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Executive

Andy Jacobs - President & Chief Executive Officer

Phil Reinsch - Chief Financial Officer

Robert Spears - Director of Residential Mortgage Investments

Bethany Siggins - Vice President of Investor Relations

Analyst

Mike Widner - Stifel Nicolaus

Steven Delaney - JMP Securities

James Ackor - Sterne Agee

Bose George - KBW

Matthew Howlett - Fox-Pitt Kelton

Tim Wagner - Deutsche Bank

Robert William - Riversource Investment

Gabe Poggi - Friedman, Billings, Ramsey

Capstead Mortgage Corp. (CMO) Q4 2008 Earnings Call January 30, 2009 11:00 AM ET

Operator

Greetings and welcome to the Capstead Mortgage Corp. fourth quarter 2009 earnings conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions)

It is now my pleasure to introduce your host, Bethany Siggins, Vice President of Investor Relations for Capstead Mortgage Corp. Thank you Ms. Siggins, you may begin.

Bethany Siggins

Good morning everyone and thank you for joining us for Capstead’s fourth quarter 2008 earnings conference call. Today’s speakers are Andy Jacobs, our President and CEO; Phil Reinsch, CFO; and Robert Spears our Director of Residential Mortgage Investments. We issued our fourth quarter 2008 earnings press release yesterday afternoon, January 29, 2009. The press release is on our website at www.capstead.com.

The link to this webcast is in the Investor Relations section of our website and an archive of the webcast will be available for 60 days. A replay of this call will be available to the end of the day on Friday, February 13. The details for the replay are in our press release. The investor presentation we are covering today is also posted to the IR front page of our website.

Before we begin I would like to remind you of our standard disclaimer about forward-looking statements, the remarks made today will contain forward-looking statements and information based on managements current expectations and these statements are being made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Statements are subject to certain risks, uncertainties and assumptions. Information about the potential risk factors that could affect the company’s financial results are available on yesterday’s press release and are also on the risk factors section and the forward-looking statements section of the company’s filings with the SEC.

Information contained in this call is current only as of the date of this call, January 30, 2009. The company assumes no obligation to update any statements including forward-looking statements made during this call.

With that I will turn the call over to Andy.

Andy Jacobs

Thank you, Bethany. Welcome everyone to Capstead fourth quarter of results. If you will start with slide four which is just a Snapshot of our long term investment capital. I think everyone understands how we display it. As a reminder of the trust preferred and the professional preferred capital that we have, we include in our analysis in determining our long term investment capital, because that can determine the size of the portfolio and how we manage leverage and such for our company.

With combined with the others, our recorded value at the end of the year for long term investment capital it’s about $860 million. If you did a market cap analysis based on the trading prices for the common and preferred it would be just in excess of a billion dollars as of a couple of days ago, but that’s of course volatile.

Getting to the fourth quarter; fourth quarter earnings as we reported were $24.3 million. This number is about $10 million lower than where we were in the third quarter. I think we had disclosed and talked about this in this time call back in the third quarter as to the disruptions in the market, but the reduction in net income for the period is a result of lower net interest margin, which are primarily attributable to higher borrowing rates.

As we said I believe, the potential during the period for more serious disruption in the credit market we took a sensitive posture in managing our portfolio. With that we extended maturities on repo borrowing over what could have been a very difficult year end. We curtailed temporarily the replacement of portfolio run-off.

While we continue to raise the capital which was accretive to book value during the period, which totaled $47 million in new common equity, all together these efforts allowed us the financial flexibility to deal with the challenges of what the credit markets were, giving us during the time.

With respect to the portfolio yields, they were relatively stable, from the third quarter to fourth quarter and slightly below those levels. The key different was of course borrowing cost. Phil will get into the details associated with this in a minute, but I think its really important to understand that the number of repos that we entered into early in the quarter to deal with the market challenges, most of those repos were of course in the peak of the market of the credit contraction and today as we stand here I will say almost all of those repos have matured and been replaced at substantially lower levels.

Good news is late in the fourth quarter, you ended up in the world central bank, the liquidity that was pumped into the system, had some positive impact to the market. More recently, the Federal Reserve and the treasury began purchasing agency debt and agency mortgage backed securities and trying to more directly influence a reduction of mortgage interest rates.

