CYS Investments, Inc. Announces Second Quarter 2013 Financial Results
NEW YORK -- July 17, 2013
CYS Investments, Inc. (NYSE: CYS) (“CYS” or the “Company”) today announced
financial results for the quarter ended June30, 2013.
Second Quarter 2013 Summary Results
*June30, 2013 net asset value per common share of $10.20 after declaring a
$0.34 dividend per common share on June 10, 2013.
*June30, 2013 leverage ratio of 7.5 to 1.
*GAAP net loss available to common shares of $402.3 million, or $2.32 per
diluted common share. The main contributors were:
*Net realized loss from investments of $211.4 million.
*Net unrealized depreciation on investments of $444.9 million.
*Net unrealized appreciation on swap and cap contracts of $215.5
*Core Earnings plus Drop Income of $63.4 million, or $0.37 per diluted
common share ($0.18 Core Earnings and $0.19 Drop Income).
*Operating expenses of 0.98% of average net assets.
*Interest rate spread net of hedge including drop income of 1.36%.
*Weighted average amortized cost of Agency RMBS of $104.32.
Second Quarter 2013 Agency RMBS Market Summary
In the second quarter of 2013, Agency RMBS markets reacted to a series of
communications made by the U.S. Federal Reserve (the “Fed”) regarding the
timing of tapering its bond purchases known as "quantitative easing" or "QE3".
As the perceived likelihood of QE3 tapering increased, Agency RMBS markets
reacted, resulting in markedly lower prices. The following table illustrates
the recent volatility of Agency RMBS prices and yields:
Fannie Mae 30 Year 3.5%
Press Price Day Price Day Yield Day
Date Release Prior of Change of
to Release Release Release
May the Federal
22, Open Market 105.359 104.672 (0.687 ) 2.65 %
May the Fed
28, Board's 104.578 103.516 (1.062 ) 2.85 %
June The Fed
19, issues FOMC 103.328 101.984 (1.344 ) 3.04 %
During this time, rates on U.S. Treasuries and swaps also increased however,
not in the same order of magnitude as Agency RMBS yields. This caused Agency
RMBS prices to decline considerably more than both U.S. Treasuries and
interest rate swaps, creating a dislocation between the value of our assets
and hedges. For example, from May 22, 2013 to June 30, 2013, the yield on a
Fannie Mae 30 Year 3.5% increased 61 basis points to 3.14%, while the rate on
a 4 year interest rate swap increased only 47 basis points to 1.20%.
At June30, 2013, the Company’s liquidity position, consisting of unpledged
Agency RMBS, U.S. Treasuries and cash and cash equivalents, was approximately
$1.3 billion, or 65.4% of net assets, compared to $1.5 billion, or 63.9% of
net assets at March 31, 2013. Despite Agency RMBS price declines during the
second quarter, the Company maintained liquidity as a percentage of net assets
above 50%. To date, the Company has maintained sufficient liquidity to meet
all margin calls.
While Agency RMBS prices declined during the second quarter of 2013, the
Company maintained its leverage discipline, ending the second quarter of 2013
with a leverage ratio of 7.5 to 1, compared to 7.8 to 1 at March 31, 2013.
During the second quarter of 2013, the Company reduced its Agency RMBS
portfolio from $20.1 billion at March 31, 2013 to $17.2 billion at June 30,
2013. The following table details the Company's portfolio at June 30, 2013 and
March 31, 2013.
