CYS Investments, Inc. (NYSE: CYS) ("CYS", "we", "us", "our", or
the "Company") today announced financial results for the quarter
ended June 30, 2017 (the "Second Quarter").
Second Quarter 2017 Summary Results
- June 30, 2017 book value per
common share of $8.31, after declaring a $0.25 dividend per common
share, up from $8.26 at March 31, 2017.
- GAAP net income (loss) available to
common stockholders of $45.0 million, or $0.30 per diluted common
share.
- Core Earnings plus Drop Income of $40.6
million ($31.9 million Core Earnings and $8.7 million Drop Income),
or $0.27 per diluted common share ($0.21 Core Earnings and $0.06
Drop Income).
- Interest rate spread, net of hedge,
including Drop Income, of 1.49%.
- Operating expense ratio of 1.40%.
- Weighted-average amortized cost of
Agency RMBS and U.S. Treasuries (collectively, "Debt Securities")
of $103.31.
- Leverage ratio of 7.20:1 at
June 30, 2017.
- Constant Prepayment Rate ("CPR") of
7.5%.
- Total stockholder return on common
equity of 3.63%.
Market Commentary
The Second Quarter presented global political and financial news
that was similar to 2016 but resulted in comparatively diminished
market reactions in the Second Quarter. In 2017, the elections in
France had the potential for significant changes to the structure
of the European Union (the "EU"), potentially even more significant
than the United Kingdom's vote to exit the EU in 2016 ("Brexit").
In both cases, markets reacted long before the elections and the
U.S. bond markets had the task of pricing for the growth and
inflation effects of the elections' ultimate outcomes. In 2017,
however, markets had the advantage of learning from the Brexit vote
and recognized that the implications may not be as severe as
previously thought. Specifically, in the Second Quarter, the yield
on the 10-year U.S. Treasury traded in a 29 basis points ("bps")
range, as compared to the second quarter of 2016 where it traded in
a 48 bps range. This is in line with recent market trends where
volatility has been steadily dropping, equity prices slowly moving
higher, and interest rates trading within a narrower range than
recent prior quarters. The expectation of more muted market
reactions seems likely to continue until and unless there is a
meaningful shift in underlying global economic conditions or to the
structure of global financial institutions. In the Second Quarter,
equity markets continued to advance incrementally and only down
shifted briefly in mid-May on potentially incriminating news
relating to the Trump administration. Over much of the Second
Quarter, the U.S. bond market dropped in yield. However, by the end
of the quarter, as the markets reacted to modestly more hawkish
comments by the European Central Bank and Bank of England, the
10-year U.S. Treasury yield moved slightly higher and closed the
quarter with just a 9 bps decrease over the quarter.
In the U.S., the Federal Reserve (the "Fed") continues its path
of normalizing interest rate policy. Having raised the target
federal funds rate (the "Fed Funds Rate") in March 2017, as
generally expected, they raised again in June 2017. Additionally,
they have begun to communicate how the Fed intends to slow their
large scale asset purchases and ultimately reduce the size of the
Fed’s balance sheet. In the Fed’s May minutes, the Federal Open
Market Committee (the "FOMC") proposed a plan under which it might
set a gradually increasing set of monthly caps, or limits, on the
amount of U.S. Treasuries and agency securities that may be
reinvested. FOMC Chair Janet Yellen further detailed the committee
plans for balance sheet tapering in the June meeting. Thus,
reinvestment levels should be reduced predictably over time.
Markets appeared to take the balance sheet normalization news in
stride as it was clear the process should be extremely gradual and
transparent in nature.
With the Fed slowly raising short-term interest rates and
volatility in long-term rates greatly diminished, the latter half
of the Second Quarter was characterized by a slowly flattening
yield curve. The 2s-10s U.S. Treasury spread fell 22 bps from the
beginning of the quarter, ending the Second Quarter at 92 bps.
While the 10-year U.S. Treasury yield fell 9 bps to 2.30% during
the Second Quarter, the 5-year U.S. Treasury yield dropped 3 bps to
1.89%. Correspondingly, the prices of Agency RMBS increased
marginally. For example, the price of 30-year FNMA 3.5% Agency RMBS
increased from $102.36 on March 31, 2017 to $102.67 at June 30,
2017, while the price of 15-year FNMA 3.0% Agency RMBS increased
from $102.55 on March 31, 2017 to $102.61 on June 30, 2017. On the
financing side of our business, we continued to benefit from an
abundance of cash in government money market funds which seeks
short-term government collateral and repo. This supply dynamic has
moderated repo rates.