These efforts, the jury may be still out relative to the overall economy benefits to that, but it has demonstrated that the world central banks are on top of the job and there is a lot of liquidity in the market and what’s happened is in that time we’ve been able to continue to finance our repo position. 2009 is a better period for liquidity and in fighting for agency mortgage backed securities especially with the treasury, the federal reserve and all this TARP money, everybody buying agency mortgage backed securities, that’s helped the prices substantially into year end and beyond.

So, with that I’ll turn it over to Phil and let him give some more details relative to the fourth quarter.

Phil Reinsch

Thank you, Andy. Turning to page five of the webcast; this page highlights some of the key takeaways from our fourth quarter financial performance. Just the booking in the slide as Andy spoke to was a challenge quarter that we are more than happy to turn the page on and we are optimistic going forward given the current availability of financing and the prospects for significantly lower borrowing rates.

Back to the fourth quarter, book value declined $0.88 during the quarter to $9.14, primarily due to the effect of lower mortgage interest rates on interest rate swap yields and consequently the value of our swap positioning. Although, portfolio value declined quarter-over-quarter with yields on our securities widening relative that swap yields, the values actually began recovering in mid December as Andy allude to and have improved dramatically thus far in 2009. Robert will speak more to the current market environment shortly.

By curtailing the replacement of portfolio run-offs, selling at small amount of bonds and raising new common equity, we managed to reduce our portfolio leverage to under eight times investment capital by year end. This has improved our financial flexibility to deal with the credit market conditions, while still posting very strong results going forward.

Net interest margins and earnings declined quarter-over-quarter as Andy indicated. Note that the yields and borrowings rates reflected here on this page are different from the all inclusive yields and borrowing rates included in our earnings press release.

If you turn to page six of the webcast, you may be aware that we recently restated our financial statements to confirm to a bank holding company styled presentation of total net interest margin and total financing spreads on all interest baring assets and liabilities.

This page reconciles this more inclusive presentation with a more focused margin and spread on the mortgage securities portfolio and related repo financing that we traditionally reported. We will likely use this new bank holding company presentation exclusively on all future SEC filings, but for this webcast we present both measures for your convenience.

As you can see, the inclusion of yield on overnight investments and cash swap deposits lowered top line yields by four basis points this quarter while the inclusion of unsecured borrowings rates recorded borrowings rates by about seven basis points. Using our traditional measure, financing spreads on our mortgage asset only for the fourth quarter came in at 128 basis points compared to the 174 basis points the prior quarter.

Yields on mortgage assets were eight basis points lower quarter-over-quarter, primarily as a result of lower coupon interest rates on our current reset portfolio, offset somewhat by lower run-offs. Repo borrowing rates were 38 basis points higher this quarter having been impacted by the credit market problems and our focus on extending our financing over year end.

Turning to page seven of the webcast, here we depict the components on our agent securities portfolio and how these investments are financed and hedged. In total we have reduced our portfolio to roughly $7.5 billion quarter-over-quarter. As I mentioned, we did not make any acquisitions to replace the portfolio run-off which totaled $309 million in the fourth quarter and we sold $113 million of our bonds.

Prepaids were very faint as you would expect given the poor shape of the housing market. Our total run-off was 15% this quarter down from 19% in the third quarter. That compares to 24% in the fourth quarter of last year.

Our Current-reset ARMs totaled $4.5 billion at December 31, down about $40 million in principal balance from the end of the third quarter. Our Current-reset arms consist of a combination of CMT copy and LIBOR based ARMs, including traditional six month and one year ARMs as well as moving average ARMs and seasoned hybrid ARMs that will begin resetting in rate within the next 18 months. Our longer to reset ARMs consist primarily of 51 ARM securities not scheduled to begin resetting in rates for 19 months or more. This portion of our portfolio was down about $382 million in principal balance by the end of the fourth quarter.

Currently, we’re financing these investments with $5.6 billion of 30 to 90 day repurchase agreements and still have $1.1 billion, a relatively high rate, longer dated repurchase agreements that were entered into prior to September 2007 that will mature over the next eight months, including $395 million that matures during the first quarter.

Our swap positioning has increased from $1.9 billion at year end to $2.3 billion currently, bringing that averaged fixed rate that we pay on these derivates down from 3.44% to 3.08% today. From an overall interest rate risk management perspective, we’ll usually keep the net duration of our portfolio and related borrowings to between three and six months. As at year-end our duration gap was roughly five months, about ten months or so on our assets and about five months on our borrowing.

