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CYS Investments, Inc. Announces Second Quarter 2012 Financial Results

Business Wire

07/18/12 - 04:01 PM EDT

CYS Investments, Inc. (NYSE: CYS) (“CYS” or the “Company”) today announced financial results for the quarter ended June 30, 2012.

Second Quarter 2012 Highlights

Public Offering

On July 16, 2012, the Company completed an underwritten public offering of 46,000,000 shares of common stock at a public offering price of $13.70 per share, raising approximately $622.2 million of net proceeds, bring the total shares of common stock outstanding to 166,603,668 as of July 16, 2012. The Company has invested all of the net proceeds of this offering into Agency RMBS and interest rate swap and caps as indicated below:

Asset Type     Coupon     Settle Date    

Par Value (in thousands)

   

Weighted Average Price

15 Year Fixed Rate 3.00 % July 2012 1,414,103 105.44
15 Year Fixed Rate 3.00 %

August 2012

150,000

105.33

15 Year Fixed Rate 3.00 %

October 2012

100,000

104.95

30 Year Fixed Rate 3.50 % September 2012 1,150,000 105.59
30 Year Fixed Rate 3.50 % October 2012 1,250,000 105.32
Hybrid ARMs 2.44 % July 2012 148,853 104.52
Hybrid ARMs 2.40 % August 2012 40,000 104.25

Hybrid ARMs

2.40 % September 2012 200,000   104.10

Total/Weighted Average

$ 4,452,956   $

105.33

 

Interest Rate Swaps

   

Expiration Date

   

Fixed Pay Rate

 

Floating Receive Rate (1)

 

Notional Amount (in thousands)

Counterparty
Credit Suisse International (3) 7/13/2017 0.86 % 0.456 % $ 750,000

Interest Rate Caps

Expiration Date

Notional Amount (in thousands)

Counterparty Cap Rate
The Royal Bank of Scotland plc 7/16/2019 1.25 % $ 500,000
Morgan Stanley Capital Service, Inc. 7/16/2022 1.75 500,000
Total $ 1,000,000

Second Quarter 2012 Results

The Company had net income of $101.7 million during the second quarter of 2012, or $0.87 per diluted share, compared to net income of $69.1 million, or $0.66 per diluted share, in the first quarter of 2012. During the second quarter of 2012, the Company had Core Earnings of $44.8 million, or $0.38 per diluted share, compared to $41.9 million, or $0.39 per diluted share, in the first quarter of 2012. Core Earnings represents a non-GAAP financial measure and is defined as net income (loss) excluding (i) net realized gain (loss) on investments and termination of swap contracts and (ii) net unrealized appreciation (depreciation) on investments and swap and cap contracts. The $2.9 million quarter-over-quarter increase in Core Earnings was generally the result of the assets settling that were purchased with the proceeds from the February 1, 2012 public offering. The $0.01 quarter-over-quarter decrease in Core Earnings per diluted share was generally the result of a lower interest rate spread net of hedge, which decreased to 1.71% during the second quarter of 2012, compared to 1.88% during the first quarter of 2012.

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. During the second quarter of 2012, the Company generated drop income of approximately $15.0 million, or $0.13 per diluted share, compared to approximately $15.4 million, or $0.15 per diluted share, during the first quarter of 2012. During the second quarter of 2012, the Company sold Agency RMBS with fast projected prepayments, and replaced the sold assets with new issue forward settling purchases of approximately $5.1 billion of Agency RMBS. These purchases had a weighted average drop of approximately $0.18 per $100.00 par value per month, compared to forward purchases in the first quarter of 2012 of approximately $4.4 billion of Agency RMBS with a weighted average drop of approximately $0.21 per $100.00 par value per month. As a result of the portfolio transactions discussed above, the Company recognized $61.1 million of net realized gains on investments in the second quarter of 2012, as compared to $5.2 million in the first quarter of 2012.

The Company utilizes forward settling transactions for the majority of its purchases. The benefit of purchasing assets in forward settling transactions is that the Company can purchase assets with specified stipulations such as average loan size and percentage of loans in a particular state. This customization allows the Company to better manage prepayments. In addition, forward settling purchases allow the Company to obtain an asset at a discount (also referred to as “drop”) to its current market value; however, the Company does not receive any interest income on the asset until the forward transaction settles. Obtaining the asset at a discount to market value reduces the impact of prepayments and is accretive to net asset value.

The Company’s net asset value per share on June 30, 2012 was $13.52 after declaring a $0.50 dividend per share on June 8, 2012, compared with $13.14 at March 31, 2012. The increase was primarily the result of Agency RMBS outperforming swaps.

