Kevin Grant Chief Executive Officer Barclays Global Financial Services Conference September 8, 2014 Exhibit 99.1 Investment Outlook |
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 Agency Residential Mortgage Backed Securities Financing lines with 43 lenders Swap agreements with 18 counterparties Self managed: highly scalable Kevin Grant, CEO, President, Chairman Frances Spark, CFO Company intends to distribute all or substantially all of its REIT taxable income 3 Target Assets Senior Management Focus on Cost Efficiency Ample Financing Sources Dividend Policy A Real Estate Investment Trust Formed in January 2006 |
Agency MBS Market Continues To See Strong Demand 15 Year: Hedged vs. Unhedged 15 Year Fixed Hedged with Swaps: April 2009 – September 2014 15 Year Hedged (i) 15 Year Unhedged (ii) Borrow Short Invest Long September 5, 2014 4 Source: Bloomberg. 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00 Note: Spreads calculated as: (i) 15 year CC Index = 50% 4 year swap, and (ii) 15 year Current Coupon Index |
Agency MBS Market Continues To See Strong Demand 30 Year: Hedged vs. Unhedged Source: Bloomberg 30 Year Fixed Hedged with Swaps: April 2009 – September 2014 Borrow Short Invest Long 30 Year Hedged 30 Year Unhedged September 5, 2014 5 0.75 1.25 1.75 2.25 2.75 3.25 3.75 4.25 4.75 5.25 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 – September 2014 April 2012 – September 2014 30 Year MBS Cheapened Meaningfully Relative to 15 Year MBS 5 Year Swap vs. Fed Funds January 2005 – September 2014 Yield Curve Creates positive carry Very low cost of financing Good ROE Hedge flexibility very important Fed still fighting deflation End of QE Poses New Risks and New Opportunities September 5, 2014 6 Source: Bloomberg September 5, 2014 September 5, 2014 30.0 35.0 40.0 45.0 50.0 55.0 60.0 65.0 70.0 75.0 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1.00 1.10 -1.00 -0.50 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 |
Global Ten Year Yields: Is U.S. Growth Out of Sync with Rest of World? GDBR10 (1.014) USGG10YR 0.362 GBTPGR10 0.008 GCAN10YR (0.271) GJGB10 (0.513) Government Ten Year Yields UK, US, Canada, Germany, Japan September 2011 - September 2014 Source: Bloomberg 7 0.00 0.25 0.50 0.75 1.00 1.25 1.50 1.75 2.00 2.25 2.50 2.75 3.00 3.25 |
Source: Board of Governors of the Federal Reserve, June 18, 2014 Actual Economic Performance: Sluggish vs. Fed Projections 8 |
Appropriate Timing of Policy Firming • Creates Significant Headwinds for the Economy • Housing Will Struggle • Corporate Interest Expense will rise 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 June 2014 Forecast, Bloomberg, CYS 2016 Transition to a Normalized Yield Curve: Will the Fed Push Out – or Pull In - Forward Rate Guidance? 9 Ten Year Treasury August 2011 - September 2014 and Implied Projection +25 -25 % Appropriate Pace of Policy Firming Target Fed Funds Rate at Year End 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 1 12 3 2014 2015 2016 |
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 Yellen 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 Tarullo Stein’s Successor New York: Dudley 10 |
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 11 |
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 under committee discussion but not yet put to vote. Either 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 Senate Banking Committee voted in favor of the bill 13-9 on May 15. Insufficient support to allow the bill to be brought to the Senate floor for debate/vote. Johnson - Crapo Bill Based on Corker-Warner, limited: only on scenarios where losses on a pool of mortgages exceeds a 10% private loss position. GSE’s wound down over 5 year period, replaced by FMIC. Similar to Corker-Warner, 10% first-loss piece is sold to private entities. 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, CYS 12 |
Economic Recovery Below Normal Pace U.S. Regular Conventional Gas Price $ per gal Updated: 2014-09-02 Capacity Utilization: Manufacturing Updated: 2014-08-15 Civilian Unemployment Rate Updated: 2014-09-05 CPI-U All Items, Core Updated: 2014-08-19 Total Nonfarm Private Payroll Employment Updated: 2014-09-04 Total Unemployed + All Marginally Attached + Total Employed Part Time for Economic Reasons Updated: 2014-09-05 Source: Federal Reserve Bank of St. Louis 13 |
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 – 2013 New and Existing Homes Months of Supply January 1999 - present Home Ownership Rate January 1985- present 14 New Homes Existing Homes |
Mortgage Market Shrinkage Likely to Continue 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 2000 - 2015E 15 Residential Mortgage Debt Decline Driven By: 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 2000 2005 2010 2012 2013 Est. 2014 Fcst. 2015 Fcst. 1,000 2,000 3,000 4,000 Refinance Originations Home Purchase Originations 1.9T 1.3T 1.1T |
Economics of Forward Purchase Source: Bloomberg, September 5, 2014 16 |
1 As of 6/30/14 $ in 000’s $14.2B Agency RMBS and U.S. Treasuries Portfolio CYS Common Stock Dividends September 2009 – June 2014 CYS Agency RMBS and U.S. Treasury Portfolio 1 Portfolio Composition and Dividends 17 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% $0.00 $0.10 $0.20 $0.30 $0.40 $0.50 $0.60 $0.70 $0.80 $0.90 $1.00 Dividend Special Dividend Annualized Dividend Yield 15 Year Fixed Rate 45% 30 Year Fixed Rate 26% Hybrid ARMs 14% US Treasury Securities 14% 20 Year Fixed Rate 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 18 Face Value Fair Value Weighted Average Asset Type (in thousands) Cost/Face Fair Value/Face Yield (1) Coupon CPR (2) 15 Year Fixed Rate $ 6,090,446 $ 6,368,659 $ 102.66 $ 104.57 1.99% 3.15% 6.2% 20 Year Fixed Rate 75,567 82,467 103.01 109.13 1.14% 4.50% 22.0% 30 Year Fixed Rate 3,511,537 3,725,156 103.97 106.08 2.73% 3.99% 5.9% Hybrid ARMs (3) 1,920,595 1,970,318 103.51 102.59 1.87% 2.57% 12.9% U.S. Treasury Securities 2,050,000 2,050,562 99.78 100.03 1.34% 1.35% NA Total $ 13,648,145 $ 14,197,162 $ 102.69 $ 104.02 2.06% 3.02% 7.6% * As of 6/30/14 (1) This is a forward yield and is calculated based on the cost basis of the security at June 30, 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 June 30, 2014. Securities with no prepayment history are excluded from this calculation. (3) The weighted average months to reset of our Hybrid ARM portfolio was 61.1 at June 30, 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. |
(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 19 |
Financial Information 20 The table above includes calculations of the Company’s Agency RMBS and U.S. Treasury Securities portfolio (“Debt Securities”) * All percentages are annualized. 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. |
Kevin Grant Chief Executive Officer Barclays Global Financial Services Conference September 8, 2014 Investment Outlook |