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| 8-K - FORM 8-K - CYS Investments, Inc. | d730196d8k.htm |
 Kevin
Grant Chief Executive Officer
Wells Fargo Securities Research & Economics
Specialty Finance Conference
May 20, 2014
Investment Outlook
Exhibit 99.1 |
 Forward-Looking Statements
This presentation contains forward-looking statements, within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, that are based on management’s beliefs and assumptions, current
expectations, estimates and projections. Such statements, including information relating to
the Company’s expectations for distributions, availability and cost of financing,
scalability of management, market conditions, monetary policy, return on equity, the yield curve, the
economy, interest expense, affordability of housing, movements in interest rates,
governmental actions, the performance of the Company’s target assets, the impact
of current Federal Reserve voters on certain policies of the Federal Reserve, the policy views of central banks, and
the size of the mortgage market are not considered historical facts and are considered
forward-looking information under the federal securities
laws.
This
information
may
contain
words
such
as
“believes,”
“plans,”
“expects,”
“intends,”
“estimates”
or
similar
expressions.
This information is not a guarantee of the Company’s future performance and is subject
to risks, uncertainties and other important factors that could cause the
Company’s actual performance or achievements to differ materially from those expressed or implied by this forward-
looking information and include, without limitation, changes in the market value and yield of
our assets, changes in interest rates and the yield
curve,
net
interest
margin,
return
on
equity,
availability
and
terms
of
financing
and
hedging,
the
likelihood
that
proposed
legislation
is
made
law
and
the
anticipated
impact
thereof,
actions
by
the
U.S.
government
or
any
agency
thereof,
including
the
Federal
Reserve,
and
the
effects of such actions and various other risks and uncertainties related to our business and
the economy, some of which are described in our
filings
with
the
SEC.
Given
these
uncertainties,
you
should
not
rely
on
forward-looking
information.
The
Company
undertakes
no
obligations to update any forward-looking information, whether as a result of new
information, future events or otherwise. 2 |
 CYS Overview
Focus on Cost
Efficiency
Target Assets
Agency Residential Mortgage Backed Securities
A Real Estate Investment Trust Formed in January 2006
Ample Financing
Sources
Financing lines with 38
lenders
Swap agreements with 18 counterparties
Dividend Policy
Self managed: highly scalable
Senior
Management
Kevin Grant, CEO, President, Chairman
Frances Spark, CFO
Company intends to distribute all or substantially all of its REIT
taxable income
3 |
 Significant
Cheapening of Agency MBS Market 15 Year: Hedged vs. Unhedged
15 Year Fixed Hedged with Swaps: April 2009 –
May 2014
15 Year Hedged
(i)
15 Year Unhedged
(ii)
Borrow Short
Invest Long
May 15, 2014
4
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
Source: Bloomberg.
Note: Spreads calculated as: (i) 15 year CC Index = 50% 4 year swap, and (ii) 15 year
Current Coupon Index |
 Significant
Cheapening of Agency MBS Market 30 Year: Hedged vs. Unhedged
30 Year Fixed Hedged with Swaps: April 2009 –
May 2014
Borrow Short
Invest Long
30 Year Hedged
30 Year Unhedged
May 15, 2014
5
0.75
1.25
1.75
2.25
2.75
3.25
3.75
4.25
4.75
5.25
Source: Bloomberg
Note: Spread calculated as: (i) 30 year CC Index - 90% 5 year
swap |
 Volatility in
the Cap/Floor Markets Hit a Low in July 2013
30 Yr MBS -
15 Yr MBS Spread
7 Yr Cap/Floor Implied Vol
November 2012 –
May 2014
April 2012 –
May 2014
30 Year MBS Cheapened Meaningfully
Relative to 15 Year MBS
5 Year Swap vs. Fed Funds
January 2005 –
May 2014
Yield Curve
Creates positive carry
Very low cost of financing
Good ROE
Hedge flexibility very important
Fed still fighting deflation
30 Year MBS Now Priced for Operation Taper
and Tightening Monetary Policy 2015
May 15, 2014
May 15, 2014
Source: Bloomberg
6
May 15, 2014
-1.00
-0.50
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00
1.10
30.0
35.0
40.0
45.0
50.0
55.0
60.0
65.0
70.0
75.0 |
 Source: Board
of Governors of the Federal Reserve, March 19, 2014 Actual Economic Performance:
Sluggish vs. Fed Projections
7 |
 Appropriate
Timing of Policy Firming
Ten Year Treasury
August 2011 -
March 2014
and Implied Projection
•
Creates Significant Headwinds for the Economy
•
Housing Will Struggle
•
Corporate Interest Expense will rise
+25
-25
Appropriate Pace
of Policy Firming
Target Fed Funds Rate at Year End
Overview of FOMC Participants Assessments
of Appropriate Monetary Policy
Can the Economy Withstand
The Implied Path of 10 Year UST?
