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| 8-K - FORM 8-K - CYS Investments, Inc. | d296309d8k.htm |
 Credit Suisse Financial Services Forum
February 9, 2012
Exhibit 99.1
Investment Outlook
February, 2012 |
 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 the Company’s 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
the
Company’s
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 |
 2
CYS: Overview
Agency Residential Mortgage Backed Securities
Currently
financing
lines
with
33
lenders
Swap agreements with 14 counterparties
Self managed: highly scalable
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 Target Assets
Objective
Senior Management
Focus on Cost
Efficiency
Ample Financing
Sources
Dividend Policy
A Real Estate Investment Trust formed in January 2006
|
 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) February 3, 2012
Mortgage Yields Currently Attractive
Par-Priced
7/1
hybrid
rates
now
1.84%
(1)
30
Year
fixed
rates
now
3.15%
(1)
15 Year fixed rates now 2.46%
(1)
Hedging rates historically low
February 3, 2012
5/1
Hybrid
Net
Interest
Margin:
1/2005
–
2/2012
5
Year
Swap
vs.
1
Month
LIBOR:
1/2005
–
2/2012
February 3, 2012
5.00
4.00
3.00
2.00
1.00
0.00
3.500
3.000
2.500
2.000
1.500
1.000
0.500
0.000
-0.500
-1.000 |
 4
Attractive Investment Environment Remains
Source:
Note:
15 Year Hedged
(i)
15 Year Unhedged
(ii)
Borrow Short
Invest Long
February 3, 2012
15
Year
Fixed
Hedged
with
Swaps:
1/1/2005
–
2/3/2012
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
Bloomberg.
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 –
12/11
Treasury Auction Volume
2 Year Treasury Note Auctions
2/98 –
12/11
3 Year Treasury Note Auctions
10/98 –
12/11
Source: Bloomberg, US Treasury
5 Year Treasury Note Auctions
2/98 –
12/11
7 Year Treasury Note Auctions
2/00 –
12/11
30 Year Treasury Note Auctions
2/00–
12/11 |
 6
Outstanding Mortgage Debt
Agency and GSE Backed Mortgage Pools: $1.16 trillion
Asset-Backed Securities Issuers: $1.88 trillion
Commercial Banks: $3.65 trillion
GSEs: $5.01 trillion
1
Other Holders includes finance companies, credit unions, life insurance companies,
state and local government, federal government, household sector, real estate investment trusts,
nonfarm noncorporate business, nonfinancial corporate business, private pension
funds, state and local government employee retirement funds, property-casualty insurance companies.
Source: U.S. Census Bureau
Other Holders: $2.10 trillion¹
Mortgage Debt Outstanding, 1960-2011
By Type
In millions
Mortgage Debt Outstanding, 1960-2011
By Holder
In millions
2010:
$13.8
trillion
$10,546,477
$2,312,539
$973,799
Home
Multifamily, Farm
Commercial
1960:
$208.3
billion
Home
$33,407
Multifamily, Farm
$33,624
$141,324
Commercial
0
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
14,000,000 |
 7
Lacker
Duke
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
Obama
Nominees
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
Hawkish
Dovish
Neutral
Powell
Stein
Tarullo |
 8
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 |
 9
The Iowa Electronic Futures Market: Obama re-elected and
a Republican Congress
Democrat
Republican
Romney
Gingrich
Republican House/
Republican Senate
Republican House/
Democrat Senate
Democrat House/
Democrat Senate
Democrat House/
Republican Senate
Source: The Iowa Electronic Markets
As of February 3
Romney
Gingrich
Republican House/
Republican Senate
Republican House/
Democrat Senate
Democrat House/
Democrat Senate
Democrat House/
Republican Senate
2012 US Republican National Convention Market
2012 US Presidential Election Vote Share Market
2012 Congressional Control Winner-Takes-All Market
As of January 23
As of January 23
As of January 23
As of February 3
Democrat
Republican
As of February 3 |
 10
Source: S&P, Fiserv, and Macromarkets LLC / Haver Analytics, BLS, Challenger,
Gray & Christmas, US Dept. of Energy, NYMEX Economic Recovery Below
Normal Pace U.S. Retail Gasoline Price, Regular Grade
2006 –
Present
Capacity Utilization: Manufacturing
2006 –
Present
%
Civilian Unemployment Rate
1940 -
present
%
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
2007 –
2011, by Month |
 11
Economics of Forward Purchase
Source: Bloomberg 02/03/12
1
5
3/8
/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 Example:
15
yr.
