Attached files
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| 8-K - FORM 8-K - CYS Investments, Inc. | d355080d8k.htm |
 Investment
Outlook May 2012
2012 Specialty Finance Symposium
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 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. 1
|
 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
Currently
financing
lines
with
34
lenders
Swap agreements with 18 counterparties
Dividend Policy
Self managed: highly scalable
Objective
Senior Management
Kevin Grant, CEO, President, Chairman
Frances Spark, CFO
Pay dividends and achieve capital appreciation throughout changing interest
rate and credit cycles
Be the most efficient Agency REIT in the market
Company intends to distribute all or substantially all of its REIT taxable
income 2 |
 -1.000
-0.500
0.000
0.500
1.000
1.500
2.000
2.500
3.000
3.500
Attractive Environment Likely to Persist
Steep Curve
Creates significant positive carry
Very low cost of financing
Significant ROE
Hedge flexibility very important
Fed still fighting deflation
5
Year
Swap
vs.
1
Month
LIBOR:
1/2005
–
5/2012
5/1
Hybrid
Net
Interest
Margin:
1/2005
–
5/2012
Source; Bloomberg
(1) May 18, 2012
Mortgage Yields Currently Attractive
Par-Priced 7/1 hybrid rates now 1.61%
(1)
30 Year fixed rates now 2.87%
(1)
15 Year fixed rates now 2.27%
(1)
Hedging rates historically low
May 18, 2012
May 18, 2012
3
0.00
1.00
2.00
3.00
4.00
5.00 |
 Attractive Investment Environment Remains
Source: Bloomberg.
Note: Spreads
calculated
as:
(i)
15
year
CC
Index
=
50%
4
year
swap,
and
(ii)
15
year
Current
Coupon
Index
15 Year Hedged
(i)
15 Year Unhedged
(ii)
4
May 18, 2012
15
Year
Fixed
Hedged
with
Swaps:
1/1/2005
–
5/18/2012 |
 Treasury Auction Volume
10 Year Treasury Note Auctions
11/98 –
4/12
2 Year Treasury Note Auctions
2/98 –
4/12
3 Year Treasury Note Auctions
10/98 –
4/12
Source: Bloomberg, US Treasury
5 Year Treasury Note Auctions
2/98 –
4/12
7 Year Treasury Note Auctions
2/00 –
4/12
30 Year Treasury Note Auctions
2/00–
4/12
0
5
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15
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5 |
 Hawkish
Dovish
Neutral
Lacker
Duke
Tarullo
Lockhart
Pianalto
Yellen
Raskin
Bernanke
Governors
2012 Voters
Fed Voters Moving To Be Even More Dovish in 2012
Williams
2013 Voters
Dudley
Evans
Rosengren
Bullard
Powell
Stein
Sources: federalreserve.gov, 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. Dudley
George
6 |
 The
Brief Hawkish Interlude Appears Over Xiaochuan
China
Bernanke
USA
Shirakawa
Japan
Canada
Carney
Australia
Stevens
New Zealand
Bollard
Draghi
EU
Tombini
Brazil
Subbarao
India
Global Accommodation has Reluctantly Restarted
Hawkish
Dovish
Neutral
Draghi
EU
Ignatiev
Russia
Shirakawa
Japan
Subbarao
India
7 |
 The
Iowa Electronic Futures Market: Obama re-elected and a Republican
Congress Democrat
Republican
Republican House/
Republican Senate
Republican House/
Democrat Senate
Democrat House/
Democrat Senate
Democrat House/
Republican Senate
Source: The Iowa Electronic Markets
2012 US Presidential Election Winner Takes All Market
2012 Congressional Control Winner-Takes-All Market
As of March 1
As of March 1
As of May 17
As of May 17
Republican House/
Democrat Senate
Democrat House/
Democrat Senate
Democrat House/
Republican Senate
Republican House/
Republican Senate
Democrat
Republican
8 |
 Source: S&P, Fiserv, and Macromarkets LLC / Haver Analytics, BLS, Challenger,
Gray & Christmas, US Dept. of Energy, NYMEX U.S. Retail Gasoline Price, Regular
Grade 1976 –
Present
Capacity Utilization: Manufacturing
1972 –
Present
%
Civilian Unemployment Rate
1947 -
present
%
Economic Recovery Below Normal Pace
CPI-U All Items, Core
2006 –
Present
% Change -
Year to Year
Total Nonfarm Private Payroll Employment
2005-present
000’s
Challenger, Gray & Christmas, Inc.
Job Cut Announcement Report
1/2007 –
3/2012, by Quarter
9 |
 Mortgage Market Shrinkage Likely to Continue
Residential Mortgage Debt Decline Driven By:
1.
Declining home prices
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 refis versus cash-out refis.
Quarterly Growth in
Residential Mortgage Debt
Q22003
–
Q4
2010
Source: BLS, LPS Applied Analytics, Financial Stability Oversight Council 2011 Annual
Report 10
Purchase
Refinance
Total Home Mortgage Debt
Home Mortgage Originations
2000
-
2010
In billions
Home Mortgage Debt
Outstanding
2000 -
2010
In millions
Median Credit Score at
Mortgage Origination
2003-2012
Net Issuance
Growth |
 Economics of Forward Purchase
Source: Bloomberg 05/18/12
3 /32
represents
a
discount
to
the
purchase
price
of
the
security
of
approximately
$0.30
per
month
from
trade
date
to
settlement
date.