June 30, 2013 March 31, 2013
Fair Value (in % Fair Value (in %
15 Year Fixed $ 5.8 34 % $ 9.2 46 %
20 Year Fixed 1.0 6 % 1.1 6 %
30 Year Fixed 7.8 45 % 6.3 31 %
Hybrid ARMs 2.6 15 % 3.5 17 %
Total $ 17.2 100 % $ 20.1 100 %
At June30, 2013, the Company’s Agency RMBS portfolio was backed by fixed-rate
mortgages and hybrid adjustable-rate mortgages (“Hybrid ARMs”) with 0 to 120
months to reset. The portfolio is comprised of 41.5% 2013 production; 46.1%
2012 production; 9.6% 2011 production; 2.6% 2010 production; and 0.2% 2009
production. Additional information about our Agency RMBS portfolio at June30,
2013 is summarized below:
Par Value Fair Value Weighted Average
Asset Type (in thousands) Cost/Par Fair Yield^(1) Coupon CPR^(2)
15 Year Fixed $ 5,582,309 $ 5,773,741 $ 104.51 $ 103.43 2.20 % 3.17 % 15.2 %
20 Year Fixed 1,028,057 1,044,339 104.91 101.58 2.29 % 3.15 % 7.6 %
30 Year Fixed 7,683,260 7,837,908 104.30 102.01 2.96 % 3.59 % 7.8 %
Hybrid ARMs 2,511,218 2,555,271 103.74 101.75 1.80 % 2.59 % 17.4 %
Total/Weighted $ 16,804,844 $ 17,211,259 $ 104.32 $ 102.42 2.49 % 3.27 % 13.5 %
^(1) This is a forward yield and is calculated based on the cost basis of the
security at June30, 2013.
^(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 June30, 2013. Securities with no prepayment history are excluded from
^(3) The weighted average months to reset of our Hybrid ARM portfolio was 74.8
at June30, 2013. 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.
Second Quarter 2013 Results
The Company had net loss available to common shares of $402.3 million during
the second quarter of 2013, or $2.32 per diluted common share, compared to net
loss of $17.7 million, or $0.10 per diluted common share, in the first quarter
of 2013. During the second quarter of 2013, the Company had Core Earnings plus
Drop Income of $63.4 million, or $0.37 per diluted common share (Core Earnings
of $31.1 million, or $0.18 per diluted common share, and Drop Income of $32.3
million, or $0.19 per diluted common share), compared to $56.4 million, or
$0.32 per diluted common share (Core Earnings of $29.1 million, or $0.17 per
diluted common share, and Drop Income of $27.3 million, or $0.15 per diluted
common share), in the first quarter of 2013.
The Company’s interest rate spread net of hedge including drop income was
1.36% for the second quarter of 2013, compared to 1.16% for the first quarter
The Company had a net realized loss on investments of $211.4 million for the
second quarter of 2013, compared to a gain of $46.7 million for the first
quarter of 2013.
The Company’s net asset value per common share on June30, 2013 was $10.20,
after declaring a $0.34 dividend per common share on June 10, 2013, compared
with $12.87 at March31, 2013.
The Company’s operating expenses were $5.7 million, or 0.98% of average net
assets, for the second quarter of 2013, compared to $5.6 million, or 0.94% of
average net assets, for the first quarter of 2013. Operating expenses were
stable during the quarter; however, the increase as a percentage of average
net assets was a result of lower average net assets.
(dollars in thousands) Three Months Ended
Key Balance Sheet Metrics June 30, 2013 March 31, 2013
Average settled Agency RMBS ^(1) $ 15,974,500 $ 16,066,672
Average total Agency RMBS ^(2) $ 19,944,791 $ 20,200,479
Average repurchase agreements ^(3) $ 13,871,404 $ 14,107,740
Average Agency RMBS liabilities ^(4) $ 17,841,695 $ 18,241,547
Average net assets ^(5) $ 2,321,128 $ 2,357,333
Average common shares outstanding ^(6) 174,145 174,864
Leverage ratio (at period end) ^(7) 7.5:1 7.8:1
Key Performance Metrics*
Average yield on settled Agency RMBS 2.03 % 1.80 %
Average yield on total Agency RMBS 2.27 % 1.97 %
including drop income ^(9)
Average cost of funds and hedge ^(10) 1.17 % 1.05 %
Adjusted average cost of funds and hedge 0.91 % 0.81 %
Interest rate spread net of hedge ^(12) 0.86 % 0.75 %
Interest rate spread net of hedge 1.36 % 1.16 %
including drop income ^(13)
Operating expense ratio ^(14) 0.98 % 0.94 %
^(1) The average settled Agency RMBS is calculated by averaging the month end
cost basis of settled Agency RMBS during the period.
