Investment Outlook - September 2013 Kevin E. Grant, CFA Chief Executive Officer Exhibit 99.1 Barclays Global Financial Services Conference September 10, 2013 |
Forward Looking Statements 2 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 future distributions and market conditions, 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 Company’s distribution policy, changes in the Company’s ability to pay distributions, 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 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. |
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 37 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 |
Investment Environment: 15 Year - Hedged vs. Unhedged 15 Year Hedged (i) 15 Year Unhedged (ii) Borrow Short Invest Long Sept 6, 2013 15 Year Fixed Hedged with Swaps, April 2009 – September 2013 0.00 1.00 2.00 3.00 4.00 5.00 Source: Bloomberg. Note: Spreads calculated as: (i) 15 year CC Index = 50% 4 year swap, and (ii) 15 year Current Coupon Index 4 |
Investment Environment: 30 Year - Hedged vs. Unhedged 30 Year Hedged 30 Year Unhedged 5 30 Year Fixed Hedged with Swaps, April 2009 – September 2013 0.75 1.25 1.75 2.25 2.75 3.25 3.75 4.25 4.75 5.25 Borrow Short Invest Long Sept 6, 2013 Note: Spread calculated as: (i) 30 year CC Index - 90% 5 year swap Source: Bloomberg |
Volatility in the Cap/Floor Markets Hit a Low in Mid-March 30 Year MBS Cheapened Meaningfully Relative to 15 Year MBS Yield Curve Creates positive carry Very low cost of financing Good ROE Hedge flexibility very important Fed still fighting deflation 30 Year MBS Priced for Operation Taper Source: Bloomberg 6 April 2012 – Sept 2013 January 2005 – Sept 2013 5 Year Swap vs. 1 Month LIBOR 30 Yr MBS - 15 Yr MBS Spread 7 Yr Cap/Floor Implied Vol October 2012 – Sept 2013 |
7 Source: Board of Governors of the Federal Reserve Actual Economic Performance: Sluggish vs. Fed Projections |
8 Appropriate Timing of Policy Firming Ten Year Treasury August 2011 – September 2013, 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 % Transition to a Normalized Yield Curve: Will the Fed’s Forecast Pan Out? Source: Federal Reserve June 2013 Forecast, Bloomberg, CYS 1 3 14 1 3.5 4.5 4 3 2.5 2 1.5 1 0.5 0 |
Operation Taper: Confused Messaging or Intentional Market Test? • Refi Activity has Rapidly Dropped - Gain on sale windfall may be over • Purchase Activity slower to react • Origination Volume Will Decrease Before the Joint Economic Committee, U.S. Congress May 22, 2013 Primary Mortgage Rate January 2012 - Sept 2013 "If we see continued improvement and we have confidence that that's going to be sustained then we could in the next few meetings ... take a step down in our pace of purchases." • Banks Will be Pushed to Government Bonds - Gov’t ROE’s now better than Credit ROE’s • Home Affordability Now Diminished “What is the Fed’s exit strategy, the steps you’ll undertake and when do you anticipate executing this? “ Source: Thomson Reuters, Bloomberg JEC Chair Brady Federal Reserve Chairman Bernanke 9 3.30 3.50 3.70 3.90 4.10 4.30 4.50 4.70 |
Fed Guidance – Markets Expect a Change Soon “…keep the target range for the federal funds rate at 0 to 1/4 percent and anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.” 1 FOMC Meeting Minutes, September 2012 , Released October 4, 2012 “… maintain its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities..” “…increase policy accommodation by purchasing additional agency mortgage- backed securities at a pace of $40 billion per month.” No Change May Vary Pace Up/Down No Change 10 Post Testimony Testimony Prior to May 22 1 |
Fed Voters: Imminent Turnover Creates Substantial Uncertainty Duke Yellen Raskin Powell Stein Pianalto Evans Bullard George 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. Fisher Kocherlakota Plosser Hawkish Dovish Neutral Bernanke 2013 Voters 2014 Voters Summers Tarullo X = resigned, or term ending in 2014 ? = role uncertain 11 Dudley Rosengren Dudley |
