Investment Outlook May, 2010 Kevin E. Grant, CFA President & CEO Exhibit 99.1 |
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 financial performance, 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, changes in accounting and reporting requirements, changes in the composition of the Board of Governors of the Federal Reserve, and various other risks and uncertainties related to our business and the economy. 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 Objective Target Assets Senior Management Agency Residential Mortgage Backed Securities A Real Estate Investment Trust formed in January 2006 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 Ample Financing Sources Currently financing lines with 25 lenders Swap agreements with 6 counterparties Dividend Policy Company intends to distribute all or substantially all of its REIT taxable income Scaled Management Fee: 1.0% to 1.5% No Incentive Fee |
3 -1.00 -0.50 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 0.00 1.00 2.00 3.00 4.00 5.00 Attractive Environment Likely to Persist Mortgage Yields Currently Attractive Par-Priced 5/1 hybrid yields now 3.60% (1) 30 Year fixed yields now 4.40% (1) 15 Year fixed yields now 3.70% (1) Hedging costs remain reasonable Steep Curve Creates significant positive carry Significant ROE Hedge flexibility very important No signs of inflation Source: Bloomberg. (1) As of April 30, 2010 5/1 Hybrid Net Interest Margin: 1/05 – 4/10 4/30/10 5 Year Swap vs 1 Month LIBOR: 1/05 – 4/10 4/30/10 |
4 0.000 0.500 1.000 1.500 2.000 2.500 3.000 3.500 4.000 4.500 5.000 Wide Spreads Create Good Environment Source: Bloomberg. Note: Spreads calculated as: (i) 5/1 Hybrids Index – 50/50 3-Year Swaps/LIBOR, and (ii) 5/1 Hybrids Index – 1-Month LIBOR Index. 5/1 Hybrids Hedged with Swaps: 1/05 – 4/10 Simple “Carry Trade” Borrow Short/ Lend Long Hedged Hybrids (i) Unhedged Hybrids (ii) 4/30/10 CYS Investment Strategy |
5 0 5 10 15 20 25 30 35 10 Year Treasury Note Auctions 2/00 – 3/10 Treasury Auction Volume Exploding 0 5 10 15 20 25 30 35 40 45 50 2 Year Treasury Note Auctions 2/00 – 3/10 0 5 10 15 20 25 30 35 40 45 3 Year Treasury Note Auctions 2/00 – 3/10 Source: Bloomberg, US Treasury 5 Year Treasury Note Auctions 2/00 – 3/10 0 5 10 15 20 25 30 35 40 45 7 Year Treasury Note Auctions 2/00 – 3/10 30 Year Treasury Note Auctions 2/00 – 3/10 0 2 4 6 8 10 12 14 16 18 0 5 10 15 20 25 30 |
6 Fed Board to Become More Dovish Hawkish Dovish Neutral Hoenig Bullard Plosser Fisher Lacker Duke Tarullo Evans Dudley Pianalto Warsh Kohn Kocherlakota Lockhart Pianalto Yellen Rosengren Raskin Diamond Bernanke Obama Nominees Governors 2010 Voters 2011 Voters 2012 Voters Source: 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. |
7 The Next 30 (78?) Months… Cabinet Appointees with Private Sector Experience Source: JP Morgan Global Wealth Management 8% 28% 31% 36% 36% 39% 40% 43% 45% 47% 48% 50% 50% 51% 52% 53% 53% 56% 58% Obama Kennedy Carter T. Roosevelt Clinton Taft Hoover Ford Johnson Coolidge Harding F.D. Roosevelt Truman Wilson G.H.W. Bush Nixon G.W. Bush Reagan Eisenhower 1 1 Secretaries of State, Commerce, Treasury, Agriculture, Interior, Labor, Transportation, Energy, Housing and Urban Development |
