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| 8-K - FORM 8-K - CYS Investments, Inc. | d236053d8k.htm |
 JMP Securities Financial Services and Real Estate Conference
September 26, 2011
Exhibit 99.1
Investment Outlook
September, 2011 |
 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. |
 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
Currently
financing
lines
with
33
lenders
Swap agreements with 16 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 |
 3
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
Source: Bloomberg.
(1) As of September 23, 2011
Mortgage Yields Currently Attractive
Par-Priced
7/1
hybrid
rates
now
2.16%
(1)
30
Year
fixed
rates
now
3.45%
(1)
15 Year fixed rates now 2.75%
(1)
Hedging rates historically low
September 23, 2011
September 23, 2011
0.00
1.00
2.00
3.00
4.00
5.00
-1.00
-0.50
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
5 Year
Swap
vs.
1
Month
LIBOR:
1/2005
–
9/2011
5/1
Hybrid
Net
Interest
Margin:
1/2005
–
9/2011 |
 4
Attractive Investment Environment Remains
CYS
Strategy
Borrow Short
Invest Long
15
Year
Hedged
(i)
15
Year
Unhedged
(ii)
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
15 Year Fixed Hedged with Swaps: 1/1/2005 - 9/23/2011 Source: Bloomberg.
Note: Spreads calculated as: (i) 15 year CC Index = 50% 4 year
swap, and (ii) 15 year Current Coupon Index |
 5
10 Year Treasury Note Auctions
11/98 –
8/11
Treasury Auction Volume
2 Year Treasury Note Auctions
2/00 –
8/11
3 Year Treasury Note Auctions
10/00 –
8/11
Source: Bloomberg, US Treasury
5 Year Treasury Note Auctions
2/00 –
8/11
7 Year Treasury Note Auctions
2/00 –
8/11
30 Year Treasury Note Auctions
2/00 –
8/11 |
 6
Hawkish
Dovish
Neutral
Plosser
Fisher
Lacker
Duke
Tarullo
Dudley
Kocherlakota
Lockhart
Evans
Pianalto
Yellen
Raskin
Bernanke
Governors
2011 Voters
2012 Voters
Fed Board has Become More Dovish
Williams
2013 Voters
Dudley
Evans
Rosengren
Bullard
Clarida
Stein
Obama
Nominees
Note: Kansas City Fed President Hoenig retires 10/1/2011, and the Kansas City
Fed President will be a 2013 Voter. 2010 Voters were Hoenig, Pinalto, Rosengren, and Bullard. 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
St. Louis |
 7
Hawkish
Dovish
Neutral
Other Central Banks are Waging the Inflation War
Xiaochuan
China
Bernanke
USA
Shirakawa
Japan
Trichet
EU (Outgoing)
Canada
Carney
Australia
Stevens
New Zealand
Bollard
Draghi
EU (Incoming)
Tombini
Brazil
Subbarao
India
Consequences: US Rates Likely To Be Lower For Longer
|
 Source: S&P, Fiserv, and Macromarkets LLC / Haver Analytics, BLS, Challenger,
Gray & Christmas, US Dept of Energy, NYMEX U.S. Retail Gasoline
Price: Regular and Crude 1/01 –
Present
%
Capacity Utilization: Manufacturing
2005 –
Present
%
Civilian Unemployment Rate
1/1/48 -
present
%
Economic Recovery Below Normal Pace
CPI-U All Items, Core
2005 –
Present
% Change -
Year to Year
Total Nonfarm Private Payroll Employment
2005-present
000’s
Challenger, Gray & Christmas, Inc.
Job Cut Announcement Report
1990 –
Present |
 9
Economics of Forward Purchase
Economics of Forward Purchase
1
Example: 15 yr. 3 ½% drop = ~6/32 pt. per month
Source: Bloomberg 9/23/11
6/32 represents a discount to the purchase price of the security of approximately $0.30 per month
from trade date to settlement date.