^(2) The average total Agency RMBS is calculated by averaging the month end
cost basis of total Agency RMBS during the period.
^(3) The average repurchase agreements are calculated by averaging the month
end repurchase agreements balance during the period.
^(4) The average Agency RMBS liabilities are calculated by averaging the month
end repurchase agreements balance plus average unsettled Agency RMBS during
^(5) The average net assets are calculated by averaging the month end net
assets 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 balance plus payable for securities purchased minus receivable for
securities sold by (ii) net assets.
^(8) The average yield on settled Agency RMBS for the period is calculated by
dividing interest income from Agency RMBS by average settled Agency RMBS.
^(9) The average yield on total Agency RMBS including drop income for the
period is calculated by dividing interest income from Agency RMBS plus drop
income by average total Agency RMBS.
^(10) The average cost of funds and hedge for the period is calculated by
dividing total interest expense, including net swap and cap interest income
(expense), by average repurchase agreements.
^(11) The adjusted average cost of funds and hedge for the period is
calculated by dividing total interest expense, including net swap and cap
interest income (expense), by average Agency RMBS liabilities.
^(12) 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
^(13) 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 Agency RMBS including drop income.
^(14) The operating expense ratio for the period is calculated by dividing
operating expenses by average net assets.
* All percentages are annualized.
At June30, 2013, the Company had financed its portfolio with approximately
$13.8 billion of borrowings under repurchase agreements with a weighted
average interest rate of 0.39% and a weighted average maturity of
approximately 41.9 days. In addition, the Company had payable for securities
purchased of $6.1 billion. During the second quarter of 2013, the Company did
not experience material changes in the availability of repurchase agreement
borrowings or to haircuts on the Agency RMBS that the Company uses as
collateral for such borrowings. Below is a list of outstanding borrowings
under repurchase agreements at June30, 2013 (dollars in thousands):
% of Net Weighted
Total % of Assets Average
Counterparty Outstanding Total At Risk ^ Maturity
Borrowings (1) in
Bank of America $ 894,094 6.5 % 2.3 % 27
Barclays Capital, 938,756 6.8 2.3 39
BNP Paribas 957,722 6.9 2.5 36
Cantor Fitzgerald & 75,696 0.5 0.2 15
Citigroup Global 522,427 3.8 1.4 83
Credit Suisse 642,940 4.7 1.7 43
Securities (USA) LLC
CRT Capital Group 45,046 0.3 0.1 15
Daiwa Securities 308,874 2.2 0.8 52
Deutsche Bank 378,037 2.7 1.1 18
Goldman Sachs & Co. 707,348 5.1 1.7 44
Guggenheim Liquidity 303,902 2.2 0.8 28
Commercial Bank of 822,802 6.0 2.2 30
ING Financial 712,633 5.2 2.0 42
Jefferies & Company, 65,541 0.5 0.2 43
J.P. Morgan 258,233 1.9 0.5 15
KGS Alpha Capital 119,065 0.9 0.4 86
LBBW Securities LLC 134,808 1.0 0.4 24
Securities (USA), 582,819 4.2 1.6 51
Mizuho Securities 528,177 3.8 1.4 48
Morgan Stanley & Co. 732,724 5.3 1.9 51
Nomura Securities 536,926 3.9 1.4 80
RBC Capital Markets, 803,772 5.8 2.3 54
The Royal Bank of 189,697 1.4 0.5 10
Bank of Nova Scotia 654,350 4.7 1.1 44
South Street 370,565 2.7 1.3 40
UBS Securities LLC 648,274 4.7 1.8 61
Wells Fargo 874,091 6.3 1.4 12
$ 13,809,319 100.0 % 35.3 %
^(1) Equal to the fair value of pledged securities plus accrued interest
income, minus the sum of repurchase agreement liabilities and accrued interest
expense divided by net assets.
The Company utilizes interest rate swap and cap contracts to hedge the
interest rate risk associated with the financing of its Agency RMBS portfolio.