During the Second Quarter we took advantage of the decline in
swap rates and opportunistically repositioned a portion of our
hedge portfolio by replacing an existing $1 billion in notional of
shorter dated swaps maturing in less than six months with an equal
amount of 7-year, cancelable-in-one year, swaps. We also
incrementally added $100 million notional of 10-year swaps. We
continued to benefit from an increase in 3-month LIBOR during the
Second Quarter, resulting in a 13 bps increase in the receive-leg
of our swaps. In addition, during the Second Quarter, 3-month LIBOR
exceeded the cap rate of 1.25% on two of our interest rate caps,
making them cash flow positive to us. Two additional caps are
expected to begin cash-flowing positive to us in the third quarter
of 2017 when the respective rates are scheduled to reset. After
repositioning and increasing the duration and size of our hedge
portfolio, we experienced an 8 bps decrease in the net swap and cap
pay rate during the Second Quarter to 41 bps from 49 bps in the
first quarter of 2017 (the "First Quarter").
Over the past four quarters, interest rates have steadily risen
while we have produced an attractive 13.4% total shareholder
return, compared to the Aggregate Bond Index of (0.31%). Notably,
despite three separate 25 bps Fed rate hikes, financing costs have
only risen approximately 55 bps and the yield on the 10-year U.S.
Treasury has risen 83 bps. While some may believe these are bearish
conditions for our industry, we have navigated through this
environment and have been able to increase our interest spread net
of hedge by 14 bps.
Looking forward, markets will be watching carefully for clues
about who the Trump administration might nominate as the next Fed
Chairperson, as well as several other important posts on the FOMC.
Chair Yellen’s term is set to expire in February 2018. Discussions
surrounding the debt ceiling, fiscal stimulus programs, tax reform,
budget/fiscal policy and trade policy changes will also continue to
impact markets.
Second Quarter 2017 Results
The Company’s book value per common share on June 30, 2017
was $8.31, compared to $8.26 at March 31, 2017, after
declaring a $0.25 dividend per common share on June 8,
2017.
The Company generated net income available to common
stockholders of $45.0 million in the Second Quarter, or $0.30 per
diluted common share, compared to $28.8 million, or $0.19 per
diluted common share, in the First Quarter, the key components of
which are described below.
In the Second Quarter, the Company generated Core Earnings
(defined below) plus Drop Income (defined below) of $40.6 million,
or $0.27 per diluted common share, comprised of Core Earnings of
$31.9 million, or $0.21 per diluted common share, and Drop Income
of $8.7 million, or $0.06 per diluted common share. This compares
to Core Earnings plus Drop Income of $41.8 million, or $0.28 per
diluted common share during the First Quarter, comprised of Core
Earnings of $32.4 million, or $0.21 per diluted common share, and
Drop Income of $9.4 million, or $0.07 per diluted common share.
Core Earnings decreased in the Second Quarter relative to the First
Quarter largely resulting from a $5.0 million increase in total
interest expense due to an increase in the average cost of funds
from repurchase agreements ("repo borrowings") and a $0.1 million
increase in swap and cap interest expense, modestly offset by a
$3.8 million increase in total interest income during the current
quarter from a decrease in prepayment speeds as further described
below. The increase in the average cost of funds stems from the
Fed's 25 bps rate hike in June 2017. The marginal net increase in
swap and cap interest expense results from the swap portfolio
repositioning and expansion, substantially offset by the increase
in 3-month LIBOR described above.
The net decrease in Core Earnings in the Second Quarter was
offset by (i) a $3.8 million increase in total interest income that
resulted from a decrease in prepayment speeds and a corresponding
$1.9 million decrease in net premium amortization expense relative
to the First Quarter and (ii) a $0.8 million decrease in operating
expenses as the First Quarter included $0.6 million of
non-recurring accelerated restricted stock and other compensation
expense related to the retirement of our prior Chief Financial
Officer and Treasurer.
In the Second Quarter, total interest income increased by $3.8
million to $77.1 million from $73.3 million in the First Quarter,
resulting in an increase in the average yield on our settled Debt
Securities to 2.86% in the Second Quarter from 2.71% in the First
Quarter. The Second Quarter weighted-average experienced CPR
decreased to 7.5% from 8.1% in the First Quarter and amortization
expense decreased $1.9 million to $12.6 million from $14.5 million
in the First Quarter.
Despite an increase in the average volume of forward trades,
Drop Income decreased by $0.7 million in the Second Quarter
relative to the First Quarter as a result of forward trades being
executed later in the Second Quarter. The volume of forward
purchase settling transactions from which we derive Drop Income
increased moderately to $1.7 billion in the Second Quarter from
$1.5 billion in the First Quarter.
The Company's net interest income of $50.9 million in the Second
Quarter, down approximately $1.2 million from $52.1 million in the
First Quarter, is largely due to the increase in interest expense
on our repo borrowings as a direct result of a 25 bps Fed rate hike
in June 2017, resulting in an increase in the average cost of funds
to 1.13% in the Second Quarter, as compared to 0.92% in the First
Quarter. The increase in total interest expense was modestly offset
by the increase in total interest income described above.