The Company’s operating expenses were $5.3 million, or 1.33% of average net assets, for the second quarter of 2012, compared to $5.1 million, or 1.46% of average net assets, for the first quarter of 2012. The increase in operating expenses was primarily the result of an increase in compensation and benefits. However, expenses as a percentage of net assets decreased as a result of the larger asset base.

(dollars in thousands)   Three Months Ended

Key Metrics*

June 30, 2012   March 31, 2012
Average Agency RMBS (1) $ 10,737,980 $ 9,238,905
Average repurchase agreements (2) $ 9,497,267 $ 8,194,067
Average net assets (3) $ 1,591,432 $ 1,406,049
Average common shares outstanding (4) 116,881 104,620
Average yield on Agency RMBS (5) 2.62% 2.78%
Average cost of funds and hedge (6) 0.91% 0.90%
Interest rate spread net of hedge (7) 1.71% 1.88%
Operating expense ratio (8) 1.33% 1.46%
Leverage ratio (at period end) (9) 7.6:1 7.7:1

(1) The Company's average Agency RMBS for the period was calculated by averaging the month end cost basis of settled Agency RMBS during the period.

(2) The Company's average repurchase agreements for the period were calculated by averaging the month end repurchase agreements balance during the period.

(3) The Company's average net assets for the period were calculated by averaging the month end net assets during the period.

(4) Our average common shares outstanding was calculated by averaging the daily common shares outstanding during the period.

(5) The Company's average yield on Agency RMBS for the period was calculated by dividing interest income from Agency RMBS by average Agency RMBS.

(6) The Company's average cost of funds and hedge for the period was calculated by dividing total interest expense, including net swap and cap interest income (expense), by average repurchase agreements.

(7) The Company's interest rate spread net of hedge for the period was calculated by subtracting average cost of funds and hedge from average yield on Agency RMBS.

(8) The Company's operating expense ratio is calculated by dividing operating expenses by average net assets.

(9) The Company's 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.

Prepayments

The portfolio recorded $651.7 million in scheduled and unscheduled principal repayments and prepayments, which equated to a constant prepayment rate (“CPR”) of approximately 18.1% and net amortization of premium of $22.7 million for the second quarter of 2012. This compared to $543.2 million in scheduled and unscheduled principal repayments and prepayments, which equated to a CPR of approximately 17.2% and net amortization of premium of $16.9 million for the first quarter of 2012. The increase in prepayments and repayments occurred due to a further decrease in mortgage interest rates during the second quarter of 2012.

Dividend

The Company declared a common dividend of $0.50 per share with respect to the second quarter of 2012, the same as for the first quarter of 2012. Using the closing share price of $13.77 on June 29, 2012, the second quarter dividend equates to an annualized dividend yield of 14.5%.

Portfolio

At June 30, 2012, the Company’s $14.1 billion portfolio of Agency RMBS was backed by fixed-rate mortgages and hybrid adjustable-rate mortgages (“Hybrid ARMs”) with 0 to 84 months to reset. The Agency RMBS portfolio is made up of 1.1% 2009 production; 10.5% 2010 production; 42.1% 2011 production; and 46.3% 2012 production. Additional information about our Agency RMBS portfolio at June 30, 2012 is summarized below:

  Par Value   Fair Value   Weighted Average
Asset Type (in thousands) Cost/Par   Fair Value/Par   MTR(1) Coupon   CPR(2)
10 Year Fixed Rate $ 239,966 $ 253,746 $ 103.79 $ 105.74 N/A 3.50 % 15.7 %
15 Year Fixed Rate 8,130,084 8,575,298 103.34 105.48 N/A 3.38 % 14.4 %
20 Year Fixed Rate 138,700 149,688 103.14 107.92 N/A 4.50 % 21.1 %
30 Year Fixed Rate 1,832,303 1,937,542 105.43 105.74 N/A 3.87 % %

Hybrid ARMs

3,015,667   3,161,861   102.63   104.85   67.4   3.09 % 18.6 %

Total/Weighted Average

$ 13,356,720   $ 14,078,135   $ 103.47   $ 105.40   67.4   (3) 3.40 % 15.8 %

(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, 100% of the hybrid ARMS in the portfolio reset annually.

(2) 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 for those bonds held at June 30, 2012. Securities with no prepayment history are excluded from this calculation.

(3) Weighted average months to reset of our hybrid ARM portfolio.