12 Yellen (Age 66) Summers (Age 59) Quantitative Easing Believes QE is effective, indeed powerful. Source: Macroeconomic Advisers, Barclays Balance Sheet Expansion Policies Must be considered in a cost-benefit framework. Focused on financial stability risks, has concerns regarding costs of further expanding the Fed’s balance sheet. Must be considered in a cost-benefit framework. Favors more aggressive asset purchase programs than Bernanke - and than the FOMC - undertook. Forward Guidance Links financial stability risks to rates being very low for too long - i.e.any policy that keeps rates lower for longer. Less inclined to move to more-aggressive forward rate guidance. Prefers more aggressive forward rate guidance than the FOMC. Labor Force Participation Concerned about hysteresis, but believes that there is not much evidence of an increase in structural unemployment. Yellen likely more inclined to delay. Concerned about hysteresis, but inclined to believe that cyclical unemployment may have already become structural unemployment. If Summers believes that there could be less slack in the economy (than Yellen), he may be more likely to raise rates when the unemployment rate reaches 6½%. Thesis Developing on a Larry Summers Fed: Significant Questions about FOMC Approach in 2014 - 2018 (- 2022?) In the short term, Yellen and Summers are more alike than different, and both are constrained by current FOMC and Chairman guidance - monetary policy will remain broadly the same. Policy differences will arise only if the economy evolves differently from FOMC expectations. Skeptical, and more concerned about financial stability risks of a very long period of low rates. More cautious about increasing the pace of asset purchases, should the economy weaken. |
13 Summers’ Approval Process: A Prolonged, Rocky Path Through a Liberal Gauntlet 1 No Republican has expressed support for any Obama nominee. Many Republicans are critical of Summers’ support of stimulus spending programs and Dodd-Frank. Democrats hold a two vote majority, however, at least three democrats are expected to oppose Summers. Losing three Democrats will preempt Summers’ advancing to Senate confirmation vote without Republican backing. In July, over 1/3 of the Senate Democratic caucus signed a letter urging Obama to nominate Yellen. Senate Banking Committee N = 22 1 Wall Street Journal, Sept. 6, 2013 2 Huffington Post, Sept. 5, 2013 Committee Member Status Mike Crapo, ID (Rnkg Member) No support expressed Bob Corker TN No support expressed Tom Coburn, OK No support expressed Dean Heller, NV No support expressed Mike Johanns NE No support expressed Mark Kirk, IL No support expressed Jerry Moran, KS No support expressed Richard Shelby, AL No support expressed Patrick J. Toomey, PA No support expressed David Vitter, LA No support expressed Committee Member Status Tim Johnson, SD (Chairman) Likely In Favor¹ Sherrod Brown OH Likely Against¹ Kay Hagan, NC Potentially Against² Heidi Heitkamp, ND Unknown Joe Manchin III, WV Unknown Robert Menendez, NJ Unknown Jeff Merkley, KS Likely Against¹ Jack Reed, RI Unknown Charles E. Schumer, NY Unknown Jon Tester, MT Unknown Mark R. Warner, IL Unknown Elizabeth Warren, MA Likely Against¹ R: 10 D: 12 |
Central Banks: Decidedly More Accommodative - Focus on Global Deflation Risk 14 Note: Raghuram Rajan succeeded Duvvuri Subbarao as the 23rd Governor of the Reserve Bank of India on September 4, 2014. Draghi EU Hawkish Dovish Neutral Draghi EU Bernanke USA Rajan India Kuroda Japan Canada Poloz Kuroda Japan Carney UK Xiaochuan China Xiaochuan China Australia Stevens Australia Stevens New Zealand Wheeler New Zealand Wheeler Tombini Brazil Tombini Brazil |