8 Economic Recovery Below Normal Pace S&P/Case-Shiller U.S. National Home Price Indices 1988 – Present % Change - Year to Year Capacity Utilization: Manufacturing 2004 – Present % Unemployment Rate Source: S&P, Fiserv, and Macromarkets LLC/Haver Analytics, BLS |
9 Portfolio Characteristics CYS Portfolio Characteristics Source: Company data as of March 31, 2010; Bloomberg (1) Months to reset (2) Q1 2010 (3) Interest Only loans Par Value Asset Type (in thousands) Cost Price MTR 1 Coupon CPR 2 I/O Loans 3 Short Reset ARMs 203,252 $ 101.35 $ 104.10 $ 10.0 3.9% 29.6% 50.0% Hybrid ARMs 472,427 101.03 104.31 47.6 4.4% 32.8% 60.0% Fixed Rate 1,055,675 101.58 103.22 NA 4.5% 12.3% 1.2% Total/Weighted-Average 1,731,354 $ 101.40 $ 103.62 $ 36.3 4.4% 22.0% 23.0% Interest Rate Swaps 740mm 2.4 Year 2.03% Weighted Average |
10 CYS Exposure to FNMA/FHLMC Buyouts: Very Limited FNMA 120 Day Delinquency Buckets Source: FNMA March 1, 2010 Press Release, refer to: http://www.fanniemae.com/newsreleases/2010/4960.jhtm; Company data as of March 31, 2010. Per March 1, 2010 FNMA Press Release CYS Exposure MBS Product Year of Issuance Coupon < 4.5% 4.5% - 5% 5% - 5.5% 5.5% - 6% 6 - 6.5% Face Value (millions) % of Total Assets Implied Reinvestment Need (millions) 30 Year (CL-prefix) 2009 0.02% 0.03% 0.17% 0.60% 1.59% - 2008 1.33% 0.78% 1.81% 3.43% 7.07% 22 1.2% 1.56 2007 2.39% 3.22% 4.87% 6.52% 11.03% - 2006 4.91% 2.74% 4.70% 6.72% 9.40% - 2005 2.32% 1.99% 3.47% 5.72% 10.57% - 15 & 10 Year (CI & CN-prefixes) 2009 0.01% 0.04% 0.13% 0.19% 0.46% 452 25.0% 0.16 2008 0.38% 0.35% 0.55% 0.83% 1.69% 44 2.4% 0.37 2007 1.44% 1.11% 1.34% 1.84% 3.04% - 2006 1.24% 1.85% 1.67% 2.43% 3.62% - 2005 0.86% 1.09% 1.60% 2.97% 5.72% - Interest Only 2009 0.00% 0.00% 0.55% 0.63% 0.93% 2008 0.00% 7.36% 5.09% 8.31% 13.22% 2007 0.00% 5.39% 13.08% 15.72% 22.56% 13 0.7% 2.93 2006 0.00% 2.08% 7.78% 12.75% 18.40% 2005 0.00% 6.80% 5.48% 10.00% 14.15% ARMs: Amortizing 2009 0.03% 0.50% 1.02% 0.00% 0.00% 142 7.9% 0.04 2008 1.91% 3.73% 5.36% 9.62% 36.05% 22 1.2% 1.18 2007 2.76% 4.53% 11.29% 13.37% 11.94% - 2006 29.09% 7.44% 10.96% 15.03% 21.08% - 2005 16.19% 7.83% 9.87% 17.28% 6.60% - 2004 and earlier 4.46% 4.20% 4.76% 7.57% 1.59% 98 5.4% 4.37 ARMs: Interest Only 2009 0.06% 0.16% 0.86% 5.61% 0.00% 166 9.2% 0.10 2008 6.22% 5.24% 6.54% 10.14% 18.74% - 2007 10.20% 13.84% 17.45% 25.22% 32.25% 45 2.5% 11.35 2006 20.86% 11.23% 14.58% 21.36% 29.71% 30 1.7% 6.41 2005 14.41% 12.37% 12.86% 25.11% 12.95% 32 1.8% 3.96 2004 and earlier 8.55% 6.71% 6.24% 15.80% 11.51% 5 0.3% 0.43 - - - - $ $ |
11 -0.500 0.000 0.500 1.000 1.500 2.000 2.500 3.000 3.500 1,500 2,000 2,500 3,000 3,500 4,000 4,500 Attractive Repo Market Dynamics Money Market Funds Awash in Cash Assets remain very high Flight to quality on asset mix Agency RMBS a major beneficiary Source: Bloomberg. Market data as of April 29, 2010. LIBOR vs Fed Funds: 10/07 – 4/10 Money Market Fund Assets: 8/01 - 4/10 Lower Spreads Reduce Funding Costs and Improved Availability TARP TSLF and TALF Fed funds target rate: 0 to 0.25% 4/30/10 ($ in billions) (%) 4/29/10 |
