the $0.50 1Q dividend.

• The decline is in line with our earnings estimate as the anticipated impact

of Fannie buyouts weighs on results.

• We believe the key questions are 1) what happened, 2) will the dividend

recover, and 3) is there any read through for the group?

• We believe the major driver of the dividend decline was Fannie delinquent

loan buyouts in the quarter. We see the impact as in line with our

projections.

• With the 2Q10 consensus EPS estimate at $0.43 it seems a dividend cut

was widely expected but perhaps not of this magnitude.

• We anticipate some dividend recovery in the second half of the year.

• The Fannie and Freddie buyouts were largely one-time events and we

project the dividend improving to $0.40 per quarter in 2H10.

• We do not anticipate full recovery due to the heavy concentration of

current-reset ARMs in Capstead's portfolio (86%) exerting ongoing

pressure on spreads.

• We believe the read through to the broader group is modest.

• For most of the sector 2Q consensus earnings are much more in line with

our own and most of the group has provided fairly good guidance or

disclosure on anticipated buyout impacts.

• Even with the dividend cut we are inclined to view the stock positively.

• Capstead is unique in the group in our view due to its very short and

closely matched asset and liability durations.

• Some of the more prominent investor concerns for the sector seem to be

spread sensitivity to rising rates and portfolio extension risk.

• With Capstead's heavy concentration of current reset ARMs we see

spread sensitivity being somewhat muted and extension risk as virtually

non-existent.

• Additionally we see its relatively low leverage position (6.35x) providing

ample dry powder to offset any spread compression brought about by

eventual Fed tightening.

• While the current 12.5% yield puts Capstead at the low end of the group

we believe it also has the lowest overall risk profile.

• With the stock trading at 0.93x our $12.41 current book value estimate

and 0.98x trailing book we believe the major risks are priced in.

• We maintain our Buy rating on the shares with a $13 target price based

on 1.10x book value of $11.77.

Risks to Target Price

We believe the primary risk to our target price is interest rate uncertainty.

Capstead economics could suffer materially, in our view, if the Fed begins

to raise rates again. The stock could also react in anticipation of the Fed, so

even if interest rates were to remain steady the stock could move in

Rating — Buy

Target Price — $13.00

FY10E EPS (Net) $1.69 $1.73

FY11E EPS (Net) $1.48 $1.51

Price (06/10/10): $11.48

52-Week Range: $16 – $8

Market Cap.($mm): $911.5

Shr.O/S-Diluted (mm): 79.4

Avg Daily Vol (3 Mo): 1,083,454

Dividend ($): $1.44

Yield (%): 12.5%

Book Value/Share: $11.77

S&P Index: 1,086.84

Created by BlueMatrix

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response to expectations of Fed adjustments.

Capstead economics are also heavily dependent on short-term borrowing costs. Any interruption or upward adjustment

in short-term borrowing costs could have a significant negative impact on Capstead economics and stock price.

Company Description

Capstead Mortgage Corp. is a mortgage REIT that began operations in 1985. Capstead's portfolio is over 99%

invested in agency MBS, meaning securities issued by Fannie Mae or Freddie Mac (the GSEs) or insured by Ginnie

Mae (GNMA). The remaining 1% is comprised primarily of non-agency residential MBS and a small amount of

commercial real estate. While Capstead may invest in additional non-agency collateral from time to time, management

indicates that it expects to focus investments in agency MBS for the foreseeable future.

Capstead funds its leveraged balance sheet primarily through repurchase agreements and shareholder equity.

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