•
Forward Rate Guidance is the Fed’s Most Impactful Tool
•
Appropriate Timing and Pace will drive the Yield Curve
1.00
2.00
3.00
4.00
5.00
6.00
0.00
2014
2015
Longer
Run
%
%
Source: Federal Reserve March 2014 Forecast, Bloomberg, CYS
2016
Transition to a Normalized Yield Curve:
Will the Fed Push Out Forward Rate Guidance?
8
1
13
2
2014
2015
2016
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0 |
 2014-15 Fed
Voters: New Perspectives, Changing Outlooks
Powell
Source: federalreserve.gov, Barclays, Macroeconomic Advisers, LLC, Bank of America
Merrill Lynch, Bloomberg, Wall Street Journal, Indiana University, Marketwatch, Thomson Reuters, Federal Reserve
Bank of Atlanta, Federal Reserve Bank of Chicago, Federal Reserve Bank of Cleveland, Maryland
Consumer Rights Coalition, Boston Globe, Businessweek, Newsweek, Washington Post, CNBC.
Dallas:
Fisher
Minneapolis:
Kocherlakota
Philadelphia:
Plosser
Hawkish
Dovish
Neutral
2014
Voters
Fed governors are appointed by the president and subject to Senate confirmation.
District
bank
Fed
presidents
are
chosen
by
their
individual
banks’
Boards
of
Directors
with
a
degree of oversight from the Federal Reserve Board.
Raskin’s Successor
Cleveland:
Mester
Board of
Governors
2015
Voters
New York:
Dudley
Chicago:
Evans
Richmond:
Lacker
Atlanta:
Lockhart
San Francisco:
Williams
Fischer
Brainard
Stein’s Successor
New York:
Dudley
9
Yellen
Tarullo |
 Central
Banks: Decidedly More Accommodative -
Focus on Global Deflation Risk
Draghi
EU
Hawkish
Dovish
Neutral
Xiaochuan
China
Xiaochuan
China
Tombini
Brazil
Tombini
Brazil
Australia
Stevens
Australia
Stevens
New Zealand
Wheeler
New Zealand
Wheeler
Kuroda
Japan
Canada
Poloz
Rajan
India
Kuroda
Japan
Carney
UK
Yellin
USA
10 |
 GSE Reform
Headway Legislative
Level of
GSE
Credit Risk
Proposal
Government Involvement
Implication
Sharing
Status
Corker-Warner Bill
Limited: Only under
catastrophic scenarios where
losses on a pool of mortgages
exceeds 10%
Completely wound down over 5
years
10% first-loss piece is sold to
private entities
Corker-Warner is under committee
discussion but not yet put to vote.
Either one of these may become the
front runner from the Senate side but
both will likely have private capital in
the first loss place with several
mechanisms for risk sharing
Crapo-Johnson Bill
Unclear: reforms the FHA/VA
but maintains explicit
government guarantee of all
FHA/VA insured loans
Not yet addressed. May add GSE
portion in coming months
None currently but may resemble
Corker-Warner when the GSE
portion is included
PATH Act
Very limited: dissolves the
GSEs completely and reduces
the scope of the FHA/VA
guarantee
Placed into receivership and
completely liquidated with
Initially, a 10% risk-sharing
program on new GSE and FHA
business, although private market
securitization is intended
eventually to replace GSEs
No news. In early 2013, the Path Act
seemed to be the clear front-runner
on the House side. The final housing
finance reform, if it happens, could
be a compromise between the PATH
Act and whatever comes out of the
Senate
Delaney-Carney-Himes
Limited: Ginnie Mae is required
to provide an explicit
government guarantee once
the 5% risk slice is eroded
when one of the private
monoline insurers defaults
GSEs will be slowly wound down
and eventually converted into
private reinsurers with limited
capacities to take on mortgage
credit risk
5% first-loss piece on each new
Ginnie Mae securitization, as well as
a 10% pro-rata risk slice on the top
95% of each Ginnie Mae
securitization
Source: Barclays
11 |
 Economic
Recovery Below Normal Pace U.S. Regular Conventional Gas Price
$ per gal
Updated: 2014-04-21
Capacity Utilization: Manufacturing
Updated: 2014-05-15
Civilian Unemployment Rate
Updated: 2014-05-02
CPI-U All Items, Core
Updated: 2014-05-15
Total Nonfarm Private Payroll Employment
Updated: 2014-04-30
Total Unemployed + All Marginally Attached + Total
Employed Part Time for Economic Reasons
Updated: 2014-05-02
Source: Federal Reserve Bank of St. Louis
12 |
 Housing Finance
Has Not Rebounded Source: CoreLogic, FHFA, S&P, Bloomberg, Barclays Research,
National Association of Realtors, US Census Bureau, MBA, Inside Mortgage Finance Share of
Government Guaranteed Mortgages 1990
–
present
New and Existing Homes Months of Supply
January
2000
–-
December
2013
Home Ownership Rate
March
1990
–
present
13 |
 Mortgage Market
Shrinkage Likely to Continue Residential Mortgage Debt Decline Driven By:
Source: FRB, Freddie Mac
Mortgage Debt
Outstanding
2007
-2013
Mortgage Debt Outstanding
Growth Rate
0.00%
0.50%
1.00%
9.75
10.00
10.25
10.50
10.75
11.00
11.25
11.50
1.50%
2.00%
3.50%
4.00%
4.50%
0.50%
2.00%
1.50%
1.00%
9.50
8.75
9.00
9.25
Single Family
Mortgage Origination Volume
1992
–
2014E
1992
1997
2002
2007
2012
2.0T
1.9T
Refinance Originations
Home Purchase Originations
1,000
0
2,000
3,000
4,000
14
1.