Our Economic Net Interest Income, a non-GAAP measure, is
generated primarily from the net spread, or difference, between the
interest income we earn on our investment portfolio and the cost of
our borrowings and hedging activities. The amount of Economic Net
Interest Income we earn on our investments depends in part on our
ability to control our financing costs, which comprise a
significant portion of our operating expenses. Economic Interest
Expense consists of interest expense, as computed in accordance
with GAAP, plus swap and cap interest expense used to hedge our
cost of funds, a component of net gain (loss) on derivative
instruments in the Company's Consolidated Statements of Operations.
We present the non-GAAP measures Economic Interest Expense, and
Economic Net Interest Income to provide an economic measure of our
interest expense and income net of borrowing and hedge expense,
which management uses to evaluate the Company's investment
portfolio. By providing users of our financial information with
such measures in addition to the related GAAP measures, we believe
it gives users additional transparency into the information used by
our management in its financial and operational decision-making,
and that it is meaningful information to consider in addition to
the related GAAP measures as it reflects the economic cost of
financing our investment portfolio. The following table presents a
reconciliation of GAAP total interest expense and net interest
income to Economic Net Interest Expense and Economic Net Interest
Income, respectively, for each respective period.
(dollars in thousands)
Three Months
Ended June 30, 2017 March 31,
2017 Total interest expense $ 26,182 $ 21,221 Swap and cap
interest expense 8,434 8,327 Economic Interest Expense $
34,616 $ 29,548 Net interest income $ 50,906 $ 52,092
Swap and cap interest expense 8,434 8,327 Economic Net
Interest Income $ 42,472 $ 43,765
In the Second Quarter, Economic Interest Expense was $34.6
million, compared to $29.5 million in the First Quarter. Interest
expense on repo borrowings increased to $26.2 million in the Second
Quarter from $21.2 million in the First Quarter due to a 21 bps
increase in the average cost of funds, while swap and cap interest
expense increased by $0.1 million during the Second Quarter as
previously noted. Overall, the adjusted average cost of funds and
hedge increased to 1.26% during the Second Quarter, from 1.08%
during the First Quarter. The Company’s interest rate spread net of
hedge including Drop Income decreased to 1.49% in
the Second Quarter, from 1.57% in the First Quarter as a
result of an increase in interest expense on repo borrowings, a
decrease in Drop Income and an increase in swap and cap interest
expense, partially offset by an increase in total interest income
during the Second Quarter.
The Company's Economic Net Interest Income, which takes into
account swap and cap interest expense, as well as interest expense
on repo borrowings, was $42.5 million in the Second Quarter, a
decrease of approximately $1.3 million from $43.8 million in the
First Quarter. The decrease in Economic Net Interest Income was
primarily due to higher total interest expense and swap and cap
interest expense, partially offset by an increase in total interest
income, as further explained above.
The Company recognized an aggregate net realized and unrealized
gain (loss) from investments of $31.5 million in the Second
Quarter, compared to $(2.6) million in the First Quarter. The
change between the current and First Quarter is largely due to the
change in U.S. Treasury yields and the corresponding increase in
the prices of our Agency RMBS during the Second Quarter and First
Quarter. To illustrate, during the Second Quarter, the 10-year U.S.
Treasury yield decreased by 9 bps, as compared to a 5 bps decrease
during the First Quarter. As a result, during the Second Quarter
the price of a 30-year 3.5% Agency RMBS increased $0.31 to $102.67,
while only increasing $0.03 to $102.36 in the First Quarter.
The Company recognized a net realized and unrealized gain (loss)
on derivative instruments of $(18.3) million in the Second Quarter,
comprised of $(28.4) million of net realized and unrealized loss on
swap and cap contracts, offset by $10.1 million of net realized and
unrealized gain on TBA dollar roll transactions whereby the Company
is not contractually obligated to accept delivery on the settlement
date (the "TBA Derivatives"), compared to a net realized and
unrealized loss on derivative instruments of $(1.0) million in the
First Quarter, comprised of $7.2 million net realized and
unrealized gain on swap and cap contracts, offset by $(8.2) million
in net realized and unrealized loss on TBA Derivatives. As
previously noted, during the Second Quarter we repositioned a
portion of our hedge portfolio by terminating and replacing swaps
with a $1 billion notional and short remaining life with an equal
amount of 7-year, cancelable-in-one-year, swaps, in addition to
incrementally adding $100 million notional of 10-year swaps.
Terminating the aforementioned hedges resulted in a realized gain
of $1.8 million during the Second Quarter. The change in
realized and unrealized gains (losses) on derivative instruments is
primarily due to the change in swap rates. To illustrate, during
the Second Quarter 5-year and 7-year swap rates decreased by 9 bps
and 11 bps, whereas they increased by 7 bps and 6 bps during the
First Quarter, respectively. The change in net realized and
unrealized gain (loss) on TBA's is primarily attributable to the
change in U.S. Treasury yields noted above.
