JMP Securities Research Conference May 13, 2013 Exhibit 99.1 Investment Outlook - May 2013 Kevin E. Grant, CFA Chief Executive Officer |
Forward Looking Statements 2 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. |
CYS Overview 3 Agency Residential Mortgage Backed Securities Financing lines with 37 lenders Swap agreements with 18 counterparties Self managed: highly scalable Kevin Grant, CEO, President, Chairman Frances Spark, CFO Company intends to distribute all or substantially all of its REIT taxable income Dividend Policy Ample Financing Sources Focus on Cost Efficiency Senior Management Target Assets A Real Estate Investment Trust Formed in January 2006 |
CYS Goal: Deliver Competitive Total Return Through Dividends 1 June 11, 2009 – March 31, 2013 2 June 11, 2009 – March 31, 2013 Source: Company filings , Bloomberg 4 -20.00 0.00 20.00 40.00 60.00 80.00 100.00 120.00 CYS: 84.0% 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 Q113: 0.94% CYS vs. Bloomberg REIT Index, S&P 500¹, 6/2009 – 3/2013 CYS Expense Ratio² (%), 6/2009 – 3/2013 |
Spread Environment: Becoming More Challenging, However Hedging Rates Remain Historically Low Yield Curve Creates positive carry Very low cost of financing Good ROE Hedge flexibility very important Fed still fighting deflation Mortgage Yields (1) Par-Priced 7/1 hybrid rates now 1.25% 30 Year fixed rates now 2.64% 15 Year fixed rates now 2.01% Source; Bloomberg (1) May 9, 2013 5 May 3, 2013 May 3, 2013 5/1 Hybrid Net Interest Margin: 1/2005 – 5/2013 5 Year Swap vs. 1 Month LIBOR: 1/2005 – 5/2013 |
Investment Environment 15 Year Fixed Hedged with Swaps: 1/2005 – 5/2013 Borrow Short Invest Long 6 May 3, 2013 15 Year Hedged (i) 15 Year Unhedged (ii) Source: Bloomberg. Note: Spreads calculated as: (i) 15 year CC Index = 50% 4 year swap, and (ii) 15 year Current Coupon Index |
7 Volatility in the Cap/Floor Markets Hit a Low in Mid-March 30 Yr MBS - 15 Yr MBS Spread 7 Yr Cap/Floor Implied Vol Nov 2012 – May 2013 April 2012 – May 2013 30 Year MBS Cheapened Meaningfully Relative to 15 Year MBS 30 Year MBS Now Cheaper Than 15 Year MBS May 3, 2013 May 3, 2013 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1.00 1.10 40 45 50 55 60 65 70 75 |
Fed Voters: Dovish, but Language Suggests ‘Operation Taper’ Duke Tarullo Yellen Raskin Powell Stein Pianalto Dudley Dudley Evans Rosengren Bullard George Fisher Kocherlakota Plosser Hawkish Dovish Neutral Bernanke 2/22/13 There are legitimate concerns associated with the costs and benefits of continued asset purchases. 3/8/13 it might be appropriate at some point to adjust the pace of MBS purchases in response to developments in primary or secondary mortgage markets. 2/27/13 It would be best to taper the dose of QE so that markets can adjust gradually to the eventual removal of this treatment. 3/6/13 I would like the FOMC to begin to taper these purchases with an aim toward ending them before the end of the year. 2/28/13 We are much more attuned to monitoring financial markets, risk pricing, and potential stress points in the financial system 3/25/13 At some point, I expect that I will see sufficient evidence of economic momentum to cause me to favor gradually dialing back the pace of asset purchases. 2013 Voters 2014 Voters Source: 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. 2/22/13 The idea of tapering the program at some point in the future may be gaining steam on the committee. |
The Fed’s Tools: Forward Rate Guidance; OT2; QE3 • With no operations after OT1, the Fed would own nearly 30% of the 10+ sector. • With OT2, that share would increase to over 40%. Source: Macroeconomic Advisers, U.S. Treasury, Federal Reserve. Updated May 24, 2012. 9 Fed Ownership Shares of Nominal Notes and Bonds in March 2013 with and without OT2 Fed Ownership of Treasuries Outstanding Maturing in Over Ten Years |
Central Banks: Decidedly More Accommodative - Focus on Global Deflation Risk Xiaochuan China Bernanke USA Kuroda Japan Canada Poloz Australia Stevens New Zealand Bollard Draghi EU Tombini Brazil Subbarao India Hawkish Dovish Neutral Draghi EU Subbarao India Xiaochuan China 10 Bank of Canada Governor Mark Carney will become Governor of the Bank of England on July 1, 2013, Stephen Poloz takes over the Bank of Canada on June 3 |
Economic Recovery Below Normal Pace U.S. Retail Gasoline Price, Regular Grade 1990 – Present $ per gal Capacity Utilization: Manufacturing 1970 – Present % Civilian Unemployment Rate 1940 - present % CPI-U All Items, Core 1940 – Present % Change - Year to Year Total Nonfarm Private Payroll Employment 2000 - present 000’s Challenger, Gray & Christmas, Inc. Job Cut Announcement Report Q1/89 – Q1/13, by Quarter 11 Source: S&P, Federal Reserve Bank of St. Louis, Fiserv, and Macromarkets LLC / Haver Analytics, BLS, Challenger, Gray & Christmas, US Dept. of Energy, NYMEX |