As of June30, 2013, the Company had entered into interest rate swap contracts
with an aggregate notional amount of $8.6 billion, a weighted average fixed
rate of 1.215%, and a weighted average expiration of 2.71 years. At June30,
2013, the Company had entered into interest rate cap contracts with a notional
amount of $4.4 billion, a weighted average cap rate of 1.443%, and a weighted
average expiration of 6.23 years. These interest rate swap and cap contracts
are described below (dollars in thousands):
Interest Rate Swaps Weighted Average Notional Fair
Expiration Year Fixed Pay Rate Amount Value
2013 1.30 % $ 2,000,000 $ (7,935 )
2014 1.41 % 1,290,000 (15,215 )
2015 2.15 % 500,000 (13,902 )
2016 1.71 % 550,000 (13,780 )
2017 0.91 % 2,750,000 38,842
2018 1.00 % 1,500,000 34,360
Total 1.21 % $ 8,590,000 $ 22,370
Interest Rate Caps Weighted Average Notional Fair
Expiration Year Cap Rate Amount Value
2015 1.40 % 500,000 1,031
2019 1.56 % 1,700,000 93,130
2020 1.25 % 1,700,000 136,743
2022 1.75 % 500,000 57,551
Total 1.44 % $ 4,400,000 $ 288,455
Drop Income is a component of our net gain (loss) from investments on our
statement 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 security on trade date. This difference is also the
economic equivalent of the assumed net interest margin (yield minus financing
costs) of the bond from trade date to settlement date. The Company derives
drop income through utilization of forward settling transactions.
During the second quarter of 2013, the Fed, under its quantitative easing
program, purchased approximately $209.3 billion of Agency RMBS, creating a
shortage of physical securities, and leading to higher current month Agency
RMBS prices. Higher current month prices relative to forward month prices will
increase drop income, or net interest margin available for forward settling
transactions. For example, as of July 5, 2013, this shortage increased the net
interest margin on forward transactions by approximately 44 basis points
(annualized) on Agency RMBS backed by 30 year Fannie Mae 3.5% mortgages when
compared to settling the same security in the current month.
The portfolio recorded $689.8 million in scheduled and unscheduled principal
repayments and prepayments, which equated to a constant prepayment rate
(“CPR”) of approximately 12.2% and net amortization of premium of $35.7
million for the second quarter of 2013. This compared to $942.7 million in
scheduled and unscheduled principal repayments and prepayments, which equated
to a CPR of approximately 17.5% and net amortization of premium of $45.8
million for the first quarter of 2013.
The CPR of the Company’s Agency RMBS portfolio was approximately 12.0% for the
month of July 2013.
The Company declared a common dividend of $0.34 per share with respect to the
second quarter of 2013, compared to $0.32 per share for the first quarter of
2013. Using the closing share price of $9.21 on June 28, 2013, the second
quarter dividend equates to an annualized dividend yield of 14.8%.
On April 30, 2013, the Company completed an underwritten public offering of
8,000,000 shares of 7.50% Series B Cumulative Redeemable Preferred Stock,
liquidation preference $25.00 per share, raising approximately $193.6 million
of net proceeds.
Share Repurchase Program
In November 2012, the Company's board of directors authorized the repurchase
of shares of common stock having an aggregate value of up to $250 million.
During the second quarter of 2013, the Company repurchased 1.8 million shares
with a weighted average purchase price of $10.24, or approximately $18.8
million in the aggregate. These purchases were accretive to the Company's net
asset value at the time the shares were repurchased. These purchases compared
to 0.6 million shares with a weighted average purchase price of $11.81, or
approximately $7.6 million in the aggregate, during the first quarter of 2013.