The Company’s operating expense ratio as a percentage of average
stockholders' equity ("Operating Expense Ratio") was 1.40% in the
Second Quarter, compared to 1.61% in the First Quarter. The First
Quarter includes $0.6 million of non-recurring accelerated
restricted stock and other compensation expense related to the
retirement of our prior Chief Financial Officer and Treasurer.
Excluding non-recurring charges, the Operating Expense Ratio during
the First Quarter was 1.46%.
Set forth below are summary financial data for the Second
Quarter and First Quarter:
Summary Financial Data
(dollars in thousands except per share data)
Three Months Ended Key Balance Sheet Metrics June
30, 2017 March 31, 2017
Average settled Debt Securities (1) $ 10,796,064 $
10,819,433 Average total Debt Securities (2) $ 12,479,401 $
12,485,920 Average repurchase agreements (3) $ 9,276,572 $
9,264,522 Average Debt Securities liabilities (4) $ 10,959,909 $
10,931,009 Average stockholders' equity (5) $ 1,550,906 $ 1,539,245
Average common shares outstanding (6) 151,729 151,572 Leverage
ratio (at period end) (7) 7.20:1 7.15:1 Hedge Ratio (8) 97 % 99 %
Book value per common share (at period end) (9) $ 8.31 $ 8.26
Weighted-average amortized cost of Agency RMBS and U.S. Treasuries
(10) $ 103.31 $ 103.26
Key Performance Metrics*
Average yield on settled Debt Securities (11) 2.86 % 2.71 % Average
yield on total Debt Securities including Drop Income (12) 2.75 %
2.65 % Average cost of funds (13) 1.13 % 0.92 % Average cost of
funds and hedge (14) 1.49 % 1.28 % Adjusted average cost of funds
and hedge (15) 1.26 % 1.08 % Interest rate spread net of hedge (16)
1.37 % 1.43 % Interest rate spread net of hedge including Drop
Income (17) 1.49 % 1.57 % Operating expense ratio (18) 1.40 % 1.61
% Total stockholder return on common equity (19) 3.63 % 2.16 %
Constant prepayment rate (weighted-average experienced 1-month)
(20) 7.5 % 8.1 %
(1) The average settled Debt Securities is calculated by
averaging the month-end cost basis of
settled Debt Securities during the period.(2) The average total
Debt Securities is calculated by averaging the month-end cost basis of total Debt
Securities and all TBA contracts during the period.(3) The average
repurchase agreements are calculated by averaging the month-end repurchase agreements
balances during the period.(4) The average Debt Securities
liabilities are calculated by adding
the average month-end repurchase agreements balances plus average unsettled Debt Securities (inclusive
of TBA Derivatives) during the period.(5) The average stockholders'
equity is calculated by averaging the
month-end stockholders' equity during the period.(6) The average
common shares outstanding are calculated by averaging the daily common shares outstanding
during the period.(7) The leverage ratio is calculated by
dividing (i) the Company's repurchase
agreements balances plus payable for
securities purchased minus receivable
for securities sold plus net TBA
Derivative positions by (ii) stockholders' equity.(8) The Hedge
ratio for the period is calculated by dividing Interest Rate Swaps and Interest Rate
Caps notional amount by total repurchase agreements.(9) Book value
per common share is calculated by dividing total stockholders' equity less the liquidation value of preferred stock at
period end by common shares outstanding at period end.(10) The
weighted-average amortized cost of Agency RMBS and U.S. Treasuries
is calculated using a weighted-average cost by security
divided by the current face at period
end.(11) The average yield on settled Debt Securities for the
period is calculated by dividing total
interest income by average settled Debt Securities.(12) The average
yield on total Debt Securities including Drop Income for the period
is calculated by dividing total
interest income plus Drop Income by
average total Debt Securities. Drop Income was $8.7 million and
$9.4 million for the Second Quarter and First Quarter,
respectively. Drop Income is a component of our net realized and
unrealized gain (loss) on investments and derivative instruments in
the consolidated statements of operations.(13) The average cost of
funds for the period is calculated by dividing repurchase agreement interest expense by
average repurchase agreements for the period.(14) The average cost
of funds and hedge for the period is calculated by dividing repurchase agreement and swap and cap
interest expense by average repurchase agreements.(15) The adjusted
average cost of funds and hedge for the period is calculated by
dividing repurchase agreement and swap
and cap interest expense by average Debt Securities
liabilities.(16) The interest rate spread net of hedge for the
period is calculated by subtracting
average cost of funds and hedge from average yield on settled Debt
Securities.(17) 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 yield on total Debt Securities including Drop
Income.(18) The operating expense ratio for the period is
calculated by dividing operating
expenses by average stockholders' equity.(19) The total stockholder
return on common equity is calculated as the change in book value
plus dividend distributions on common
stock divided by book value at the
beginning of the period.(20) CPR represents the weighted-average
1-month CPR of the Company's Agency RMBS during the period.* All
percentages are annualized except total stockholder return on
common equity.
Portfolio
The Company's Debt Securities portfolio, including net TBA
Derivatives, at fair value, increased to approximately $12.6
billion at June 30, 2017, from $12.5 billion at March 31,
2017. During the first quarter of 2017 we continued to
sell lower yielding, and purchase higher yielding, Agency RMBS
resulting in an increase in the average yield and simultaneous
decrease in the weighted-average amortized cost of our Debt
Securities portfolio, which we continued to benefit from throughout
the Second Quarter. We expect to continue to benefit from this
portfolio repositioning in future quarters. During the Second
Quarter, we moderately reduced our 15-year Agency RMBS holdings and
increased our 30-year Agency RMBS holdings. We experienced a 0.6%
decline in the weighted-average 1-month prepayment speeds during
the Second Quarter to 7.5% from 8.1% in the First Quarter. The
decline in prepayment speeds, coupled with additional portfolio
repositioning resulted in a 15 bps increase in the average yield on
Debt Securities during the Second Quarter to 2.86% from 2.71% in
the First Quarter.
The following tables detail the Company's Debt Securities
portfolio, inclusive of $0.9 billion and $1.4 billion of net TBA
Derivatives at June 30, 2017 and March 31, 2017,
respectively (dollars in thousands):
June 30, 2017 March
31, 2017 Fair Value % of Total
Fair Value % of Total 15-Year Fixed
Rate $ 4,096,032 33% $ 4,232,639 34% 20-Year Fixed Rate 38,034 —%
40,054 —% 30-Year Fixed Rate 8,090,392 64% 7,846,908 63% Hybrid
ARMs 341,811 3% 282,451 2% U.S. Treasuries 24,841 —% 49,688
1% Total $ 12,591,110 100% $ 12,451,740 100%
Key metrics related to the Company’s Debt Securities portfolio,
inclusive of net TBA Derivatives, as of June 30, 2017 are
summarized below:
Face Value Fair
Value Weighted-Average Asset Type (in
thousands) Cost/Face
FairValue/Face
Yield(1) Coupon
CPR(2) 15-Year Fixed Rate $ 3,982,575 $
4,096,032 $ 102.48 $ 102.85 2.23 % 3.07 % 8.8 % 20-Year Fixed Rate
35,368 38,034 102.61 107.54 2.13 % 4.50 % 13.9 % 30-Year Fixed Rate
7,797,427 8,090,392 103.77 103.76 2.90 % 3.68 % 6.2 % Hybrid ARMs
(3) 332,190 341,811 102.64 102.90 2.18 % 2.96 % 19.5 % U.S.
Treasury Securities 25,000 24,841 99.94 99.36
1.27 % 0.63 % n/a Total $ 12,172,560 $ 12,591,110
$ 103.31 $ 103.44 2.65 % 3.46 % 7.5 %
__________
(1) Represents a forward yield and is calculated based on the
cost basis of the security at June 30, 2017.
(2) Represents CPR for those bonds held at June 30, 2017.
CPR is a method of expressing the prepayment rate for a mortgage
pool that assumes a constant fraction of the remaining principal is
prepaid each month. Specifically, the constant prepayment rate is
an annualized version of the experienced prior three-month
prepayment rate. Securities with no prepayment history are excluded
from this calculation.
(3) The weighted-average months to reset of our Hybrid ARM
portfolio was 71.8 at June 30, 2017. 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 Hybrid ARM and will reset thereafter
annually.
Leverage & Liquidity
Our leverage was 7.20:1 at the end of the Second Quarter,
compared to 7.15:1 at the end of the First Quarter. As of
June 30, 2017 and March 31, 2017, the Company financed
its portfolio through repo borrowings of approximately $9.4 billion
and $9.0 billion, respectively, and recognized a payable for
securities purchased net of receivable for securities sold of
approximately $0.8 billion and $0.5 billion, respectively.
At June 30, 2017 and March 31, 2017, the Company’s
liquidity position, consisting of unpledged Agency RMBS, U.S.
Treasuries, and cash and cash equivalents, was approximately $1.07
billion, or 69.4%, and $1.05 billion, or 68.8%, of stockholders'
equity, respectively.
Financing
During the Second Quarter, the Company financed its investment
portfolio with average repo borrowings of $9.3 billion, with an
average cost of funds of 1.13%, compared to $9.3 billion and 0.92%,
respectively, during the First Quarter. Total interest expense
increased $5.0 million to $26.2 million in the Second Quarter from
$21.2 million in the First Quarter, primarily due to the increase
in our cost of funds during the Second Quarter, as described in
more detail above.
During the Second Quarter, the Company did not experience a
decline in the availability of repo borrowings. At June 30,
2017, repo borrowings with any individual counterparty were less
than 7% of our total repo borrowings. As of June 30, 2017, we
had 35 active counterparties and 51 total counterparties available
to finance the Company's operations through repo borrowings.
Below is a summary, by region, of our outstanding borrowings at
June 30, 2017 (dollars in thousands):
Counterparty Region Number of
Counterparties Total Outstanding
Borrowings % of Total North America 21
$5,036,458 53.8% Europe 8 2,374,498 25.3% Asia 6 1,959,889 20.9%
Total 35 $9,370,845 100.0%
Hedging
The Company utilizes interest rate swap and cap contracts (a
"swap" or "cap", respectively) to manage interest rate risk
associated with the financing of its Debt Securities portfolio.
As of June 30, 2017, the Company held swaps with an
aggregate notional amount of $6.6 billion, a weighted-average fixed
rate of 1.48%, a weighted-average receive rate of 1.17%, a
weighted-average net pay rate of 0.31% and a weighted-average
remaining maturity of 3.6 years. The receive rate on the Company's
swaps is the 3-month LIBOR, which resets quarterly and stood at
1.17% at June 30, 2017, up from 1.04% at March 31, 2017.
Our weighted-average fixed pay rate on swaps increased to 1.48% at
June 30, 2017 from 1.23% at March 31, 2017 as a result of the
portfolio repositioning and expansion described above, while the
net pay rate on swaps increased to 0.31% at June 30, 2017 from
0.19% at March 31, 2017.
At June 30, 2017, the Company held caps with a notional
amount of $2.5 billion, a weighted-average cap rate of 1.28%, and a
weighted-average remaining maturity of 2.5 years. For two of our
caps 3-month LIBOR exceeded the cap rate of 1.25%, making them cash
flow positive. Two additional caps are expected to begin
cash-flowing in the third quarter of 2017 when the respective rates
are scheduled to reset. After repositioning and increasing the
duration and size of our hedge portfolio, we experienced an 8 bps
decrease in the net swap and cap pay rate during the Second Quarter
to 41 bps from 49 bps in the First Quarter.
As of March 31, 2017, the Company held swaps with an
aggregate notional amount of $6.5 billion, a weighted-average
fixed rate of 1.23%, a weighted-average receive rate
of 1.04%, a weighted-average net pay rate
of 0.19% and a weighted-average remaining maturity
of 2.8 years. At March 31, 2017, the Company
held caps with a notional amount of $2.5 billion, a
weighted-average cap rate of 1.28%, and a weighted-average
remaining maturity of 2.8 years.
Key provisions of the Company's outstanding swaps and caps at
June 30, 2017 are summarized below (dollars in thousands):
Interest Rate
Swaps Weighted-Average Expiration
Year Notional Amount Fair Value Fixed Pay
Rate Receive Rate Net Pay
(Receive) Rate 2018 $ 1,500,000 $ 4,037 1.00% 1.18% (0.18)%
2020 1,750,000 18,251 1.45% 1.16% 0.29% 2021 1,700,000 39,725 1.21%
1.18% 0.03% 2022 500,000 (455 ) 1.98% 1.17% 0.81% 2024 * 1,000,000
894 2.42% 1.17% 1.25% 2027 100,000 1,178 2.16% 1.27%
0.89% Total $ 6,550,000 $ 63,630 1.48% 1.17% 0.31%
Interest Rate Caps
Weighted-Average Expiration Year Notional
Amount Fair Value Cap Rate Receive Rate
Net Cap Pay Rate 2019 $ 800,000 $ 4,937 1.34% —% 1.34% 2020
1,700,000 22,794 1.25% 0.91% 0.34% Total $ 2,500,000
$ 27,731 1.28% 0.62% 0.66%
______________
* Includes 7-year swaps with a notional value of $500 million,
$250 million, and $250 million, cancelable on April 19, 2018, May
19, 2018 and May 21, 2018, respectively.
Duration Gap
Our net duration gap increased to 1.03 at June 30, 2017,
from 0.93 at March 31, 2017.