1 |
 10
Portfolio Composition and Results
Total Agency RMBS: $8,835.3 million
1
As of 6/30/11
2
CYS paid quarterly dividends of $0.35 per share of common stock on October 21, 2009,
$0.55 per share of common stock on January 27, 2010 and April 28, 2010, and $0.60 per share of common
stock on July 28, 2010, October 20, 2010, December 29, 2010, April 20, 2011, and
July 27, 2011. On September 9, 2011, CYS declared a dividend of $0.55 per share of common stock for the third
quarter of 2011. The dividend will be paid on October 19, 2011 to stockholders of
record on September 21, 2011. 30
Year
Fixed
7.1%
20
Year
Fixed
7.3%
15 Year Fixed
52.1%
Hybrid ARM’s
33.5%
CYS Agency RMBS Portfolio
CYS
Dividends:
10/2009
–
9/2011
1
$0.35
$0.00
$0.10
$0.20
$0.30
$0.40
$0.50
$0.60
$0.70
Oct-09
$0.55
Jan-10
$0.55
Apr-10
$0.60
Jul-10
$0.60
Oct-10
$0.60
Dec-10
$0.60
Apr-11
$0.60
Jul-11
$0.55
Oct-10 |
 11
Portfolio Characteristics
CYS Portfolio Characteristics*
* As of 6/30/11
Par Value
Fair Value
Asset Type
Cost/Par
Fair
Value/Par
MTR
(1)
Coupon
CPR
(2)
15 Year Fixed
$4,439,585
$4,605,393
$102.33
$103.73
N/A
3.89%
5.5%
20 Year Fixed
626,399
643,866
102.35
102.79
N/A
4.14%
2.5%
30 Year Fixed
588,274
625,974
103.33
106.41
N/A
5.00%
N/A
(3)
Hybrid ARMs
2,849,820
2,960,036
102.24
103.87
63.1
3.37%
12.8%
Total/Weighted Avg.
$8,504,078
$8,835,269
$102.37
$103.89
63.1
(4)
3.81%
7.3%
Weighted Average
(in thousands)
“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. 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. Securities with no prepayment history are excluded
from this calculation.
The Agency RMBS backed by 30 year mortgages in the portfolio are newly issued and did not have three
months of CPR history as of June 30, 2011. Weighted average months to reset of our Hybrid ARM portfolio.
(1)
(2)
(3)
(4) |
 12
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 |
 13
Historical Financials
June 30, 2011
March 31, 2011
Income
Statement
Data
(in
000's)
Investment
Income
–
Interest
Income
$65,720
$40,980
Total expenses
9,335
7,522
Net Investment Income
56,385
33,458
Net gain (loss) from investments
129,225
19,820
Net gain (loss) from swap and cap contracts
(86,188)
(1,181)
Net Income (Loss)
$99,422
$52,097
Net Income (Loss) Per Common Share (diluted)
$1.20
$0.74
Distributions per Common Share
$0.60
$0.60
Non-GAAP
Measure
(in
000's)
Core Earnings
(1)
$41,510
$21,599
Non-GAAP
Reconciliation
(in
000's)
NET INCOME
$99,422
$52,097
Net (gain) loss from investments
(129,225)
(19,820)
Net (gain) loss on termination of swap contracts
3,493
-
Net unrealized (appreciation) depreciation on swap and cap contracts
67,820
(10,678)
Core Earnings
$41,510
$21,599
Key Portfolio Statistics*
Average
yield
on
Agency
RMBS
(2)
3.37%
3.27%
Average cost of funds and hedge
(3)
1.14%
1.44%
Interest rate spread net of hedge
(4)
2.23%
1.83%
Operating
expense
ratio
(5)
1.92%
2.11%
Leverage
ratio
(at
period
end)
(6)
8.1:1
8.1:1
Balance
Sheet
Data
(in
000's)
6/30/2011
3/31/2011
Cash and Cash Equivalents
$1,092
$6,001
Total Assets
$9,310,511
$8,787,632
Repurchase Agreements
$7,548,091
$5,364,030
Net assets
$1,019,809
$969,266
Net assets per common share
$12.35
$11.74
Three Months Ended
As of
(1) Core Earnings is defined as net income (loss) excluding net realized gain (loss) on investments,
net unrealized appreciation (depreciation) 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 total liabilities by net assets.
* All percentages are annualized.
|
 14
Financial Highlights
Steep yield curve and attractive spreads in target assets
Tailwinds likely to continue
Investment Company accounting provides transparency |
 JMP Securities Financial Services and Real Estate Conference
September 26, 2011
Investment Outlook
September, 2011 |