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| 8-K - 8-K - CYS Investments, Inc. | d820737d8k.htm |
 Kevin
Grant Chief Executive Officer
Investment Outlook
Banking and Financial Services Conference
November 13, 2014
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 45
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 |
 Agency MBS Market
Continues To See Strong Demand 15 Year: Hedged vs. Unhedged
15 Year Fixed Hedged with Swaps: April 2009 –
November 2014
15
Year
Hedged
(i)
15
Year
Unhedged
(ii)
Borrow Short
Invest Long
November 7, 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 –
November 2014
Borrow Short
Invest Long
30 Year Hedged
30 Year Unhedged
November 7, 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 –
November 2014
April 2012 –
November 2014
•
30 Year MBS Have Cheapened
Meaningfully Relative to 15 Year
MBS
5 Year Swap vs. Fed Funds
January 2005 –
November 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
6
Source: Bloomberg
November 7, 2014
November 7, 2014
November 7, 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 |
 Global Ten Year
Yields: Is U.S. Growth Out of Sync with Rest of World?
GDBR10
(1.185)
USGG10YR
0.338
GCAN10YR
(0.232)
GJGB10
(0.520)
Government Ten Year Yields
UK, US, Canada, Germany, Japan
August 2011 –
November 2014
Source: Bloomberg, November 7, 2014
7
GBTPGR10
(0.031)
0.00
0.50
1.00
1.50
2.00
2.50
3.00 |
 Actual Economic
Performance: Sluggish vs. Fed Projections
8
Source: Board of Governors of the Federal Reserve, September 17, 2014
|
 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?
Transition to a Normalized Yield Curve:
Will the Fed Push Out –
or Pull In -
Forward Rate Guidance?
9
Ten Year Treasury
August 2011 -
November 2014
and Implied Projection
+25
-25
%
%
2014
2015
2016
2017
1.0
2.0
3.0
4.0
5.0
0.0
1.5
2.5
3.5
4.5
0.5
Appropriate Pace
of Policy Firming
Target Fed Funds Rate at Year End
Longer Run
Source: Federal Reserve September 2014 Forecast, Bloomberg, CYS
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
1
14
2
2014
2015
2016 |
 2014-16 Fed
Voters: New Perspectives, Changing Outlooks
Powell
Dallas:
Fisher
Minneapolis:
Kocherlakota
Philadelphia:
Plosser
Hawkish
Dovish
Neutral
Yellen
Raskin’s Successor
Board of
Governors
New York:
Dudley
Chicago:
Evans
Richmond:
Lacker
Atlanta:
Lockhart
San Francisco:
Williams
Fischer
Brainard
Tarullo
Cleveland:
Mester
Stein’s Successor
New York:
Dudley
10
New York:
Dudley
Cleveland:
Mester
Boston:
Rosengren
Kansas City:
George
St. Louis:
Bullard
2014
Voters
2015
Voters
2016
Voters
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. |
 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: 2014-11-03
Capacity Utilization: Manufacturing
Updated: 2014-10-16
Civilian Unemployment Rate
Updated: 2014-11-07
CPI-U All Items
Updated: 2014-10-22
Total Nonfarm Private Payroll Employment
Updated: 2014-11-05
Total Unemployed + All Marginally Attached + Total
Employed Part Time for Economic Reasons
Updated: 2014-11-07
Source: Federal Reserve Bank of St. Louis
13 |
 Housing Finance
Has Not Rebounded Source: St Louis Fed, www.census.gov
14
New Homes
Existing Homes
Homeownership Rate
Seasonally Adjusted Homeownership Rate
Recession
1995 1997
1999 2001 2003 2005 2007
2009 2011 2013 2014
70
69
68
67
66
65
64
63
Share of Government Guaranteed Mortgages
New and Existing Homes Months of Supply
Home Ownership Rate
January 1999 – present
1990 – 2013
January 1985 - present (%)
|
 Mortgage Market
Shrinkage Likely to Continue 15
3.0%
3.5%
4.0%
Single Family
Mortgage Origination Volume
2000-2015E
2000
2005
2010
2012
2013
Est.
2014
Fcst.
2015
Fcst.
1,000
2,000
3,000
4,000
Mortgage Debt Outstanding
2007-2014
Mortgage Debt Outstanding
Growth Rate
Source: http://www.federalreserve.gov/econresdata/releases/mortoutstand/current.htm
9,000
9,500
10,000
10,500
11,000
11,500
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
Refinance Originations
1.9T
1.1T
1.3T
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
Home Purchase Originations |
 Economics of
Forward Purchase Source: Bloomberg, November 7, 2014
16 |
 1
As of 9/30/14
2
Annualized dividend yield is calculated using the stock price at the quarter end.
$14.5B Agency RMBS and U.S. Treasuries Portfolio
CYS Common Stock Dividends
September
2009
-
September
2014
CYS
Agency
RMBS
and
U.S.
