guess [Indiscernible] memo to Ginnie Mae asking them to look into some of these originators.

And, so between that and the fact that you haven’t had a MIP decline in a couple of years now, Ginnie’s speeds are starting to behave more predictably and a little slower than they have. And, so we kind of like Ginnie ARMS right now..

Interesting, that’s a helpful answer.

Last question for me, what’s keeping you guys from adding a ton of leverage in the portfolio right now, how should we think about that if we do in fact get a couple or even a couple of more rate hikes between now and the end of next year?.

We actually saw little bit of a decline in leverage this quarter, but that’s mostly related to raising some preferred capital very late in the quarter.

We’re always looking at how we can handle leverage in the book and whether we turn it up or not is really going to depend up on conditions, the market is healthy for financing, but you don’t want to be too heavily levered when you’re facing your counterparties, you’ve got to manage that with them.

So, there’s certainly plenty of capacity and a lot of counterparties asking for more balances..

Okay. Thanks for the comments guys as always. I appreciate it..

The next question comes from Steve Delaney with JMP. Please go ahead..

Thanks. Good morning, everyone and congratulations on bringing Lance on board. Robert I was just wondering, you commented on the underperformance of ARMs versus fixed coupons which performed very well regarding within the bond universe in the quarter.

I’m just curious if you noted any kind of unusual technicals going on this quarter in the ARMs other than the just prepayment issue that’s in the asset class, if you just saw any unusual trading patterns it might have caused ARMs not to move prices, not to move higher like the fixed rate side?.

Well, a couple of things, first and foremost the curve flattened more. Secondly we saw a big pickup in production in the second quarter that led into the start of the third quarter and the second quarter as well was spread wide in the ARMs, you had some secondary selling.

What’s going on now you’re starting to see ARM production taper off because the curve - you have like 90 day lag between what rates to what production translates, and so, now ARMs are trading really well at this point in time because you’ve had a decline in supply, there is very little secondary selling, and in the last couple of weeks we’ve seen some speediness in curve with long end going up.

And, so ARM started trading better at the end of the third quarter and they’re trading really well right now. So, it was kind of lag affect between, yes, spillover from the second quarter into early third quarter. So, the technical have improved significantly in the last two or three weeks in ARMs..

As the 10 years has sold off..

10 years sold off and then there is very little production right now. Production, new issue production is probably running down 35% from where it was two months ago..

Got it, got it, yes.

And, then I noticed Wells was up this morning, and they’ve actually split their quotes between refis and purchase money which is really interesting with refis being more expensive, so they’re sitting at four in a quarter this morning on 30 years, and that’s about 50 basis points higher than early September when I guess we saw the lows.

How does that compare to where you’re generally resetting, post reset ARMs linked to one year LIBOR, do you have any real decent spread there, and if not how much higher does the 30 year end need to go to kind of really slow this thing down to maybe high teen type of CPRs?.

A couple of, I mean, if you just look at, let’s say roughly when your LIBOR is at 180 and if you have 170 margin on top of that, that gets to 350 net coupon which is going to put underlying mortgage rate around 4 and 4.8. So, there is not a lot of difference between that and the 30 year.

But what’s happening now particularly in some of these very season ARMs, when your LIBOR has been very stable for the last 10 to 11 months now, it’s been kind of in the 170 to 180 range.

And, so those guys that reset a year ago, yes, it’s the initial prepayment shock is not there anymore, so a lot of these guys reset up a 150 basis points a year ago, they’ve been sitting at the same rate for 12 months.

So, on season ARMs you start to see a burnout effect and we are seeing that right now where a very season paper has drifted down from the mid 20s to the low 20s. And, so if you don’t stir up the hornets nest a lot of times it’s not just a pure rate decision.

And so the stability of one year LIBOR and our underlying ARM index is it’s helping a lot right now from speed standpoint..

That’s a great point about the consistency. So, somebody who has reset 13, 14 months ago, when he’s coming up a month or two may not get any sticker shock because he saw it last year, okay, that’s a great point, I had not really thought about that burnout element. So, you’re not creating new candidates each month it sounds like, okay, great.