Turning to page eight, this is a sequential depiction of our earnings. Obviously fourth quarter net margins, financing spreads and average portfolio balance declined quarter-over-quarter for the reasons we’ve already discussed. To harp a little more on comparing total financing spreads, it is financing spreads on just our mortgage assets. You can see that over the last five quarters the difference in the two measures has ranged from eight to 11 basis points.

Page nine is our balance sheet. Note the substantial growth in common equity capital controlling of our long term investment capital since December 31, 2006. During the fourth quarter we raised $47 million in new common equity capital through our continuing software programs. For all of 2008 we raised about $280 million and since the fall of 2000 we raised about $487 million through this program and three follow-on offerings that we completed since that time. For 2008, this new common equity capital increased our book value by $1.20 a share.

With that I’ll turn the discussion over to Robert.

Robert Spears

Thank you, Phil. Again our sources of financing, that’s basically talking about our Repo counterparties. At year end we had positions on with 18 different counterparties which is up from 14 at year end 2007 and 10 at September 30, 2007. The good news is we’re already starting to see haircuts come down probably this year. Towards year end, our average haircut is just under six points. So far in January we’ve already had six of our 18 repo counterparties lower haircuts, so that’s a good positive trend.

We mentioned earlier, we’re also resuming replacing portfolio run-offs. So, the reasons we are doing that now is we’re comfortable with our leverage at current levels; the Repo financing is readily available; spreads on new acquisitions are relatively attractive. The tough part right now, maturity price has gone up considerably this year. Generic reforms both short and reset ARMs are up three quarters to a point, which is good news for book value and not as good news from the standpoint of borrowing these secures.

Historically, borrowing hybrids with mid-to-high 103 dollar prices did not benefit trade and we’re not looking on doing that. Shorter reset securities are still trading with one of one handles and so we will probably lean more toward shorter reset securities right now. The risk on the higher priced securities is obviously curtailment risk and the (Inaudible) so there’s a good chance to pick up. So we’re being very cautious replacing run-offs, you can now leverage about where it is and at these levels, between seven and eight times leverage, we can earn very attractive spreads on our portfolio.

We’ll go to slide 11, this has already been talked about and this is really kind of data from the fourth quarter, so I’m not going to spend much time on it. Our spreads and our portfolio were around 128 basis points. We’re obviously going to improve substantially from that in the first quarter which is covered more in slide 12.

Turning over to slide 12, repo borrowing rates have come down considerably early in the year. Feds has cut the fund rates to 0 to 25 basis points. We have been growing repo trades recently in the 55 to 80 basis point area which is just very attractive. We also had $279 million of our long-term repo at around 5% that rolled off in the fourth quarter of last year.

We got close to another $400 million rolling off in the first quarter this year and the entire long term repo position which is at a rate of around 5% will be gone by the third quarter. As Phil, mentioned we’ve replaced some of that longer term repo, we added to our stock position, we added about $400 million of two year swaps, we were paying fixed at a 1.37% rate.

If you think about what these lower repo rates have done already, if you just look at isolated portfolio, our liabilities that aren’t swapped out or aren’t longer term repo, you have got about $3.8 billion. That at the end of the year, our short repo rates were about 2-6. If you think about that we’ve already rolled about $3.8 billion, about 185 basis points cheaper than where it was at year end.

So, in terms of aggregate portfolio spread that’s obviously a very big positive and as longer term repo continues to mature, we will replace that of either a short repo or we might swap some of that out as well. So, the financing part of the equation is very, very positive.

On the prepayment front our speeds are at historically low levels. As Phil mentioned our aggregate run off was around 15% in the fourth quarter. Early this year, we already have January factors which are December prepayments and speed probably even hurt. Having said that, given where rates are and with the various programs trying to intend people to refinance, there is some risk to prepayment speeds picking up.

The biggest risk, I think is if they talk about raising appraisal requirements on streamline hard. If that happens, that will obviously cause people to pick up a good bit. A large portion of our armed portfolio is comprised of loans that have high LTV close off, etc that would help that borrower causing us a fairly large down payment, he can’t refinance right now.

If they made the appraisal requirement, waver documentation requirement etc make it very easy, those guys could refinance. So, that’s the risk out there. Having said that, the mortgage banking industry is in a state of disarray right now; their processing times are taking 90 to 120 days to close loans.

Primary mortgage rates are being offered at levels that are significantly higher than what would be reflective in where the end prices are trading and so that is going to help offset some of the key pick ups. As well given that 60% of our portfolio or short resets, if you think about those underlying loans, those borrowers are resetting down, we are even getting mortgage rates with a four handle right now in an environment where a no cost refi would still be in the low to mid five.

