ABCDE Safe Harbor Statement - ABCDE Private Securities Litigation - PowerPoint PPT Presentation

INVESTOR PRESENTATION ABCDE THIRD QUARTER 2019 ABCDE

Safe Harbor Statement - ABCDE Private Securities Litigation Reform Act of 1995 Statement Concerning Forward-looking Statements This document contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain the words “believe,” “anticipate,” “expect,” “estimate,” “intend,” “will be,” “will likely continue,” “will likely result,” or words or phrases of similar meaning. Actual results could differ materially from those projected in these forward-looking statements due to a variety of factors, without limitation, fluctuations in interest rates, the availability of suitable qualifying investments, changes in mortgage prepayments, the availability and terms of financing, changes in market conditions as a result of federal corporate and individual tax reform, changes in legislation or regulation affecting the mortgage and banking industries or Fannie Mae, Freddie Mac or Ginnie Mae securities, the availability of new investment capital, the liquidity of secondary markets and credit markets, and other changes in general economic conditions. These and other applicable uncertainties, factors and risks are described more fully in the Company’s filings with the U.S. Securities and Exchange Commission. Forward-looking statements speak only as of the date the statement is made and the Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Accordingly, readers of this document are cautioned not to place undue reliance on any forward-looking statements included herein. 1 1

About Capstead ABCDE • Founded in 1985, Capstead is the oldest publicly-traded residential mortgage REIT. • We manage a leveraged portfolio of adjustable-rate residential mortgage securities issued by Fannie Mae, Company Freddie Mac, or Ginnie Mae that can earn attractive risk-adjusted returns. Summary • At September 30, 2019, our ARM securities portfolio stood at $11.2 billion, supported by $1.2 billion in long-term investment capital levered 8.8 times. • Our short-duration strategy differentiates us from our peers because the adjustable-rate mortgages underlying our portfolio reset to more current interest rates within a relatively short period of time: • Resulting in smaller fluctuations in portfolio values from changes in interest rates compared to portfolios containing longer duration investments such as fixed-rate mortgage securities. Our portfolio duration was approximately 14½ months at quarter-end, and after considering related borrowings and derivatives held for portfolio hedging purposes, we had a zero net duration gap . Proven Strategy, • This relative stability affords us more flexibility in managing through periods of market stress. Efficiently • Our strategy is designed to insulate investors from credit and, to a large degree, interest rate risk. Executed • We routinely borrow for 30 to 90 days and extend the duration of our borrowings primarily using two- to three-year term, pay-fixed, receive three-month LIBOR, interest rate swap agreements. • We have long-term relationships with a variety of domestic and foreign lending counterparties. At quarter-end we had borrowings outstanding with 20 counterparties. • We are internally managed with low operating costs and a strong focus on performance-based compensation ensuring the alignment of management’s interests with those of our stockholders. • With moderating mortgage prepayments, lower borrowing costs due to lower short-term interest rates Current and active management of our hedge positions, we are increasingly optimistic that we will report higher Opportunity earnings in the coming quarters. • For investors seeking levered returns with a comparably higher degree of safety from interest Value rate and credit risk, we believe Capstead represents a compelling opportunity that is difficult to Proposition find elsewhere in the market. • Duration is a measure of market price sensitivity to interest rate movements. A shorter duration indicates less interest rate risk. 2 • Net duration gap refers to portfolio duration less the duration of related borrowings and derivatives held for hedging purposes.

Market Snapshot ABCDE COMMON EQUITY CAPITAL MEZZANINE CAPITAL NYSE: CMO NYSE: CMOPRE 7.50% (in thousands, except per share data) (in thousands, except per share data) Shares outstanding (11/7/19): 94,606 Shares outstanding (9/30/19): 10,329 Book value (9/30/2019): $8.60 Price (11/7/19): $25.38 50% Price (11/7/19): $7.56 Market capitalization (11/7/19): $262,150 84% Market capitalization (11/7/19): $715,221 Perpetual preferred; callable at $25 par Price as a multiple of book value: 87.9% Cost of preferred capital: 7.72% LONG-TERM UNSECURED BORROWINGS 16% Recorded amount, net (9/30/19): $98,367 Matures in 2035/2036; callable at $100 par Cost of capital: 7.74% 3