Home prices now reset lower
2.
Delevering Consumers/Homeowners
3.
Psychology of lower leverage
4.
Low volume of new and existing home sales
5.
All-cash home purchase transactions, and higher downpayments
6.
Scheduled principal payments
7.
High percentage of cash-in refi’s versus cash-out refi’s.
8.
QM Rules Restrictive |
 Economics of
Forward Purchase Source: Bloomberg, May 16, 2014
15 |
 1
As of 3/31/14
$ in 000’s
Fair Value of Total Agency RMBS and U.S. Treasuries: $13,307,735
CYS Common Stock Dividends
September
2009
–
March
2014
CYS
Agency
RMBS
and
U.S.
Treasury
Portfolio
Portfolio Composition and Dividends
16
15 Year Fixed
Rate
48%
20 Year Fixed
Rate
1%
30 Year Fixed
Rate
24%
Hybrid ARMs
15%
U.S.
Treasury
Securities
12%
$0.00
$0.10
$0.20
$0.30
$0.40
$0.50
$0.60
$0.70
$0.80
$0.90
$1.00
1
Note: the December 2012 dividend was composed of $0.40 quarterly cash dividend, and $0.52 special cash
dividend. |
 CYS Agency
RMBS and U.S. Treasury Portfolio Characteristics* Portfolio Characteristics
Face Value
Fair Value
Weighted Average
Asset Type
(in thousands)
Cost/Face
Fair Value/Face
Yield
(1)
Coupon
CPR
(2)
15 Year Fixed Rate
$ 6,227,169
$ 6,432,461
$ 102.58
$ 103.30
2.31%
3.13%
5.6%
20 Year Fixed Rate
81,294
87,371
103.04
107.48
1.94%
4.50%
11.5%
30 Year Fixed Rate
3,149,975
3,263,950
103.24
103.62
3.32%
3.96%
4.1%
Hybrid ARMs
(3)
1,946,543
1,986,641
103.55
102.06
1.98%
2.56%
9.5%
U.S. Treasury Securities
1,550,000
1,537,312
99.61
99.18
1.68%
1.50%
NA
Total
17
* As of 3/31/14
(1)
This is a forward yield and is calculated based on the cost basis of the security at March
31, 2014. (2) CPR is a method of expressing the prepayment rate for a mortgage
pool that assumes that a constant fraction of the remaining principal is prepaid each
month or year. Specifically, the constant prepayment rate is an annualized version of the prior three month prepayment rate for those bonds
held at March 31, 2014. Securities with no prepayment history are excluded from this
calculation. (3) The weighted average months to reset of our Hybrid ARM portfolio
was 63.2 at March 31, 2014. Months to reset is the number of months remaining before
the fixed rate on a Hybrid ARM becomes a variable rate. At the end of the fixed period, the variable rate will be determined by the
margin and the pre-specified caps of the Hybrid ARM and will reset annually. $ 12,954,981
$ 13,307,735
$ 102.53
$
102.72 2.43%
3.06%
6.1% |
 (1)
Drop Income is a component of our net realized and unrealized gain (loss) on investments on
our consolidated statements of operations, and is therefore excluded from Core
Earnings. (2)
Core Earnings is defined as net income (loss) available to common shares excluding net
realized gain (loss) on investments, net unrealized gain (loss) on investments, net
realized gain (loss) on termination of swap and cap contracts and net unrealized gain
(loss) on swap and cap contracts. Financial Information
18
Drop
income
per
common
share
(diluted)
(1)
Core
Earnings
per
common
share
(diluted)
(2)
Income Statement Data
Three Months Ended
(In thousands, except per share numbers)
3/31/2014
12/31/2013
Total interest income
84,367
91,743
Interest expense
28,346
32,814
Net interest income
56,021
58,929
Other income (loss):
Net realized gain (loss) on investments
16,670
(22,650)
Net unrealized gain (loss) on investments
89,234
(167,671)
Net realized gain (loss) on termination of swap and cap contracts
(9,323)
(10,891)
Net unrealized gain (loss) on swap and cap contracts
(16,240)
54,633
Other income
119
-
Total other income (loss)
80,460
(146,579)
Total operating expenses
4,214
Net income (loss)
Dividends on preferred stock
Net income (loss) available to common shares
Net income (loss) per common share basic & diluted
$
0.07
$
0.07
$
0.31 Distributions per common share
$
0.32
$
0.32 Non-GAAP Measure/Reconciliation (in 000's)