So, that’s going to offset some of the prepayment pressure as well, but having said all of that the jury is just very much out on what feature one would do and it will pick up to what extent, nobody really knows, because we’re in a totally different environment than we’ve been in before, but the good news is our aggregate premium on our portfolio is around 1.25 points. So, we can stand significant increases in fees and still throw off very nice yields on our existing portfolio.

If you flip over to slide 13, the last question was on the composition of our portfolio and so we broke out the shorter term, short reset versus our longer resets and I’ll just walk you through this very quickly. If you look at our current reset ARMs we have a little under $4.5 billion. Go over to the right, our basis in those is 101.10; I’m going about the fifth line. Our net WAC is 474 and the fully index net WAC is right under 3% and that’s what those loans at reset do, given currency and LIBOR rates.

As Phil alludes to earlier, we have a mixture of CNC based, LIBOR based, copy based ARMs in our portfolio. The average net margin on that book is 182 basis points. As you head out to the far right column you have 4.58 months to roll, okay. So, all of these securities aren’t going reset at one-time and if you think about this, the fully indexed, net WAC is 3%.

So, that would imply CNC index somewhere around 50 basis points, LIBOR around 175 and average net out at 182 basis points to it and you’ll get a coupon of around 3%. I mean said that, it’s going to take 10 or 11 months for these loans to totally adjust down to that fully indexed rate.

So, what all that means is coupon on our short reset portfolio, given current market conditions will reset down between 15 to 20 basis points. If you look at our longer reset ARMs at $2.85 billion, we all know that just north of 101.5, we got a 6.10 coupon with 35 months to roll. So, those yields are fairly static. The only thing that can really change those yields are prepayments, but all things being equal, the longer reset ARMs are going to roughly 5.75 and the shorter ARMs are going to reset down.

If you look at the total winded portfolio, you got a 5.27 coupon with 15 months to roll. So, just wanted to kind of go; we’ve got lots of questions on our current reset. So I would say just assume our shorter resets are going to drop 15 to 20 basis points a month and our longer reset ARMs, the yields are going to be fairly constant and you can kind of back into what our portfolio will do over the coming months.

And with that I’ll turn it back over to Andy.

Andy Jacobs

Thank you, Robert. Just in summary, we look back over these last 18 months; it’s been one of the most unbelievable credit market environments that the financial world has ever seen. Our securities performed well. Our portfolio performed well, that we built throughout this period, agency guaranteed mortgage backed securities continued to be one of the safest and most liquid securities in the world; the way we finance them with primarily 30 to 90 day borrowing that we continued through this environment.

So, we are very comfortable with our long-term strategy and continuing to do this. 2009 as Robert said was target set funds between 0 and 0.25 point. I think the forward curve as the target by the end of 2009 maybe toward 0.5 point. This is going to be a very good environment for Capstead with these historically low rates.

As Robert said, financing spreads, in spite of mortgage yield portfolios continuing to come down to adjust to current levels our financial costs have dropped rather significantly and we’re going to have some very attractive net interest spreads throughout this year and we are looking forward to posting another good year after what 2008 was; I believe a very good year for the company.

So, with that I will open it up to for questions and turn it back over to Bethany.

Bethany Siggins

We are ready for questions whenever you are.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Mike Widner - Stifel Nicolaus.

Mike Widner – Stifel Nicolaus

Just a couple of questions here if I could; you talked a fair bit about repo and certainly good to hear that every things a lot better now. I’m still struggling a little bit with how high the costs were given some of things you mentioned in Q4. It looks like you returned in an average about 331 basis points on the short term repo during the quarter. Was that reflecting a lot of sort of 60 plus day Repo bookings in September or October or were there 30 day rates that high over the course of November, December?

Robert Spears

It was a combination of both. If you remember a lot more shot up during the quarter we were rolling in the 3% to 4% area. At the peak of the price there’s been a lot of that early to mid quarter taking you over year end.

So those were kind of more 60 to 95 day Repo that you’ve got toward year end, the pressure started coming off, but 30, 60, 90 day Repo had three support handles for a very good portion of the fourth quarter and it’s dropped that much just as we got over quarter end. For now it is trade low as 55 basis points. The kind of the 55 to 80 basis point range is kind of the norm for short Repo right now.

Mike Widner – Stifel Nicolaus

Okay. So, I’m not sure if you have this off hand, if you could give it to me. I’m just wondering how much of that sort of 30; well basically there’s 30 plus and there’s 60 and 90 days. So if you might have rolled kind of late in the quarter that’s still going to be carried through January and February, if you sort of follow what I mean?