Update: GSE Reform • Wind Down FNMA & FreddieMac over 5 Years • Existing Securities Become Explicit Full Faith & Credit of US Treasury (like GNMAs) U.S. Senators Bob Corker, R-Tenn., Mark Warner, D-Va., Mike Johanns, R-Neb., Jon Tester, D-Mont., Dean Heller, R-Nev., Heidi Heitkamp, D-N.D., Jerry Moran, R-Kan., and Kay Hagan, D-N.C., all members of the Senate Banking, Housing and Urban Affairs Committee • Creates Federal Mortgage Insurance Corp. (FMIC) • Credit Support comes in the form of Insurance • Managed by a Government Technocrat • No Portfolio Business • Obama supports principal ideas in this bill. • Bipartisan support on the Senate Banking Committee FNMAs and Freddie Macs converge on GNMA Prices Committee Hearings and markup this Fall, potential for 2014 adoption • Simpler, fungible securities • TBA market intact • New “Insurance Tranches” traded by Institutional Investors Impact Corker Warner Provisions 15 |
Economic Recovery Below Normal Pace U.S. Regular Conventional Gas Price $ per gal Updated 9/3/2013 Capacity Utilization: Manufacturing % Updated 8/15/2013 Civilian Unemployment Rate % Updated 9/6/2013 CPI-U All Items, Core % Change - Year to Year Updated 8/15/2013 Total Nonfarm Private Payroll Employment Updated 9/5/2013 Total Unemployed + All Marginally Attached + Total Employed Part Time for Economic Reasons (U6) Updated 9/6/13 Source: S&P, Federal Reserve Bank of St. Louis, Fiserv, and Macromarkets LLC / Haver Analytics, BLS, Challenger, Gray & Christmas, US Dept. of Energy, NYMEX 16 |
Mortgage Market Shrinkage Likely to Continue 17 Residential Mortgage Debt Decline Driven By: 1. 2. 3. 4. 5. 6. 7. 8. Mortgage Debt Outstanding 2007 -2013 Source: FRB, Freddie Mac Single Family Mortgage Origination Volume 1992 – 2013E 1992 1997 2002 2007 2012 2.0T 1.9T Refinance Originations Home Purchase Originations 1,000 0 2,000 3,000 4,000 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 Home prices now reset lower Delevering Consumers/Homeowners Psychology of lower leverage Low volume of new and existing home sales All-cash home purchase transactions, and higher downpayments Scheduled principal payments High percentage of cash-in refi’s versus cash-out refi’s. QM Rules Restrictive |
Economics of Forward Purchase Source: Bloomberg, 9/6/13 18 |
19 Portfolio Composition and Dividends 1 As of 6/30/13 Total Agency RMBS: $17,211 million CYS Common Stock Dividends September 2009 – June 2013 CYS Agency RMBS Portfolio Hybrid ARMs: 15% 15 Year Fixed: 34% 30 Year Fixed: 45% 20 Year Fixed: 6% 1 Note: the December 2012 dividend was composed of $0.40 quarterly cash dividend, and $0.52 special cash dividend. $0.00 $0.10 $0.20 $0.30 $0.40 $0.50 $0.60 $0.70 $0.80 $0.90 $1.00 |
20 Portfolio Characteristics CYS Agency RMBS Portfolio Characteristics* * As of 6/30/13 Par Value Fair Value Weighted Average Asset Type (in thousands) Cost/Par Fair Value/Par MTR (1) Coupon CPR (2) 15 Year Fixed Rate $5,582,309 $5,773,741 $104.51 $103.43 N/A 3.17% 15.2% 20 Year Fixed Rate 1,028,057 1,044,339 104.91 101.58 N/A 3.15% 7.6% 30 Year Fixed Rate 7,683,260 7,837,908 104.30 102.01 N/A 3.59% 7.8% Hybrid ARMs 2,511,218 2,555,271 103.74 101.75 74.8 2.59% 17.4% Total/Weighted Average $16,804,844 $17,211,259 $104.32 $ 102.42 3.27% 13.5% (2) CPR, or “Constant Prepayment Rate,” 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. Securities with no prepayment history are excluded from this calculation. (1) MTR, or “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 ARM. After the fixed period, 100% of the hybrid ARMS in the portfolio reset annually. |
21 (1) Drop income is a component of our net income accounted for as net gain from investments on our statement of operations and therefore excluded from our Core Earnings. (2) Core earnings is defined as net income (loss) available to common shares excluding net gain (loss) on investments, net realized gain (loss) on termination of swap and cap contracts and unrealized appreciation (depreciation) on swap and cap contracts. Financial Information Three Months Ended Income Statement Data (in 000's) 6/30/2013 3/31/2013 Total investment income $ 81,551 $ 73,101 Interest expense 14,047 15,031 Operating expenses 5,671 5,553 Total expenses 19,718 20,584 Net investment income 61,833 52,517 Net gain (loss) from investments (656,295) (78,811) Net gain (loss) from swap and cap contracts 196,176 10,091 Net income (loss) (398,286) (16,203) Dividend on preferred shares (3,995) (1,453) Net