Financing, Leverage & Liquidity

At June 30, 2012, the Company had financed its portfolio with approximately $9.8 billion of borrowings under repurchase agreements with a weighted average interest rate of 0.39% and a weighted average maturity of approximately 27.3 days. In addition, the Company had payable for securities purchased of $3.1 billion. The Company’s leverage ratio at June 30, 2012 was 7.6 to 1. At June 30, 2012, the Company’s liquidity position was approximately $1,039.6 million, consisting of unpledged Agency RMBS, U.S. treasury bills and cash and cash equivalents. Below is a list of outstanding borrowings under repurchase agreements at June 30, 2012 (dollars in thousands):

Counterparty   Total Outstanding Borrowings   % of Total  

Amount At Risk (1)

  Weighted Average Maturity in Days
Bank of America Securities LLC $ 509,687 5.2 % $ 28,867 29
Bank of Nova Scotia 477,432 4.9 17,592 42
Barclays Capital, Inc. 455,563 4.7 24,499 28
BNP Paribas Securities Corp 321,138 3.3 18,030 17
Cantor Fitzgerald & Co. 206,794 2.1 12,098 11
Citigroup Global Markets, Inc. 507,343 5.2 30,171 19
Credit Suisse Securities (USA) LLC 623,242 6.4 30,245 16
Daiwa Securities America, Inc. 239,800 2.5 14,820 23
Deutsche Bank Securities, Inc. 481,491 4.9 29,094 51
Goldman Sachs & Co. 657,611 6.7 36,581 34
Guggenheim Liquidity Services, LLC 261,811 2.7 16,236 21
Industrial and Commercial Bank of China Financial Services LLC 640,825 6.6 33,614 42
ING Financial Markets LLC 314,466 3.2 17,643 11
Jefferies & Company, Inc. 89,842 0.9 5,049 46
LBBW Securities LLC 186,363 1.9 10,496 52
Mitsubishi UFJ Securities (USA), Inc. 518,833 5.3 28,475 31
Mizuho Securities USA, Inc. 333,394 3.4 19,852 25
Morgan Stanley & Co. Inc. 295,705 3.0 16,237 39
Nomura Securities International, Inc. 251,848 2.6 12,906 23
RBC Capital Markets, LLC 461,531 4.7 27,512 31
South Street Securities LLC 398,060 4.1 24,472 18
The Royal Bank of Scotland PLC 167,529 1.7 10,020 11
UBS Securities LLC 658,336 6.8 37,477 17
Wells Fargo Securities, LLC   704,669   7.2   24,467   18
  $ 9,763,313   100.0   % $ 526,453  

___

(1) Equal to the fair value of pledged securities plus accrued interest income, minus the sum of repurchase agreement liabilities and accrued interest expense.

Hedging

The Company utilizes interest rate swap and cap contracts to hedge the interest rate risk associated with the financed portion of its Agency RMBS portfolio. As of June 30, 2012, the Company had entered into 16 interest rate swap contracts with an aggregate notional amount of $5.2 billion, a weighted average fixed rate of 1.462% and a weighted average expiration of 2.3 years. At June 30, 2012, the Company had entered into seven interest rate cap contracts with a notional amount of $1.9 billion, a weighted average cap rate of 1.653% and a weighted average expiration of 5.5 years. These interest rate swap and cap contracts are described below (dollars in thousands):

 

Interest Rate Swaps

  Expiration   Fixed   Floating   Notional   Fair
Counterparty Date Pay Rate Receive Rate (1) Amount Value
The Royal Bank of Scotland plc 5/26/2013 1.6000 % 0.467 % $ 100,000 $(998 )
The Royal Bank of Scotland plc 6/30/2013 1.3775 0.461 300,000 (2,609 )
The Royal Bank of Scotland plc 7/15/2013 1.3650 0.467 300,000 (2,676 )
Goldman Sachs 12/15/2013 1.3088 0.468 400,000 (4,566 )
Goldman Sachs 12/16/2013 1.2640 0.468 400,000 (4,305 )
The Royal Bank of Scotland plc 12/16/2013 1.2813 0.468 500,000 (5,492 )
Deutsche Bank Group 12/17/2013 1.3225 0.468 400,000 (4,655 )
The Royal Bank of Scotland plc 7/1/2014 1.7200 0.461 100,000 (2,328 )
Nomura Global Financial Products, Inc. 7/16/2014 1.7325 0.467 250,000 (6,017 )
Deutsche Bank Group 8/16/2014 1.3530 0.466 200,000 (3,389 )
Goldman Sachs 9/23/2014 1.3120 0.468 500,000 (8,293 )
Deutsche Bank Group 10/6/2014 1.1725 0.469 240,000 (3,287 )
Goldman Sachs 2/14/2015 2.1450 0.467 500,000 (20,299 )
Nomura Global Financial Products, Inc. 6/2/2016 1.9400 0.467 300,000 (13,722 )
Morgan Stanley Capital Services, Inc. (2) 12/19/2016 1.4263 0.509 250,000 (5,117 )
Credit Suisse International (3) 4/24/2017 1.3100 0.537 500,000   (5,584 )
Total $ 5,240,000   $(93,337 )