Robert Spears

Well, as Andy mentioned earlier, almost all of those Repos have matured, but we really don’t have hardly any of the higher cost short Repo on the books right now.

Mike Widner – Stifel Nicolaus

Okay, great. Good to hear. Jus one other one; obviously leverage came down, which you told us it would; the environment is it different now? I’m just wondering how you’re thinking about leverage going forward?

Robert Spears

I think right now the spread that we’re earning on the existing portfolio and the spreads came in on new purchases and were extremely attractive and I think we’re very comfortable with the portfolio size as it is now and so barring any incremental capital raises, I think we’ll keep the portfolio about where it is. Now, that leverage number, obviously with book value potentially improving could be a little lower right now, but I think we’ll keep the portfolio fairly constant at these levels.

Mike Widner – Stifel Nicolaus

Okay. So basically 7.5, well you’d say it’s constant from the principal amount standpoint or constant from a value.

Andy Jacobs

Well, as we’ve said many times, our range is going to be in an eight to 12 times. Obviously we’re not near the higher end. We’re going to continue in this environment to stay towards the lower end at any time; whether that’s 7.5 or whether that’s 8.5. A lot of that’s going to depend on the availability of securities in the market and the prices in premiums and whether we think it’s appropriate to add that, but in spite of all that, borrowing costs have dropped significantly and spreads are going to be very wide and very attractive this year.

Mike Widner – Stifel Nicolaus

Well hopefully, it certainly seems to be setting up their way and actually maybe one if I could. I was a little perplexed to see MDS values on the whole for your portfolio decline; I’m just wondering if you could talk quickly about the difference in re-pricing you might have seen on the current ARMs as opposed to sort of further after reset ARMs as we saw improvement in the pricing or the valuation on the longer term versus the short term?

Robert Spears

Sure. What happened was shorter reset securities got hit particularly hard in the fourth quarter. For a while the main buyers we’re looking for either fixed rate pass-through or longer reset hybrids and so at one point, yields on short reset securities were actually repaying at not higher than longer reset securities. So those didn’t trade as well as the fourth quarter and so what ended up happening longer resets improved by roughly 0.75 quarters of a point in price and our shorter reset securities actually declined in value by about 0.58 those points.

So in aggregates we were down maybe a couple of ticks on the whole portfolio, but longer reset ARMs definitely out performed shorter-to-reset ARMs in the fourth quarter. Early this year, that’s starting to come back inline and both short and longer reset securities are up nicely this year, but they did under perform the shorter reset bonds in the fourth quarter of last year.

Operator

Your next question comes from Steven Delaney - JMP Securities.

Steven Delaney - JMP Securities

Andy we are hearing fairy broadly and we can all see where repo pricing is going and I guess just anecdotally people are using the phrase “Repo seems to be more available. People are calling us, asking us if we want to borrow more money” which is all great to hear. So I guess I’ve got a question to you guys collectively, whoever wants to take it. Why do you think that is? I mean it’s great for obviously your business model, but the bank still have capital constraints out there and what do you think is behind it or do we have new players coming in that maybe weren’t beyond the traditional primary dealers?

Andy Jacobs

Well, definitely over the last year there’s been new players beyond the primary dealers from the past and I think all of us in the sector don’t want to over rely on those primary dealers, because they do as you said have their own balance sheet problems. I think it’s just a combination.

The world banking system is a lot more liquid. We borrow domestically; we borrow from European banks and Asian banks. So I mean it’s just a more diversification there and there’s just a substantial amount of liquidity that everybody pumped in. The treasury, putting a bid in to buy a half of trillion dollars worth of mortgage backed securities has improved pricing. Everybody is a lot more comfortable with the underlying securities and so there’s no more downward pressure in evaluations.

Agency mortgage backed securities held up very well compared to every other, fixed income assets that you can look at in the market and I think it’s just all the liquidity and the actions by the world banking system. I think it’s improved; people’s appetite for this and the alternative is 0% to 25% overnight treasury rate, repo at 55 basis points looks pretty darn good at some points to a lot of these players.

Phil Reinsch

I think seriously quite a still other guys are funding in the overnight markets, which as Andy said they can really fund in the 15 to 20 basis point area and lend it to guys like us say 70 basis points and take a little bit of interest rates risk in an environment where the Fed has pulled and your not going to raise rates and so you got some spreads in the repo world that are pretty attractive to a lot of these guys right now.