And, just kind of a history lesson, I mean, you guys know as well as anybody, two years ago we had a very large mortgage REIT acquire a $12 billion $14 billion season ARM portfolio in an M&A deal, I’m just curious that company hadn’t reported, we’ll see their portfolio, but one of the thoughts in my mind when I saw the underperformances if maybe there were some large wanted list floating around that may have to come out that transaction a few years ago, but it sound like you haven’t seen any of that in the market?.

Well, I mean I think if you look at secondary selling, there’s always secondary selling, it was $1.8 billion in the third quarter versus $2.5 billion in the second quarter, and in that mix of secondary selling, you have money managers, you have banks, and you have REITs.

And, so there have been and you can do the math on what RIETs own ARMs now and so there has been some ARM papers sold by RIETs..

Interesting, okay, that’s helpful. And, thanks.

And, guys you’re pretty quick with your 10-Q, should we look for that by the end of the week by Friday?.

A week, on Friday week..

Friday week..

Yes..

Okay. Well, I owe you guys a model update and we’ll get that out as quick as we can when we see that if not before. Thanks for the comments..

All right..

The next question comes from [Jim DeLisle] with Wasatch Advisors. Please go ahead.

Good morning folks..

Good morning..

And, welcome Lance. I look forward to meeting you. Based on my basic assumption your books value hasn’t changed a whole heck of a lot since quarter end.

Is that a fair assumption?.

Well, I hate to give you too much on update there..

Okay, well let me work on that assumption. Don’t [Indiscernible] my illusions.

The price book would be somewhere probably just on low side of 90 or so, can you remind me, do you guys have an authorization for a share buyback from your Board?.

We do, we suspended it, but it could be reauthorized with a quick call with the Board, we had a 100 million buyback that we put in place a couple of Januarys ago, but never got the opportunity to acquire shares a seat discount, so we didn’t actually use any of that authorization, we bought shares back in late 2012, so that’s not hard to reactivate..

Lee Cooperman hear and say, given the inherent stability of your asset class in terms of duration [Indiscernible] like relative to many of the asset classes within the sector, one thinks you guys could run a significantly higher level of leverage that other people out there could just leave it at that?.

We already a turn - about a turn higher than the average fully levered mortgage REIT by virtue of having our short duration portfolio..

Okay..

So, some of that it’s already built it..

All right, but other might - might once again looking to the inherent stability of the asset class those might be more comfortable even running a higher premium leverage position than that and I’m just stating from my own point of view.

Second question is, to what extent do you see the ARMs prices, secondary ARMs prices, being influenced by where CMO floaters are creating in the marketplace, there seems to have been a little bit of movement in those spreads recently?.

Yes, I mean, the CMO that’s strongly dictates what type of ARM collateral trades that are richer, cheaper price that have been decent amount, Ginnie Mae structures creator recently, so even Ginnie has traded well.

And, we also have - there’s a floater bid for very season LIBOR paper with IO, and as the floater and IO is materializes that rich in those bonds, so it’s a big factor and what different type of ARM collateral does from a pricing standpoint..

And, would you expect that as we go through the regular winter seasonal, can we expect the tracking of speed somewhere in the vicinity that we saw last year or you’re thinking we set slightly higher level?.

Obviously it depends upon the slope of the curve and raise, but as of right now speeds in the fourth quarter this year versus last year are running slower mainly because if you remember last year post-election and REIT shot up and you’ve got to rush through refinance at the end of last year that you will not see in this year, so just looking at fourth quarter this year versus last year, they’re probably going to be slower and I would expect that still older into the first quarter to be slightly slower as well..

Great, thank you; and once again congratulations to you guys and to Lance..

Thanks Jim..

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Lindsey Crabbe for any closing remarks..

Thanks again for joining us today. If you have further question, please give us a call. We look forward to speaking with you next quarter..

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect..