Cypress Sharpridge Investments, Inc. (CYS)

Q2 2010 Earnings Call Transcript

July 22, 2010 9:00 am ET


Rick Cleary – COO

Kevin Grant – Chairman, President and CEO

Frances Spark – CFO

Bill Shean – Managing Director, Investments


Mike Widner – Stifel Nicolaus

Steve Delaney – JMP Securities

Gabe Poggi – FBR

Kevin Casey – Casey Capital

Bruce Harting – Barclays Capital

Eugene Fox – Cardinal Capital Management

Robert Grunewald – Cicero Capital



Good morning and welcome to the Cypress Sharpridge Investments, Inc. second quarter 2010 earnings conference call. During management’s presentation your line will be in a listen-only mode. At the conclusion of management’s remarks there will be a question-and-answer session. (Operations instructions)

Management has asked me to remind you that certain information presented and certain statements made during management’s presentation with respect to future financial or business performance, strategies or expectations may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements indicate or are based on management’s beliefs, assumptions and expectations of CYS future performance taking into account information currently in the Company’s possession. Beliefs, assumptions and expectations are subject to change, risk and uncertainty as a result of possible events or factors, not all of which are known to management or within its control.

If management’s underlying beliefs, assumptions and expectations prove incorrect or change than the company’s performance and its business, financial condition, liquidity and result of operations may vary materially from those expressed, anticipated or contemplated in any of our forward-looking statements. In any events actual results may differ.

Management invites you to refer to the forward-looking statements disclaimer contained in the Company’s annual report on Form 10-K filed with the SEC, which provides the description of some of the factors that could have material impact on the Company’s performance and could cause actual results to differ from those that maybe expressed in forward-looking statements.

Also the content of this call contain time-sensitive information that is accurate only of today, Thursday, July 22, 2010. The company does not intend to and undertake no duty to update the information to reflect future events or circumstances.

For opening remarks and introductions I’ll now turn the call over to Rick Cleary, CYS’s Chief Operating Officer. Please go ahead, Mr. Cleary.

Rick Cleary

Thank you, Sania. Good morning and welcome to CYS’s 2010 Second Quarter Earnings Conference Call. Today’s call is being recorded and access to the recording will be available on the Company’s Web site at starting at 3:00 P.M. this afternoon.

With me here this morning are Kevin Grant, the Company’s Chairman and CEO, Frances Spark, the company’s CFO and Bill Shean, Managing Director of Investments.

To better understand today’s discussion, it’ll be helpful to have the earnings release that we issued last night. The release is available with the investor relations section of our Web site and as in past releases. This release includes information regarding non-GAAP financial measures including reconciliation of those measures to GAAP measures which will be discussed on this call.

I’m now pleased to turn the call over to Kevin.

Kevin Grant

Thank you, Rick, and good morning, everyone. Welcome to our Second Quarter 2010 Earnings Conference Call. This was a very busy quarter for us. We’re pleased to report a good quarter for CYS. The existing portfolio is performing well and we were not meaningfully impacted by Fannie Mae and Freddie Mac’s buyout program.

Indeed, CYS’s prepayments continue to slow through the quarter. The cash flows are very stable owing to the stability of the 15-year mortgages and this should produce a fairly stable NIM for many quarters to come.

We spent a lot of time during the quarter on liability management. We took advantage of the market and reset from hedges at lower rate and we extended their maturity. Rebalancing the hedges with something that we need to do anyway but we were fortunate this quarter to see good opportunities during the quarter to actually improve our net interest margin and reduce interest rate risk.

In summary, during the quarter, the yield on the portfolio went up, the NIM went up, the expense ratio went down and will go down more this quarter and the NAV went up and we were able to feel very confident raising the dividend.

As you know we did a follow-on offering in late June, the three principle motivations for the transaction were first to take advantage of the investing environment, second, to make a meaningful impact on our expense ratio, and third, to improve the liquidity of our stock. The transaction settled on June 30 and we wasted no time putting a new capital for it.

Hybrid ARMs had lagged the overall RMBS market during the quarter so that was the first place we focused and executed that portion of the targeted asset strategy immediately.

As we have been saying for some time, we still like the 15-year market. In early July, there was a small back-up in prices and we jumped on it and took advantage. All the meaningful trades are now executed for the new capital and the purchases will settle mostly in September and October and a little bit in November. We feel very good about the execution and timing. The new capital will help lower our expense ratio quite a bit further.

We continue to benefit from the interest rate environment and the spread present in our market. The U.S. economy appears to be in a very weak recovery with little or no inflationary pressures and a growing possibility of the U.S. entering a self-reinforcing deflationary environment.

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