Steven Delaney - JMP Securities

Would you say Robert that going forward you would expect that your repo book, you might be able to diversify it even more broadly to minimize risk with the certain lender?

Rob Spears

Yes, I think that’s the case and we have 18 active counterparties at year end. We are still in the process of adding more and yes I think that’s the goal to get it even more diversified.

Steven Delaney - JMP Securities

Great and just one final thing from me; I know in your third quarter, in your Q, you gave us an update on the status of those two legacy commercial real estate loans. There wasn’t anything obviously in the press release related to that, but I take it as a positive you didn’t find it necessary to set up a loan loss reserve on either of those. Is there any update or comment that you can make on those at this time or do we need to wait for the K?

Phil Reinsch

You’ve kind of need to wait for any real details, but you certainly bagged it by noting that since it wasn’t discussed, no impairment charge was recorded. It is certainly a positive.

Steven Delaney - JMP Securities

And you also showed it in your yield table with an 8% handle. So I mean does that imply we should assume that it is accruing or paying -- you showed that it’s having that kind of…

Phil Reinsch

Absolutely.

Operator

Your next question comes from James Ackor - Sterne Agee.

James Ackor - Sterne Agee

A couple of questions, I guess first of all given the nature of the repo market right now, and a combination with how you were describing the shorter reset yields and coupons with regard to expectations and then also factoring in the fact that you continue to focus more on the short reset side of to the equation because the premiums and some of the longer resets are pretty onerous. What are we talking about here in terms of incremental spread or spread on an incremental investment that you are putting on your books?

Andy Jacobs

Well, I mean if you look at it, it’s a hard mortgage universe; whether it’s a short ARM all the way out to a fixed rate cap for a yield bar, somewhere in the 3% to 4% range. A lot of the ARMs that determine is actual prepayments fee and so on a hedge basis if you want a hybrid longer reset, lets say at 375 yield, you’re able to swap out the interest rate or you can get hedge spreads of around 200 basis points.

Conversely you can buy short reset ARMs yielding closer to 3%, but the swap repo and lets say it’s 75 basis points, then you could have 200 to 225 basis points as been spread as well. So, it’s kind of pick your point and almost everything in the mortgage universe on a hedge basis is yielding on mark prepayment assumption spreads of around 200 basis points.

It’s just the problem with bonds trading, longer reset ARM’s trading at the high 103 and the profile is not very positive and it’s fee pick up is dormant; you’re yields are a lot lower than expected. With the rate back up you have more duration than you expected and so at this point gain we have about a 60/40 mix, 60% shorter reset and I don’t think the mix of our portfolio will dip any lower than that on the shorter reset side.

Jim Ackor - Sterne, Agee & Leach

So it’s pretty clear that there’s just no way that you guy’s don’t widen out material in the first quarter. Another question, it’s more maybe a 30,000 foot request for commentary. Can you kind of discuss what if any expectations or thoughts you have with regard to how all of these proposed loan modifications and given more specifically potential for that whole concept of the cram down might impact your portfolio specifically?

Phil Reinsch

I think Jim going to a 50,000 foot level. It’s unknown what is going to be. The one thing that I think we saw was one of the rescue plans last year as they were looking to do thousands and thousands of fixes on somebody that was headed toward foreclosure, but they did like 400, just complete failures dis-functional in rolling out the various program.

Will the new administration be more successful in getting stuff rolled out quicker? History tells me 50,000, per level. Their best plans, it’s going to take a while still to get it functioning efficiently and maybe not even ever, but that said defaults, foreclosures, bankruptcy trend down. As those relate to the agency sector from our standpoint, they just come in as prepayments. You have to end up basically buying it out of that mortgage-backed security and it goes on to the training balance sheet, the fed balance sheet or somebody else’s. It’s a pay off to us.

Jim Ackor - Sterne, Agee & Leach

Okay. So, you haven’t seen anything that would suggest other than what you just described which is been the sort of the general consistent of this whole and naturally started to come to the front burner.

Phil Reinsch

That’s right.

Operator

Your next question comes from Bose George - KBW.

Bose George - KBW

The tax losses that detail on your current portfolio, as a follow-up, what’s the index on the shorter dated ARMs as you guys are looking at now?

Andy Jacobs

We have a mixture of remind index, but TMT is roughly 50 basis points right now, LIBOR is 175 basis points, copy is 315 basis points right now. So, really depends and so we gave your sub-blend of the entire portfolio.