Drop Income
"Drop Income" is a component of our net realized and unrealized
gain (loss) on investments and net realized and unrealized gain
(loss) on derivative instruments in the Company's Consolidated
Statements of Operations, and is therefore excluded from Core
Earnings. Drop Income is the difference between the spot price and
the forward settlement price for the same Agency RMBS on the trade
date. This difference is also the economic equivalent of the
assumed net interest spread (yield less financing costs) of the
Agency RMBS from trade date to settlement date. The Company derives
Drop Income through utilization of forward settling transactions of
Agency RMBS. The Company's Drop Income and average market value of
all TBAs outstanding during the Second Quarter and First Quarter
follow (dollars in thousands):
June 30, 2017 March
31, 2017 $ Change Drop Income $ 8,678 $ 9,382 $ (704 )
Average market value of all TBAs $ 1,657,271 $ 1,513,532 $ 143,739
Prepayments
We received $305.8 million in principal repayments and
prepayments from our Agency RMBS portfolio during the Second
Quarter, representing a weighted-average CPR of approximately 7.5%
and net amortization expense of $12.6 million. During the First
Quarter, we received $330.5 million in principal repayments and
prepayments from our Agency RMBS portfolio, representing a
weighted-average CPR of approximately 8.1% and net amortization
expense of $14.5 million. The decrease in CPR in the Second Quarter
was principally due to subdued mortgage financings and bond
seasoning factors.
Dividend
The Company declared a common dividend of $0.25 per share for
the Second Quarter, unchanged from the First Quarter. Using the
closing share price of $8.41 on June 30, 2017, the Second
Quarter dividend equates to an annualized dividend yield of
11.9%.
Share Repurchase Program
The Company did not repurchase any shares of its common stock in
the Second Quarter or First Quarter under its share repurchase
program. As of June 30, 2017, the Company had
approximately $155.5 million available under the share repurchase
program to repurchase shares of its common stock.
Conference Call
The Company will host a conference call at 9:00 AM Eastern Time
on Thursday, July 27, 2017, to discuss its financial results
for the Second Quarter. To participate in the call, please dial
(888) 647-8086 at least 10 minutes prior to the start time and
reference the conference passcode 55269759. International callers
should dial (484) 821-5013 and reference the same passcode. The
conference call will be webcast live over the Internet and can be
accessed at the Company’s web site at www.cysinv.com. To listen to
the live webcast, please visit 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 of the call will be available on Thursday,
July 27, 2017, at approximately 12:00 PM Eastern Time through
Thursday, August 10, 2017 at approximately 11:00 AM Eastern Time.
To access this replay, please dial (855) 859-2056 and enter the
conference ID number 55269759. International callers should dial
(404) 537-3406 and enter the same conference ID number. A replay of
the conference call will also be archived on the Company’s website
at www.cysinv.com.
Additional Information
The Company plans to make available a supplemental presentation
("Presentation") for the benefit of its stockholders on the
Company's website, www.cysinv.com, prior to the conference call.
The Presentation will be available on the Webcasts/Presentations
tab of the Investor Relations section of the Company's website.
About CYS Investments, Inc.
CYS Investments, Inc. is a specialty finance company that
primarily 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 treated as a real estate
investment trust for federal income tax purposes.
Forward-Looking Statements Disclaimer
This release contains “forward-looking statements” made pursuant
to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995, including those relating to interest rates and
interest rate volatility, the prices, supply and volatility of
Agency RMBS, earnings, yields, investment environment, hedges,
forward settling transactions, liquidity, prepayments, the
anticipated benefits of our portfolio and hedge repositioning, and
the effect of actions of the U.S. government, the Fed and the FOMC
on our results. Forward-looking statements typically are identified
by use of the terms such as “believe,” “expect,” “anticipate,”
“estimate,” “plan,” “continue,” “intend,” “should,” “may” or
similar expressions. Forward-looking statements are based on the
Company's beliefs, assumptions and expectations of the Company's
future performance, taking into account all information currently
available to the Company. The Company cannot assure you that actual
results will not vary from the expectations contained in the
forward-looking statements. All of the forward-looking statements
are subject to numerous possible events, factors and conditions,
many of which are beyond the control of the Company and not all of
which are known to the Company, including, without limitation,
market conditions and those described in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2016,
which has been filed with the Securities and Exchange Commission.
All forward-looking statements speak only as of the date on which
they are made. New risks and uncertainties arise over time, and it
is not possible to predict those events or how they may affect us.
Except as required by law, the Company is not obligated to, and
does not intend to, update or revise any forward-looking
statements, whether as a result of new information, future events
or otherwise.