3
½%
drop
=
~5
3/8
/32
pt.
per
month
1 |
 12
$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
Portfolio Composition and Results
Total Agency RMBS: $9,372.4 million
$0.60
Apr-11
1
As of 12/31/11
$0.60
Jul-11
$0.55
Oct-11
Dec-11
$0.50
15 Year Fixed
Rate: 53.5%
Hybrid ARMs:
34.5%
20 Year Fixed
Rate: 6.2%
30 Year Fixed
Rate: 2.8%
10 Year Fixed
Rate: 3.0%
CYS Agency RMBS Portfolio
1
CYS
Dividends:
10/2009
–
12/2011 |
 13
Portfolio Characteristics
* As of 12/31/11
(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
$272,115
$284,948
$103.96
$104.72
N/A
3.50%
13.6%
15 Year Fixed Rate
4,763,965
5,010,121
102.53
105.17
N/A
3.79%
17.8%
20 Year Fixed Rate
551,766
585,103
102.32
106.04
N/A
4.14%
28.1%
30 Year Fixed Rate
239,747
259,123
103.09
108.08
N/A
5.00%
26.3%
Hybrid ARMs
3,098,024
3,233,159
102.31
104.36
64.0
(3)
3.29%
20.3%
Total/Weighted Average
$8,925,617
$9,372,454
$102.50
$105.01
64.0
3.66%
19.5%
Weighted Average
(in thousands)
CYS Agency RMBS Portfolio Characteristics* |
 14
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 |
 15
Historical Financials
12/31/2011
9/30/2011
Income Statement Data
(in 000's)
Investment
Income
–
Interest
Income
$61,631
$64,566
Total expenses
10,510
14,610
Net Investment Income
$51,121
$49,956
Net gain (loss) from investments
(8,587)
120,959
Net gain (loss) from swap and cap contracts
1,559
(74,594)
Net Income
$44,093
$96,321
Net Income Per Common Share (diluted)
$0.53
$1.16
Distributions per Common Share
$0.50
$0.55
Non-GAAP Measure
(in 000's)
Core Earnings
(1)
$37,836
$34,487
Non-GAAP Reconciliation
NET INCOME
$44,093
$96,321
Net (gain) loss from investments
8,587
(120,959)
Net (gain) loss on termination of swap contracts
1,411
-
Net unrealized (appreciation) depreciation on swap
and cap contracts
(16,255)
59,125
Core Earnings
$37,836
$34,487
Key Portfolio Statistics*
Average
yield
on
Agency
RMBS
(2)
2.81%
3.02%
Average
cost
of
funds
and
hedge
(3)
1.01%
1.07%
Interest
rate
spread
net
of
hedge
(4)
1.80%
1.95%
Operating
expense
ratio
(5)
1.53%
2.33%
Leverage
ratio
(at
period
end)
(6)
7.7:1
7.7:1
Three Months Ended
Balance Sheet Data
(in 000's)
12/31/2011
9/30/2011
Cash and Cash Equivalents
$11,508
$7,180
Total Assets
$9,518,057
$9,540,317
Repurchase Agreements
$7,880,814
$7,540,669
Net assets
$1,077,458
$1,074,207
Net assets per common share
$13.02
$12.98
As of
(in 000's)
(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 (i) the Company’s repurchase agreements balance
plus payable for securities purchased minus receivable for securities sold (ii) by net assets.
* All percentages are annualized.
|
 16
Financial Highlights
Steep yield curve and attractive spreads in target assets
Tailwinds likely to continue
Fed’s Transparency very helpful
Investment Company accounting provides transparency |
 Credit Suisse Financial Services Forum
February 9, 2012
Investment Outlook
February, 2012 |