Economics of Forward Purchase
11
Example: 15 yr. 3½% drop = ~3
5/8
/32 pt. per month
1
5/8
1 |
 Portfolio Composition and Results
12
1
As of 3/31/12
Total Agency RMBS: $13,307.4 million
10 Year Fixed
Rate, 2%
15 Year Fixed
Rate, 58%
20 Year Fixed
Rate, 4%
30 Year
Fixed Rate,
9%
Hybrid ARMs,
27%
CYS Agency RMBS Portfolio
1
CYS
Dividends:
9/09
–
4/12 |
 Portfolio Characteristics
CYS Agency RMBS Portfolio Characteristics*
* As of 3/31/11
(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,
the
interest
rates
on
100% of our hybrid ARMs reset annually.
(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 CPR is an
annualized version of the prior three month prepayment rate.
Securities with no prepayment history are excluded from this calculation.
(3) Weighted average months to reset of our hybrid ARM portfolio.
Par Value
Fair Value
Asset Type
Cost/Par
Fair
Value/Par
MTR
(1)
Coupon
CPR
(2)
10 Year Fixed Rate
$256,373
$269,227
$103.88
$105.01
N/A
3.50%
13.8%
15 Year Fixed Rate
7,306,193
7,666,261
103.05
104.93
N/A
3.54%
14.8%
20 Year Fixed Rate
460,938
489,662
102.36
106.23
N/A
4.16%
21.8%
30 Year Fixed Rate
1,132,244
1,225,193
106.90
108.21
N/A
5.09%
26.5%
Hybrid ARMs
3,493,632
3,657,100
102.54
104.68
65.9
3.19%
20.1%
Total/Weighted Average
$ 12,649,380
$13,307,443
$103.24
$ 105.20
65.9
(3)
3.61%
17.3%
Weighted Average
(in thousands)
13 |
 History of Transparent and Consistent
Financial Reporting
CYS uses Financial Reporting for Investment Companies
CYS financial reporting -
Best in Class
Schedule of investments
NAVs have reflected mark-to-market accounting since inception
No OCI account on balance sheet
Realized and unrealized losses taken through income statement
Losses expensed in period incurred
14 |
 Historical Financials
15
3/31/2012
12/31/2011
Income Statement Data (in 000's)
Investment
Income
–
Interest
Income
$65,369
$61,631
Total expenses
11,972
10,510
Net Investment Income
53,397
51,121
Net gain (loss) from investments
33,150
(8,587)
Net gain (loss) from swap and cap contracts
(17,429)
1,559
Net Income
$69,118
$44,093
Net Income Per Common Share (diluted)
$0.66
$0.53
Distributions per Common Share
$0.50
$0.50
Non-GAAP Measure (in 000's)
Core Earnings
(1)
$41,891
$37,836
Non-GAAP
Reconciliation
(in
000’s)
NET INCOME
$69,118
$44,093
Net (gain) loss from investments
(33,150)
8,587
Net (gain) loss on termination of swap contracts
--
1,411
Net unrealized (appreciation) depreciation on swap
and cap contracts
5,923
(16,255)
Core Earnings
$41,891
$37,836
Key Portfolio Statistics*
Average yield on Agency RMBS
(2)
2.78%
2.81%
Average cost of funds and hedge
(3)
0.90%
1.01%
Interest rate spread net of hedge
(4)
1.88%
1.80%
Operating expense ratio
(5)
1.46%
1.53%
Leverage ratio (at period end)
(6)
7.7:1
7.7:1
Balance Sheet Data (in 000's)
3/31/2012
12/31/2011
Cash and Cash Equivalents
$10,643
$11,508
Total Assets
$13,555,905
$9,518,057
Repurchase Agreements
$8,234,669
$7,880,814
Net assets
$1,525,792
$1,077,458
Net assets per common share
$13.14
$13.02
Three Months Ended
As of
(1) Core Earnings is defined as net income (loss) excluding net gain (loss) on investments, net
realized gain (loss) on termination of swap contracts and unrealized appreciation (depreciation) on swap and cap contracts.
(2) Our average yield on Agency RMBS for the period was calculated by dividing our interest income
from Agency RMBS by our average Agency RMBS.
(3) Our average cost of funds and hedge for the period was calculated by dividing our total interest
expense, including our net swap and cap interest income (expense), by our average repurchase agreements.
(4) Our interest rate spread net of hedge for the period was calculated by subtracting our average
cost of funds and hedge from our average yield on Agency RMBS.
(5) Our operating expense ratio is calculated by dividing operating expenses by average net assets. (6) Our leverage ratio was
calculated by dividing (i) the Company’s repurchase agreements balance plus payable for securities purchased minus receivable for securities sold by (ii) net assets.
* All percentages are annualized.
|
 Financial Highlights
Steep yield curve and attractive spreads in target assets
Tailwinds likely to continue
Fed Transparency very helpful
Investment Company accounting provides transparency
16 |
 2012 Specialty Finance Symposium
Investment Outlook
May 2012 |