income (loss) available to common shares ($402,281) ($17,656) Net income (loss) per common share (diluted) ($2.32) ($0.10) Drop income per common share (diluted) $0.19 $0.15 Core Earnings per common share (diluted) $0.18 $0.17 Distributions per common share $0.34 $0.32 Non-GAAP Measure/Reconciliation (in 000's) NET INCOME (LOSS) AVAILABLE TO COMMON SHARES (402,281) (17,656) Net (gain) loss from investments 656,295 78,811 Net (gain) loss from termination of swap and cap contracts (7,329) (8,630) Net unrealized (appreciation) depreciation on swap and cap contracts (215,546) (23,417) Core Earnings $31,139 $29,108 (2) (1) |
22 (1) The average settled Agency RMBS is calculated by averaging the month end cost basis of settled Agency RMBS during the period. (2) The average total Agency RMBS is calculated by averaging the month end cost basis of Agency RMBS during the period. (3) The average repurchase agreements are calculated by averaging the month end repurchase agreements balance during the period. (4) The average Agency RMBS liabilities are calculated by averaging the month end repurchase agreements balance plus average unsettled Agency RMBS during the period. (5) The average net assets are calculated by averagingthe month end net assets during the period. (6) The average common shares outstanding are calculated by averaging the daily common shares outstanding during the period. (7) The leverageratio is calculated by dividing (i) the Company's repurchase agreements balance plus payable for securities purchased minus receivable for securities sold by (ii) net asset. (8) The average yield on settled Agency RMBS for the period is calculated by dividing interest income from Agency RMBS by average settled Agency RMBS. (9) The average yield on total Agency RMBS including drop income for the period is calculated by dividing interest income from Agency RMBS plus drop income by average totalAgency RMBS. (10) The average cost of funds and hedge for the period is calculated by dividing total interest expense, including net swap and cap interest income (expense), by average repurchase agreements. (11) The adjusted average cost of funds and hedge for the period is calculated by dividingtotal interest expense, including net swap and cap interestincome (expense), by average Agency RMBS 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 Agency RMBS. (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 total yield on Agency RMBS including drop income assets. (14) The operating expense ratio for the period is calculated by dividing operating expenses by average net assets. *All percentages are annualized. Three Months Ended Key Balance Sheet Metrics June 30, 2013 March 31, 2013 Average settled Agency RMBS (1) $15,974,500 $16,066,672 Average total Agency RMBS (2) $19,944,791 $20,200,479 Average repurchase agreements (3) $13,871,404 $14,107,740 Average Agency RMBS liabilities (4) $17,841,695 $18,241,547 Average net assets (5) $2,321,128 $2,357,333 Average common shares outstanding (6) 174,145 174,864 Leverage ratio (at period end) (7) 7.5:1 7.8:1 Key Performance Metrics* Average yield on settled Agency RMBS (8) 2.03% 1.80% Average yield on total Agency RMBS including drop income (9) 2.27% 1.97% Average cost of funds and hedge (10) 1.17% 1.05% Adjusted average cost of funds and hedge (11) 0.91% 0.81% Interest rate spread net of hedge (12) 0.86% 0.75% Interest rate spread net of hedge including drop income (13) 1.36% 1.16% Operating expense ratio (14) 0.98% 0.94% Financial Information |
History of Transparent and Consistent Financial Reporting CYS uses Financial Reporting for Investment Companies CYS Financial Reporting – Transparent and Best in Class Schedule of investments NAVs have reflected mark-to-market accounting since inception Realized and unrealized losses taken through income statement in period incurred No OCI account on balance sheet 23 |
Barclays Global Financial Services Conference September 10, 2013 Investment Outlook - September 2013 Kevin E. Grant, CFA Chief Executive Officer |