Bose George – KBW

And then in terms of the stuff that you guys are potentially buying. Is there…

Andy Jacobs

Oh right now, we’re focusing a little more on LIBOR based products right now.

Bose George – KBW

Okay and then just switching to the comment you had made about asset prices in the first quarter; did you say they’re up about a point to your portfolio?

Andy Jacobs

The ARM market in general is up on average, somewhere between 0.75 and 1 point. They’re both short entries, their ARM securities which if you look at you’re inventories, prices reported etc, which equates and swap yield are actually flat to up a bit. So, securities have tightened as much as 50 basis points already in the first quarter, but in aggregate 0.75 to 1 point, is a pretty good profit for what ARM prices have done year-to-date.

Operator

Your next question comes from Matthew Howlett - Fox-Pitt Kelton.

Matthew Howlett - Fox-Pitt Kelton

I know you said in the first quarter you are just going to replace run-offs, so can we assume at this point, the continue offering plan program will be suspended in the first quarter until you decide to get back into the market?

Andy Jacobs

Well, we didn’t necessarily mean to imply that we wouldn’t take advantage of the recent trading in our stock to raise some additional capital.

Matthew Howlett - Fox-Pitt Kelton

Okay, and to follow on that point, needless to say in a big following-on rates sort of that in the question at this point until you said premiums come down in the marketplace and I guess the follow on to that question is, what price level would you get back in? I know the 5.5 and these are about to break 103 or could. Is that sort of a magic number, the 103 or is it more about until you get better clearance on what prepayments are going to do and what those covenants are supposedly going to do?

Andy Jacobs

I mean when you price, when you come in with a big follow-on I think we have a discipline, I think you look at the 2008 and the capital raises that we did in 2008. The only follow on we did was back in February of 2008. The rest of the year we were just slugging away with our continuous offering program. We did everything we did add accretion, accretive to the book value for the period and now we will continue to do that.

With that, we don’t see a whole lot of assets that are attractive enough to want to go out and do a big rate and try to deploy that capital, the dilution of that new equity to your position. In this market, assets are rich and we’re happy in here to just kind of pick around in what’s available and not have to reach on things, so just maintaining the discipline.

The amount of run off as Phil said for this last quarter was little over $300 million. That's going to increase somewhat, but that $300 million when tending to try to replace at the right prices and as we raise capital at the appropriate times we’ll put that capital to work. The good news is there’s availability on repo. The market is definitely better. People throwing repo at us, that’s all fine and good; we got to find the right assets to deploy it if that’s the case.

Matthew Howlett - Fox-Pitt Kelton

Fair enough and then just one last question on the outlook for prepayments; I know it’s very difficult to try to gauge prepayments in hybrids, this year going forward without further information from the government, but I think most street models are projecting somewhere between 25 to 30, lifetime CPR’s on the hybrids. I mean we just see expense on that. I mean I guess if it’s kind of lower, you think there could be a lot of value in the upping coupon trade or is it just too early right now to go in and trade on like that?

Phil Reinsch

Generically that’s probably not a bad number. The difference is the competition of the collateral is different out there that every bond is a different story. I mean anything originated in the last couple of years I think is going to prepay significantly faster than that because that’s going to be reflective of mortgages that were underwritten with tighter credit standards and more realistic LTV etc.

Loans that were originated in 2005 that had a 90 LTV at the time and lowered off are not prepaying at all and the only way those guys can prepay is if almost all credit requirements are completely waved. So, it is really depended upon what bonds you are look at, at a given point in time. Another thing as I mentioned earlier our shorter reset securities are resetting now to a rate that is going to be very palatable to the consumers and those prepayments, we’re seeing our shorter reset prepayments come down considerably.

So it’s really a bond by bond question. I don’t disagree with that aggregate number. Mid-20’s doesn’t sound unreasonable, but within that I think you’re going to have home securities that prepay significantly faster and some securities that prepay significantly slower.

Operator

Your next question comes from Tim Wagner - Deutsche Bank.

Tim Wagner - Deutsche Bank

A question on haircuts; I think you had mentioned around 6 of 18 counterparties have lowered them. Are you seeing a variety of I guess a broad distribution of haircuts out there?

Andy Jacobs

No, really it’s started kind of clustering together in the fourth quarter and pretty much just a range with kind of the five to seven area, which is kind of what we were saying our aggregate was below six, but you’re basically seeing guys come in a good point or so from there. So, now the cluster is starting to move down in the five to six area.

