Cypress Sharpridge Investments' CEO Discusses Q2 2012 Results - Earnings Call Transcript

Cypress Sharpridge Investments, Inc. (CYS)

Q2 2012 Earnings Call

July 19, 2012 9:00 am ET


Kevin Grant – Chief Executive Officer

Frances Spark – Chief Financial Officer

Richard Cleary – Chief Operating Officer

William Sheehan – Managing Director of Investments


Steve Delaney – JMP Securities

Mark Devries – Barclays

Douglas Harter – Credit Suisse

Stephen Laws – Deutsche Bank

Jim Young – West Family Investments

Vic Agarwal [ph] – Wells Fargo Securities

Arren Cyganovich – Evercore Partners



Good morning and welcome to the CYS Investments, Inc. 2012 Second Quarter 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. I will provide you with the instructions to enter the Q&A queue after management’s comments.

Management has asked me to remind you that certain information presented and certain statements made during management’s presentation with respect to the 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, then the Company’s performance and its business, financial condition, liquidity and results of operations may vary materially from those expressed, anticipated or contemplated in any of their forward-looking statements. In any event, actual results may differ. Management invites you to refer to the forward-looking statement disclaimer contained in the Company’s annual report on Form 10-K filed with the SEC which provides a description of some of the factors that could have a material impact on the Company’s performance and could cause actual results to differ from those that may be expressed in the forward-looking statements.

The Company has asked me to note that the content of this conference call contains time-sensitive information that is accurate only as of today, Thursday, July 19, 2012. The Company does not intend to and undertakes no duty to update the information to reflect future events or circumstances.

For opening remarks and introductions, I will now turn the call over to Rick Cleary, CYS’ Chief Operating Officer; and Mr. Cleary, you have the floor.

Richard Cleary

Thanks, Jeff. Good morning and welcome to CYS’ 2012 Second Quarter Earnings conference call. Today’s call is being recorded and access to the recording of today’s call will be available on the Company’s website at, commencing at 3 pm Eastern time this afternoon.

To better understand our results, it would be helpful to have the press release that we issued last night. The release includes information regarding non-GAAP financial measures, including reconciliation of those measures to GAAP measures, which will be discussed on this call.

I’d now like to turn the call over to our CEO, Kevin Grant.

Kevin Grant

Thanks Rick. Thanks Jeff, and good morning and welcome to our second quarter 2012 earnings conference call. As usual, joining Rick and me this morning is our CFO, Frances Spark, and Bill Sheehan from our investment team. We have a few opening comments, and I’ve also asked Bill Sheehan to spend a few minutes on the investing environment, given the historic low yield.

We are pleased to report solid results for the second quarter of 2012. The Company delivered another $0.50 dividend plus $0.38 of NAV appreciation. We have been well positioned to benefit in this environment, and we’ve benefited from some very good asset choices over the past several quarters.

Dollar prices are high in the MBS market, so getting the prepayment story right can really pay off. During the quarter, we were quite active, selling assets priced too high for their prepayment exposure and replacing them with assets with better prepayment protection. The consumer response to the low rates is here as measured by the refi index, and the prepayments will run through the system over the next few months. This activity generated about 61 million in realized capital gains for us, and we think the assets we sold were priced way too high relative to very attractive alternatives in the marketplace.

Keep in mind that the market tends to price mortgages for fast prepayments, so getting the prepayment story right can really pay off. We look at every single asset every day, so we have a very good idea where to look for the best assets and which assets are bid too high for the environment. Currently we are living a lesson in bond math. Prices are up, yields are down. In our case, this means that our NAV is up but our net spread, ROE and therefore dividend are expected to be a bit lower going forward. This is the math of the environment.

In last week’s offering, we indicated that we see the spread environment for new investments is in the 150 to 170 range. This compares to the 171 for us in Q2. We expect leverage on our balance sheet to remain about the same, so that means just doing the math that the ROE should contract by around 100 basis points. The equity raise will continue to help us with our expense ratio, and that will provide a little bit of an offset for this.

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