Interest Rate Caps

Expiration Notional Fair
Counterparty Date Cap Rate Amount Value
The Royal Bank of Scotland plc 12/30/2014 2.0725 % $ 200,000 $ 147
The Royal Bank of Scotland plc 10/15/2015 1.4275 300,000 987
The Royal Bank of Scotland plc 11/8/2015 1.3600 200,000 750
Credit Suisse International 5/23/2019 2.0000 300,000 8,801
Wells Fargo Bank, N.A. 6/1/2019 1.7500 300,000 10,043
ING Capital Markets, LLC 6/29/2019 1.5000 300,000 11,441
UBS AG 7/2/2019 1.5000 300,000   11,702  
Total $ 1,900,000   $ 43,871  

_______________

(1) Resets quarterly to 3-Month LIBOR

(2) The interest rate swap effective date is December 19, 2012 and does not accrue any income or expense until that date.

(3) The interest rate swap effective date is April 24, 2013 and does not accrue any income or expense until that date.

Conference Call

The Company will host a conference call at 9:00 AM Eastern Time on Thursday, July 19, 2012, to discuss its financial results for the quarter ended June 30, 2012. To participate in the event by telephone, please dial 866.713.8563 at least 10 minutes prior to the start time and reference the conference passcode 30403304. International callers should dial 617.597.5311 and reference the same passcode. The conference call will also be webcast live over the Internet and can be accessed at the Company’s web site at http://www.cysinv.com. To listen to the live webcast, please visit http://www.cysinv.com at least 15 minutes prior to the start of the call to register, download, and install necessary audio software. A dial-in replay will be available on Thursday, July 19, 2012, at approximately 12:00 PM Eastern Time through Thursday, August 2, 2012, at approximately 11:00 AM Eastern Time. To access this replay, please dial 888.286.8010 and enter the conference ID number 57013594. International callers should dial 617.801.6888 and enter the same conference ID number. A replay of the conference call will also be archived on the Company’s website at http://www.cysinv.com.

About CYS Investments, Inc.

CYS Investments, Inc. is a specialty finance company that invests on a leveraged basis in residential mortgage pass-through certificates for which the principal and interest payments are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. The Company refers to these securities as Agency RMBS. CYS Investments, Inc. has elected to be taxed as a real estate investment trust for federal income tax purposes.

CYS INVESTMENTS, INC.

STATEMENTS OF ASSETS AND LIABILITIES (UNAUDITED)

     
(In thousands, except per share numbers) June 30, 2012 March 31, 2012 December 31, 2011*
ASSETS:

Investments in securities, at fair value (including pledged  assets of $10,066,807, $8,806,898 and $8,412,295,  respectively)

$ 14,162,935 $ 13,388,839 $ 9,466,128
Interest rate cap contracts, at fair value 43,871 4,548 5,966
Cash and cash equivalents 13,846 10,643 11,508

Receivable for securities sold and principal repayments(including pledged assets of $354,838, $0 and $0,respectively)

365,583 116,918 5,550
Interest receivable 35,472 34,152 27,815
Other assets 1,421   805   1,090
Total assets 14,623,128   13,555,905   9,518,057
 
LIABILITIES:
Repurchase agreements 9,763,313 8,234,669 7,880,814
Interest rate swap contracts, at fair value 93,337 84,941 79,476
Payable for securities purchased 3,058,300 3,634,983 463,302
Distribution payable 59,465 58,069 -

Accrued interest payable (including accrued interest onrepurchase agreements of $3,920, $2,425 and $3,747,respectively

15,696 15,564 15,617
Accrued expenses and other liabilities 3,163   1,887   1,390
Total liabilities 12,993,274   12,030,113   8,440,599
NET ASSETS $ 1,629,854   $ 1,525,792   $ 1,077,458
Net assets consist of:

Common Stock, $0.01 par value, 500,000 shares authorized(120,595, 116,139 and 82,753 shares issued and outstanding,respectively)

$ 1,206 $ 1,161 $ 828
Additional paid in capital 1,496,613 1,434,836 997,884
Retained earnings 132,035   89,795   78,746
NET ASSETS $ 1,629,854   $ 1,525,792   $ 1,077,458
NET ASSET VALUE PER SHARE $ 13.52   $ 13.14   $ 13.02
________
* Derived from audited financial statements.