Operator

Your next question comes from Robert William - Riversource Investment.

Robert William - Riversource Investment

I was hoping we could go back to this financing side again. I missed a little of bit what you said. So, as it relates to the 30 to 90 day Repo, you mentioned substantially all of the higher costs that had roll, what did it roll to, in terms of rate?

Robert Spears

Those were the Repos we talked about in the 55 to 80 basis points area.

Phil Reinsch

That’s what you’re seeing here in the latter part of the month, if it was a little higher at the beginning part of the month obviously.

Robert William - Riversource Investment

So, about 55 now?

Robert Spears

55 to below what our market is at this point for what we’ve been able to execute here.

Phil Reinsch

Yes, just generically 75 basis points.

Robert William - Riversource Investment

Okay and then, the greater than 90 day, where does that stand today in terms of the balance?

Robert Spears

About $1.1 billion and we’ve got almost $400 million of that that will come off in the first quarter and all of it will be gone before the end of the third quarter.

Robert William - Riversource Investment

Are you facing that one-for-one to your swaps? I think you’ve mentioned you were replacing part of it with swaps, but how exactly…?

Phil Reinsch

We’re not. I mean we’re putting swaps on to maintain our duration gap where it is and so if you look at say we got $400 million coming off in the first quarter and we had close to $300 million in fourth quarter of last year, that’s $700 million; we put $400 million in swaps on. So, we are doing it in the context, but the overall portfolio, keeping our duration gap between three and six months and effectively hedging our longer reset book to a duration of about a year right now.

Robert William - Riversource Investment

You’re 60% short ARMs; right?

Phil Reinsch

Yes.

Robert William - Riversource Investment

Okay, great. The other question is on the assets side and just a clarification and maybe some commentary on whether or not any other bonds you own have floors in them and if not are there deals out there that do you have floors and how do they look versus the ones that don’t on a shorter reset assets?

Robert Spears

Sure we have that floors. Most of the securities that we’re creating with higher floors are very seasonal and we own some of those. If you think about shedding ARMs too they’re kind of floored, because they have a 1% periodic cap, but most of the bonds that have marked floors kind of in the 3% to 4% area are very old and we own some various seasoned copy bonds that have 4% floors, but it’s not a significant portion of our portfolio. I would for the sake of analysis assume that periodic caps for the most parts are going to be kind of your floored rate.

Robert William - Riversource Investment

How much of the short ARM book, have either periodic caps or hard floors?

Robert Spears

All of them with the exception of our MPAs have periodic caps. We don’t disclose all of that information. So, those are unfloored, but it’s the lagging index and so without going into specifics we have the details; it’s hard to give you that number.

Yes, I would just assume for the most part of if you look at that short reset analyst, just assume that pretty much those securities are going to come down at almost a linier basis over 10 to 12 month period. So, we are going from 475 to 3% over the course of the year and kind of divide that evenly and I’ll kind to show where coupons are. The number of bond that we have marked floors on is not going to be material enough to change that analysis.

Operator

Your last question comes from Gabe Poggi - Friedman, Billings, Ramsey

Gabe Poggi - Friedman, Billings, Ramsey

Isn’t it that assets are generally rich right now and you guys are going to pick around to what’s available? Is there a point kind of out in the future where you don’t think those pockets to purchase, your traditional assets and your 60% short-term resets where they won’t be available and you guys might have to extend your duration gap, so how do you think about that?

Phil Reinsch

I don’t think so. I mean the various declines applying is on the origination front. I mean in the fourth quarter you only have $7.5 billion of new origination ARMs created. Having said that, there’s always secondary supply and we rarely buy new origination bonds anyway and so if we are looking at run-off being at $100 million, $125 million a month, that’s not a problem from the standpoint of replacing that via secondary supply of bonds that we like. Now, having said that, I wouldn’t want to have a big sludge of new capital that I have to deploy in this environment right now; we are not concerned about replacing run-offs.

Operator

Thank you. At this time, we have no further questions. I’d like to turn the floor back over to Ms. Siggins for any closing comments.

Bethany Siggins

That’s all we have for today. Thanks you for joining us. If you have further questions, please give us a call. Have a great weekend and we look forward to speaking with you next quarter.

Operator

Thank you. This does conclude today’s teleconference. You may now disconnect your lines at this time. Thank you for your participation.

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

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Source: Capstead Mortgage Corp. Q4 2008 Earnings Call Transcript
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