12 Non-Agency Legacy Assets Recovering Market Value NAV at Market (per share) NAV at Face Value (per share) Remaining Life CLO $13.8 MM $0.73 $1.75 8.3 years RESIX $0.1 MM $0.01 $0.31 28.1 years Total $13.9 MM $0.74 $2.06 Source: Company data as of March 31, 2010. CYS’ CLO & RESIX Securities CLO Market has improved Non-Agency assets represent approximately 74 cents of Book Value Q1 Market appreciation of $4.5mm or 24 cents of Book Value CLO Cash Distributions expected to resume RESIX securities likely to be extinguished |
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 Competitors likely to move closer to CYS’ financial reporting standards when FASB declares SOP 07-1 effective Potential to create meaningful adjustments for the other companies |
14 Historical Financials (1) Includes interest income on Agency RMBS and non-Agency securities. (2) Net income excluding net realized gain (loss) on investments and swap contracts and net unrealized appreciation (depreciation) on investments and swap contracts. (3) Calculated by dividing total interest income from Agency RMBS by average Agency RMBS. (4) Calculated by dividing total interest expense, including net swap interest income (expense) by average repurchase agreements. (5) Calculated by subtracting average cost of funds & hedge from average yield on Agency RMBS. (6) Calculated by dividing total liabilities by net assets. Income Statement Data Investment Income – Interest Income (1) Total expenses Net Investment Income Net gain (loss) from investments Net gain (loss) from swap contracts Net Income (Loss) Net Income (Loss) Per Common Share (diluted) Distributions per Common Share Non-GAAP Measure Core Earnings (2) Key Portfolio Statistics Average Yield on Agency RMBS (3) Average Cost of Funds & Hedge (4) Interest Rate Spread Net of Hedge (5) Leverage Ratio (at period end) (6) Balance Sheet Data Cash and Cash Equivalents Total Assets Repurchase Agreements Net assets Net assets per common share NET INCOME Net (gain) loss from investments Net unrealized (appreciation) depreciation on swap contracts Core Earnings 3/31/2010 12/31/2009 $16,936.9 $15,767.5 3,217.8 3,102.6 13,719.1 12,664.9 6,464.3 (4,320.5) (10,040.2) (1,307.5) $10,143.2 $7,036.9 Quarter Ended $0.54 $0.37 $0.55 $0.55 $10,424.7 $9,688.0 3.86% 4.01% 1.14% 1.21% 2.72% 2.80% 6.5:1 6.6:1 $775.7 $1,889.7 $1,840,877.9 $1,866,196.3 $1,487,589.2 $1,372,707.6 $244,446.2 $244,291.0 $13.03 $13.02 $10,143.2 $7,036.9 (6,464.3) 4,320.4 $10,424.7 $9,688.0 Non-GAAP Reconciliation: 6,745.8 (1,669.3) |
15 Financial Highlights Steep yield curve and attractive spreads in target assets Tailwinds likely to continue Reinvestment needs relatively low Non-Agency assets recovering Investment Company accounting provides transparency |
Kevin E. Grant, CFA President & CEO Investment Outlook May, 2010 |