Long-Term Investment Capital ABCDE Long-term Investment Capital Recent Capital BV Common Stock (Deployed) Price, net of Discount to Accretion Activity Shares Raised expenses Trailing BV (Dilution) 2017 (397,352) $ (3,460,000) $ 8.71 80.0% $ 0.01 2018 (10,653,060) (84,594,000) 7.94 77.5 0.29 Q3 2019 9,000,000 75,101,982 8.34 93.4 (0.06) (2,050,412) $ (12,952,018) We are incented to grow the Company by raising capital based solely on the attractiveness of the opportunity for our stockholders rather than for the purpose of increasing compensation or external management fees. We view share repurchases in the same way. • Beginning of period book value used to illustrate discount and calculate accretion on activity. On August 1, 2019, we closed an overnight “bought deal” that was re-offered to 4 investors at $8.60 per share, a 3.8% discount to our $8.93 June 30, 2019 book value.

Third Quarter Financial Highlights ABCDE NET INCOME & BOOK VALUE INVESTMENT PORTFOLIO FINANCING Core EPS Portfolio Value Investment Capital Secured Borrowings Swap Portfolio GAAP EPS $(0.02) $0.11 $11.24B $1.17B $10.29B $7.20B ARM Securities Portfolio Core Earnings Leverage -8% -8% 9.59x $0.11 $0.12 8.80x Post Initial Longer Current Reset 82% to Reset Reset 49% 51% Yet to Reset 18% Q2 2019 Q3 2019 Q2 2019 Q3 2019 Book Value Yield on Investments Secured Borrowings -4% -2% -2% $8.93 $8.60 2.82% 2.76% 2.35% 2.31% Q2 2019 Q3 2019 Q2 2019 Q3 2019 Q2 2019 Q3 2019 5

Reasonable Risk-Adjusted Economic Returns ABCDE (Changes in Book Value plus Dividends) Economic return is a key metric for mortgage REITs. Our strategy typically leads to outperformance during periods of rising longer-term interest rates and/or worsening credit conditions relative to other residential mortgage REITs. Falling longer-term interest rates coupled with a flattening and at times inverted yield curve has made the 2 nd and 3 rd quarters of 2019 a challenging operating environment. • Agency Peers: AGNC, AI, ANH, ARR, CYS, EARN, HTS, NLY, ORC (HTS through 2016; CYS through 2018). • Broader REIT Peers: Agency peers plus AMTG, CIM, DX, HCFT, IVR, JMI, MFA, MITT, MTGE, NYMT, RWT, TWO, WMC (HTS, AMTG and JMI through 2016; HCFT and MTGE through 2018). • CMO economic returns exclude $(0.28) per share associated with 2013 preferred capital redemption and issuance transactions and $(0.03) per share in separation of service charges incurred in 2016. Including the effects of these items, our economic returns would have been lower by 206 basis points in 2013, 26 basis points in 2016, 6 and by nine, five, and 39 basis points for the 3-, 5- and 6-year averages, respectively.

Sensitivity to Interest Rate Changes ABCDE Effects of Instantaneous Parallel Shifts in the Yield Curve on Duration (in years) Duration Recent Duration -100 bps Duration +100 bps Fannie Mae 30-year 3% fixed-rate TBA 2.50 5.77 9.92 Indicative (contraction) extension (3.27) 4.15 Capstead’s agency ARM securities portfolio 0.90 1.18 1.45 Indicative (contraction) extension (0.28) 0.27 Related borrowings and derivatives -1.20 -1.21 -1.20 Net duration -0.30 -0.03 0.25 Indicated change in book value -2.36% -5.43% Our ARM portfolio with its 14 ½ month duration compares favorably with fixed rate portfolios with durations measured in years not months. The relatively modest contraction and extension risk (convexity) of ARM securities naturally mitigates the risk of over or under hedging. • Change in book value is measured by the change in duration times the market value of the portfolio and related derivatives held for hedging purposes. 7 • Recent duration for Fannie Mae 30-year TBAs is based on October settlement. Capstead’s positions are as of September 30, 2019.

Short-Duration Strategy ABCDE 14 14 12 12 10 10 Duration in Months 8 8 Leverage 6 6 4 4 2 2 0 0 -2 -2 Long-Term Capital Common Only Portfolio Duration Net Duration Our leverage level is conservative relative to our peers given our duration profile. 8