NET INCOME (LOSS) AVAILABLE TO COMMON SHARES
$ 125,484
$ (97,067)
Net realized (gain) loss on investments
(16,670)
22,650
Net unrealized (gain) loss on investments
(89,234)
167,671
Net realized (gain) loss on termination of swap and cap contracts
9,323
10,891
Net unrealized (gain) loss on swap and cap contracts
16,240
(54,633)
Core Earnings
$ 45,143
$ 49,512
$
0.28
$
0.78
$
(0.59) 5,794
$ 130,687
$ (91,864)
(5,203)
(5,203)
$ 125,484
$ (97,067)
$
$ |
 The table
above includes calculations of the Company’s Agency RMBS and U.S. Treasury Securities portfolio (“Debt Securities”)
Financial Information
(in thousands)
Three Months Ended
Key Balance Sheet Metrics
March 31, 2014
December 31, 2013
Average settled Debt Securities
(1)
$12,472,238
$13,024,294
Average total Debt Securities
(2)
$13,454,972
$14,293,267
Average repurchase agreements
(3)
$10,867,627
$11,384,159
Average Debt Securities liabilities
$11,850,361
$12,653,132
Average stockholders' equity
(5)
$1,861,121
$1,896,360
Average common shares outstanding
(6)
161,831
163,850
Leverage ratio (at period end)
(7)
6.32:1
6.97:1
Key Performance Metrics*
Average yield on settled Debt Securities
(8)
2.71%
2.82%
Average yield on total Debt Securities including Drop Income
2.85%
2.93%
Average cost of funds and hedge
(10)
1.04%
1.15%
Adjusted average cost of funds and hedge
0.96%
1.04%
Interest rate spread net of hedge
(12)
1.67%
1.67%
Interest rate spread net of hedge including Drop Income
1.89%
1.89%
Operating expense ratio
(14)
1.25%
0.89%
19
1)
The average settled Debt Securities is calculated by averaging the month end cost basis of
settled Debt Securities during the period. 2)
The average total Debt Securities is calculated by averaging the
month end cost basis of total Debt Securities during the period.
3)
The average repurchase agreements are calculated by averaging the month end repurchase
agreements balance during the period. 4)
The average Debt Securities liabilities are calculated by adding
the average month end repurchase agreements balance plus average unsettled Debt Securities
during the period. 5)
The average stockholders' equity is calculated by averaging the month end stockholders' equity
during the period. 6)
The average common shares outstanding are calculated by averaging the daily common shares
outstanding during the period. 7)
The leverage ratio is calculated by dividing (i) the Company's repurchase agreements balance
plus payable for securities purchased minus receivable for securities sold by (ii) stockholders' equity.
8)
The average yield on Debt Securities for the period is calculated by dividing total interest
income by average settled Debt Securities. 9)
The average yield on total Debt Securities including Drop Income
for the period is calculated by dividing total interest income plus Drop Income by average
total Debt Securities. 10)
The average cost of funds and hedge for the period is calculated
by dividing interest expense by average repurchase agreements.
11)
The adjusted average cost of funds and hedge for the period is calculated by dividing interest
expense by average Debt Securities liabilities. 12)
The interest rate spread net of hedge for the period is calculated by subtracting average cost
of funds and hedge from average yield on settled Debt Securities. 13)
The interest rate spread net of hedge including Drop Income for the period is calculated by
subtracting adjusted average cost of funds and hedge from average yield on total Debt
Securities including Drop Income. 14)
The operating expense ratio for the period is calculated by dividing operating expenses by
average stockholders' equity. * All percentages are annualized.
(4)
(9)
(11)
(13) |
 Investment
Outlook Kevin Grant
Chief Executive Officer
Wells Fargo Securities Research & Economics
Specialty Finance Conference
May 20, 2014 |