CYS INVESTMENTS, INC.

STATEMENTS OF OPERATIONS (UNAUDITED)

   
Three Months Ended Six Months Ended
(In thousands, except per share numbers) June 30, 2012   March 31, 2012 June 30, 2012
INVESTMENT INCOME
Interest income from Agency RMBS $ 70,352 $ 64,147 $ 134,499
Other income 1,395   1,222   2,617  
Total investment income 71,747   65,369   137,116  
EXPENSES:
Interest 8,993 6,853 15,846
Compensation and benefits 3,346 3,164 6,510
General, administrative and other 1,933   1,955   3,888  
Total expenses 14,272   11,972   26,244  
Net investment income 57,475   53,397   110,872  
GAINS AND (LOSSES) FROM INVESTMENTS:
Net realized gain (loss) on investments 61,113 5,173 66,286
Net unrealized appreciation (depreciation) on investments 7,473   27,977   35,450  
Net gain (loss) from investments 68,586   33,150   101,736  
GAINS AND (LOSSES) FROM SWAP AND CAP CONTRACTS:
Net swap and cap interest income (expense) (12,687 ) (11,506 ) (24,193 )
Net gain (loss) on termination of swap contracts
Net unrealized appreciation (depreciation) on swap and cap contracts (11,669 ) (5,923 ) (17,592 )
Net gain (loss) from swap and cap contracts (24,356 ) (17,429 ) (41,785 )
NET INCOME $ 101,705   $ 69,118   $ 170,823  
NET INCOME PER COMMON SHARE - DILUTED $ 0.87   $ 0.66   $ 1.54  

Core Earnings:

Core Earnings represents a non-GAAP financial measure and is defined as net income (loss) excluding net gain (loss) from investments, net gain (loss) on termination of swap contracts and net unrealized appreciation (depreciation) on swap and cap contracts. In order to evaluate the effective yield of the portfolio, management uses Core Earnings to reflect the net investment income of our portfolio as adjusted to include the net swap and cap interest income (expense). Core Earnings allows management to isolate the interest income (expense) associated with our swaps and caps in order to monitor and project our borrowing costs and interest rate spread. In addition, management utilizes Core Earnings as a key metric in conjunction with other portfolio and market factors to determine the appropriate leverage and hedging ratios, as well as the overall structure of the portfolio.

The Company adopted Accounting Standards Codification (“ASC”) 946, Clarification of the Scope of Audit and Accounting Guide Investment Companies (“ASC 946”) , prior to its deferral in February 2008, while most, if not all, other public companies that invest only in Agency RMBS have not adopted ASC 946. Under ASC 946, the Company uses financial reporting specified for investment companies, and accordingly, its investments are carried at fair value with changes in fair value included in earnings. Most other public companies that invest only in Agency RMBS include most changes in the fair value of their investments within shareholders’ equity, not in earnings. As a result, investors are not able to readily compare the Company’s results of operations to those of most of its competitors. The Company believes that the presentation of its Core Earnings is useful to investors because it provides a means of comparing its Core Earnings to those of its competitors. In addition, because Core Earnings isolates the net swap and cap interest income (expense) it provides investors with an additional metric to identify trends in the Company’s portfolio as they relate to the interest rate environment.

The primary limitation associated with Core Earnings as a measure of the Company’s financial performance over any period is that it excludes the effects of net realized gain (loss) from investments. In addition, the Company’s presentation of Core Earnings may not be comparable to similarly-titled measures of other companies, who may use different calculations. As a result, Core Earnings should not be considered as a substitute for the Company’s GAAP net income (loss) as a measure of our financial performance or any measure of our liquidity under GAAP.

  Three Months Ended   Six Months Ended
(In thousands) June 30, 2012   March 31, 2012 June 30, 2012
NET INCOME $ 101,705 $ 69,118 $ 170,823
Net (gain) loss from investments (68,586 ) (33,150 ) (101,736 )
Net (gain) loss on termination of swap contracts
Net unrealized (appreciation) depreciation on swap and cap contracts 11,669   5,923   17,592  
Core Earnings $ 44,788   $ 41,891   $ 86,679  


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