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. Growth in Residential Mortgage Debt 2004 -2012 Source: Deutsche Bank, BLS, LPS Applied Analytics, Financial Stability Oversight Council 2012 Annual Report 12 Mortgage Origination Volume 1990 - 2012 |
Economics of Forward Purchase Source: Bloomberg 05/09/13 13 |
Portfolio Composition and Results 1 As of 3/31/12 Note: the 12/2012 dividend was composed of $0.40 regular cash, and $0.52 special dividend. Total Agency RMBS: $20,063 million 14 15 Year Fixed: 46% Hybrid ARMs: 17% 30 Year Fixed: 31% 20 Year Fixed: 6% $0.00 $0.10 $0.20 $0.30 $0.40 $0.50 $0.60 $0.70 $0.80 $0.90 $1.00 CYS Agency RMBS Portfolio 1 CYS Common Stock Dividends: 9/2009 – 4/2013 |
Portfolio Characteristics * As of 3/31/13 15 Par Value Fair Value Weighted Average Asset Type (in thousands) Cost/Par Fair Value/Par MTR (1) Coupon CPR (2) 15 Year Fixed Rate $8,774,166 $9,228,421 $104.38 $105.18 N/A 2.98% 14.9% 20 Year Fixed Rate 1,059,923 1,112,782 104.94 104.99 N/A 3.16% 5.7% 30 Year Fixed Rate 5,957,689 6,283,218 105.14 105.46 N/A 3.53% 8.8% Hybrid ARMs 3,282,679 3,438,118 103.70 104.74 74.5 2.64% 15.4% Total/Weighted Average $19,074,457 $20,062,539 $104.53 $105.18 74.5 (3) 3.11% 13.4% CYS Agency RMBS Portfolio Characteristics* (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. |
History of Transparent and Consistent Financial Reporting CYS uses Financial Reporting for Investment Companies CYS Financial Reporting – Transparent and Best in Class Schedule of investments NAVs have reflected mark-to-market accounting since inception Realized and unrealized losses taken through income statement in period incurred No OCI account on balance sheet 16 |
Financial Information (1) Drop income is a component of our net income accounted for as net gain from investments on our statement of operations and therefore excluded from our Core Earnings. (2) Core earnings is defined as net income (loss) available to common shares excluding net gain (loss) on investments, net realized gain (loss) on termination of swap contracts and unrealized appreciation (depreciation) on swap and cap contracts. 17 Income Statement Data (in 000's) 3/31/2013 12/31/2012 Total investment income $ 73,101 $ 79,579 Interest expense 15,031 16,378 Operating expenses 5,553 4,787 Total expenses 20,584 21,165 Net investment income 52,517 58,414 Net gain (loss) from investments (78,811) (95,994) Net gain (loss) from swap and cap contracts 10,091 (2,363) Net income (loss) (16,203) (39,943) Dividend on preferred shares (1,453) (1,452) Net income available to common shares ($17,656) ($41,395) Net income per common share (diluted) ($0.10) ($0.24) Drop income per common share (diluted) (1) $0.15 $0.18 Core Earnings per common share (diluted) (2) $0.17 $0.21 Distributions per common share $0.32 $0.92 Non-GAAP Measure/Reconciliation (in 000's) NET INCOME (LOSS) AVAILABLE TO COMMON SHARES (17,656) (41,395) Net (gain) loss from investments 78,811 95,994 Net (gain) loss from termination of swap and cap contracts (8,630) 0 Net unrealized (appreciation) depreciation on swap and cap contracts (23,417) (16,965) Core Earnings $29,108 $37,634 |
Financial Information 18 Three Months Ended Key Metrics* 3/31/2013 12/31/2012 Average yield on settled Agency RMBS (1) 1.80% 1.97% Average cost of funds and hedge (2) 1.05% 1.03% Interest rate spread net of hedge (3) 0.75% 0.94% Interest rate spread net of hedge including drop income (4) 1.16% 1.31% Operating expense ratio (5) 0.94% 0.76% Leverage ratio (at period end) (6) 7.8:1 7.7:1 As of Balance Sheet Data (in 000's) 3/31/2013 12/31/2012 Cash and cash equivalents $13,463 $13,882 Receivable for securities sold $414,936 $10,343 Repurchase agreements $13,760,475 $13,891,307 Payable for securities purchased $4,657,501 $4,515,501 Net assets $2,322,076 $2,402,662 Net assets per common share $12.87 $13.31 (1) Our average yield on settled Agency RMBS for the period was calculated by dividing our interest income from Agency RMBS by our average settled Agency RMBS. (2) 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. (3) 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. (4) 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 total yield on Agency RMBS including drop income. (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. |
JMP Securities Research Conference May 13, 2013 Investment Outlook - May 2013 Kevin E. Grant, CFA Chief Executive Officer |