CYS INVESTMENTS, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share
data)
June 30, 2017
March 31,2017
December 31,2016*
(unaudited) (unaudited) Assets: Cash and cash
equivalents $ 1,264 $ 584 $ 1,260 Investments in securities, at
fair value: Agency mortgage-backed securities (including pledged
assets of $9,834,904, $9,482,227 and $10,233,165, respectively)
11,705,696 11,011,163 12,599,045 U.S. Treasury securities
(including pledged assets of $24,841, $26,334 and $44,469,
respectively) 24,841 49,688 49,686 Receivable for securities sold
and principal repayments 689 573 409,849 Receivable for cash
pledged as collateral — — 600 Interest receivable 32,340 31,401
31,825 Derivative assets, at fair value 92,520 136,552 142,556
Other investments 8,028 8,028 8,028 Other assets 4,038 2,929
2,419 Total assets $ 11,869,416 $ 11,240,918
$ 13,245,268
Liabilities and stockholders'
equity: Liabilities: Repurchase agreements $ 9,370,845 $
9,015,594 $ 9,691,544 Payable for securities purchased 817,597
524,482 1,881,963 Payable for cash received as collateral 64,402
101,819 91,503 Accrued interest payable 28,810 25,457 27,908
Accrued expenses and other liabilities 3,045 3,559 6,170 Dividends
payable 42,342 42,337 4,410 Derivative liabilities, at fair value
6,725 — 6,051 Total liabilities $ 10,333,766
$ 9,713,248 $ 11,709,549
Stockholders'
equity: Preferred Stock, $0.01 par value, 50,000 shares
authorized: 7.75% Series A Cumulative Redeemable Preferred Stock,
(3,000 shares issued and outstanding, respectively, $75,000 in
aggregate liquidation preference) $ 72,369 $ 72,369 $ 72,369 7.50%
Series B Cumulative Redeemable Preferred Stock, (8,000 shares
issued and outstanding, respectively, $200,000 in aggregate
liquidation preference) 193,531 193,531 193,531 Common Stock, $0.01
par value, 500,000 shares authorized (151,731 151,708 and 151,435
shares issued and outstanding, respectively) 1,517 1,517 1,514
Additional paid in capital 1,946,856 1,945,966 1,944,908 Retained
earnings (accumulated deficit) (678,623 ) (685,713 ) (676,603 )
Total stockholders' equity $ 1,535,650 $ 1,527,670 $
1,535,719
Total liabilities and stockholders' equity
$ 11,869,416 $ 11,240,918 $ 13,245,268
Book
value per common share $ 8.31 $ 8.26 $ 8.33
__________________
* Derived from audited consolidated financial statements.
CYS INVESTMENTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended (dollars in thousands, except per
share data)
June 30, 2017
March 31, 2017 Interest income: Agency RMBS $ 77,027 $
73,227 Other 61 86 Total interest income 77,088
73,313 Interest expense: Repurchase agreements 26,182
21,221 Total interest expense 26,182 21,221
Net interest income 50,906 52,092 Other income
(loss): Net realized gain (loss) on investments (19,831 ) (66,044 )
Net unrealized gain (loss) on investments 51,299 63,478 Other
income 39 47 Net realized and unrealized gain (loss)
on investments and other income 31,507 (2,519 ) Swap and cap
interest expense (8,434 ) (8,327 ) Net realized and unrealized gain
(loss) on derivative instruments (18,324 ) (1,012 ) Net gain (loss)
on derivative instruments (26,758 ) (9,339 ) Total other income
(loss) 4,749 (11,858 ) Expenses: Compensation and benefits
3,004 3,776 General, administrative and other 2,426 2,438
Total expenses 5,430 6,214 Net income (loss) $
50,225 $ 34,020 Dividends on preferred stock (5,203 )
(5,203 ) Net income (loss) available to common stockholders $
45,022 $ 28,817 Net income (loss) per common share
basic & diluted $ 0.30 $ 0.19
Core Earnings
"Core Earnings" represents a non-GAAP financial measure and is
defined as net income (loss) available to common stockholders
excluding net realized and unrealized gain (loss) on investments
and derivative instruments. Management uses Core Earnings to
evaluate the effective yield of the portfolio after operating
expenses. The Company believes that providing users of the
Company's financial information with such measures, in addition to
the related GAAP measures, gives investors greater transparency and
insight into the information used by the Company's management in
its financial and operational decision-making.
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 and unrealized gain
(loss) on investments and derivative instruments. In addition, the
Company's presentation of Core Earnings may not be comparable to
similarly-titled measures of other companies, which may use
different calculations. As a result, Core Earnings should not be
considered a substitute for the Company's GAAP net income (loss), a
measure of our financial performance or any measure of our
liquidity under GAAP.
The following table reconciles Net income to Core Earnings, a
non-GAAP measure, and summarizes Core Earning plus Drop Income for
the periods presented.
Three Months Ended (dollars in
thousands, except per share data)
June 30, 2017
March 31, 2017 Net income (loss) available to
common stockholders $ 45,022 $ 28,817 Net realized (gain) loss on
investments 19,831 66,044 Net unrealized (gain) loss on investments
(51,299 ) (63,478 ) Net realized and unrealized (gain) loss on
derivative instruments 18,324 1,012 Core Earnings $
31,878 $ 32,395 Core Earnings per average share $
0.21 $ 0.21 Drop Income $ 8,678 $ 9,382
Core Earnings plus Drop Income $ 40,556 $ 41,777 Core
Earnings plus Drop Income per average share $ 0.27 $ 0.28
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CYS Investments, Inc.Richard E. Cleary, 617-639-0440Chief
Operating Officer
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