Treasury
Portfolio
1
Portfolio Composition and Dividends
17
20 Year
Fixed Rate:
1%
30 Year
Fixed Rate: 36%
Agency
Hybrid
ARMs: 13%
U.S.
Treasuries:
4%
15 Year
Fixed Rate: 46%
Dividend
Special Dividend
Annualized
Dividend
Yield
(2)
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
$0.00
$0.10
$0.20
$0.30
$0.40
$0.50
$0.60
$0.70
$0.80
$0.90
$1.00
Note: the December 2012 dividend was composed of $0.40 quarterly cash dividend, and $0.52
special cash dividend.
|
 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
$
6,422,985
$
6,670,579
$
102.89
$
103.85
2.20
%
3.17
%
8.5%
20 Year Fixed Rate
71,568
78,005
102.98
108.99
1.34
%
4.50
%
15.4%
30 Year Fixed Rate
4,987,788
5,267,793
105.13
105.61
2.97
%
4.02
%
5.9%
Hybrid ARMs
(3)
1,857,254
1,901,530
103.48
102.38
1.94
%
2.57
%
15.5%
U.S. Treasury Securities
560,000
556,150
99.33
99.31
1.77
%
1.63
%
NA
Total
$
13,899,595
$
14,474,057
$
103.63
$
104.13
2.42
%
3.34
%
9.2%
CYS Agency RMBS and U.S. Treasury Portfolio Characteristics*
*
As of 9/30/14
(1)
This is a forward yield and is calculated based on the cost basis of the security at
September 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 September 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 59.8 at September30,
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
Income Statement Data
(In thousands, except per share numbers)
Sept. 30, 2014
June 30, 2014
Total interest income
77,132
71,978
Total interest expense
33,446
27,039
Net interest income
43,686
44,939
Other income (loss):
Net realized gain (loss) on investments
40,470
33,118
Net unrealized gain (loss) on investments
(112,085)
157,479
Net realized gain (loss) on termination of swap and cap contracts
(6,004)
Net unrealized gain (loss) on swap and cap contracts
58,909
(65,181)
Other income
50
50
Total other income (loss)
(12,656)
119,462
Total expenses
6,045
6,020
Net income (loss)
24,985
$
158,381
$
Dividends on preferred stock
(5,203)
(5,203)
Net income (loss) available to common shares
19,782
$
153,178
$
Net income (loss) per common share basic & diluted
0.12
$
0.95
$
Drop income per common share (diluted)
(1)
0.11
$
0.12
$
Core Earnings per common share (diluted)
(2)
0.20
$
0.21
$
Distributions per common share
0.30
$
0.32
$
Non-GAAP Measure/Reconciliation (in 000's)
NET INCOME (LOSS) AVAILABLE TO COMMON SHARES
$19,782
$153,178
Net realized (gain) loss on investments
(40,470)
(33,118)
Net unrealized (gain) loss on investments
112,085
(157,479)
Net realized (gain) loss on termination of swap and cap contracts
-
6,004
Net unrealized (gain) loss on swap and cap contracts
(58,909)
65,181
Core Earnings
$32,488
$33,766
Three Months Ended |
 Financial
Information 20
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 for the period is calculated by dividing repurchase agreement
interest expense by average amount of repurchase agreements outsending for the period.
11)
The average cost of funds and hedge for the period is calculated by dividing interest expense
by average repurchase agreements.
12)
The adjusted average cost of funds and hedge for the period is calculated by dividing interest
expense by average Debt Securities liabilities. 13)
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.
14)
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.
15)
The operating expense ratio for the period is calculated by dividing operating expenses by
average stockholders' equity. The table above includes calculations of the Company’s Agency RMBS and U.S.
Treasury Securities portfolio (“Debt Securities”) * All
percentages are annualized. (In thousands, except per share numbers)
Three Months Ended
Key Balance Sheet Metrics
Sept. 30, 2014
June 30, 2014
Average settled Debt Securities
(1)
$ 11,837,201
$ 11,599,873
Average total Debt Securities
(2)
$ 14,138,849
$ 13,711,749
Average repurchase agreements
(3)
$ 10,189,360
$ 9,981,049
Average Debt Securities liabilities
(4)
$ 12,491,008
$ 12,092,925
Average stockholders' equity
(5)
$ 1,937,700
$ 1,916,575
Average common shares outstanding
(6)
Leverage ratio (at period end)
(7)
6.63:1
6.35:1
Key Performance Metrics* (in %)
Average yield on settled Debt Securities
(8)
2.61
2.48
Average yield on total Debt Securities including drop income
(9)
2.67
2.67
Average cost of funds
(10)
0.30
0.30
Average cost of funds and hedge
(11)
1.31
1.08
Adjusted average cost of funds and hedge
(12)
1.07
0.89
Interest rate spread net of hedge
(13)
1.30
1.40
Interest rate spread net of hedge including drop income
(14)
1.60
1.78
Operating expense ratio
(15)
1.25
1.26 |
 Kevin
Grant Chief Executive Officer
Investment Outlook
Banking and Financial Services Conference
November 13, 2014 |