The Company will host a conference call at 9:00 AM Eastern Time on Thursday,
July 18, 2013, to discuss its financial results for the quarter ended June30,
2013. To participate in the call by telephone, please dial 888.895.5271 at
least 10 minutes prior to the start time and reference the conference passcode
35232102. International callers should dial 847.619.6547 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 18, 2013, at
approximately 12:00 PM Eastern Time. To access this replay, please dial
888.843.7419 and enter the conference ID number 35232102#. International
callers should dial 630.652.3042 and enter the same conference ID number. A
replay of the conference call will also be archived on 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 taxed as a real estate investment trust
for federal income tax purposes.
Forward-Looking Statements Disclaimer
This Current Report on Form 8-K contains “forward-looking statements” made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995, including those relating to forward settling transactions,
forward yield, and the effect of actions of the U.S. government, including the
Fed, 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,
2012, 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.
STATEMENTS OF ASSETS AND LIABILITIES (UNAUDITED)
(In thousands, except June 30, March 31, 2013 December 31,
per share numbers) 2013 2012*
securities, at fair
pledged assets of $ 17,218,204 $ 20,301,944 $ 20,861,718
Derivative assets, at 365,067 135,427 124,169
Cash and cash 11,302 13,463 13,882
securities sold and 4,583,565 414,936 10,343
Interest receivable 44,212 44,817 46,558
Other assets 1,175 542 826
Total assets 22,223,525 20,911,129 21,057,496
Repurchase agreements 13,809,319 13,760,475 13,981,307
Derivative liabilities, 54,242 58,464 98,575
at fair value
Payable for securities 6,126,222 4,657,501 4,515,501
Payable for cash 106,742 32,471 28,910
received as collateral
Distribution payable 62,530 57,115 1,243
accrued interest on 24,810 21,584 28,863
of $3,293, $4,164 and
Accrued expenses and 3,007 1,443 435
Total liabilities 20,186,872 18,589,053 18,654,834
NET ASSETS $ 2,036,653 $ 2,322,076 $ 2,402,662
Net assets consist of:
Preferred Stock, $25.00
par value, 50,000
Series A Cumulative
Stock, (3,000, 3,000
and 3,000 shares issued $ 72,369 $ 72,369 $ 72,369
Series B Cumulative
Stock, (8,000, 0 and 0
shares issued and 193,550 — —
Common Stock, $0.01 par
value, 500,000 shares
174,600 and 174,924 1,728 1,746 1,749
shares issued and
Additional paid in 2,212,529 2,230,457 2,237,512
Retained earnings (443,523 ) 17,504 91,032
NET ASSETS $ 2,036,653 $ 2,322,076 $ 2,402,662
NET ASSET VALUE PER $ 10.20 $ 12.87 $ 13.31
* Derived from audited
CYS INVESTMENTS, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended
(In thousands, except per share numbers) June 30, 2013 March 31, 2013
Interest income from Agency RMBS $ 80,991 $ 72,101
Other income 560 1,000
Total investment income 81,551 73,101
Interest 14,047 15,031
Compensation and benefits 3,425 3,320
General, administrative and other 2,246 2,233
Total expenses 19,718 20,584
Net investment income 61,833 52,517
GAINS AND (LOSSES) FROM INVESTMENTS:
Net realized gain (loss) on investments (211,418 ) 46,680
Net unrealized appreciation (444,877 ) (125,491 )
(depreciation) on investments
Net gain (loss) from investments (656,295 ) (78,811 )
GAINS AND (LOSSES) FROM SWAP AND CAP
Net swap and cap interest income (26,699 ) (21,956 )
Net gain (loss) on termination of swap 7,329 8,630
and cap contracts
Net unrealized appreciation 215,546 23,417
(depreciation) on swap and cap contracts
Net gain (loss) from swap and cap 196,176 10,091
NET LOSS $ (398,286 ) $ (16,203 )
DIVIDENDS ON PREFERRED STOCK (3,995 ) (1,453 )
NET LOSS AVAILABLE TO COMMON SHARES $ (402,281 ) $ (17,656 )
NET LOSS PER COMMON SHARE - BASIC & $ (2.32 ) $ (0.10 )
Core Earnings represents a non-GAAP financial measure and is defined as net
income (loss) available to common shares excluding net gain (loss) from
investments, net gain (loss) on termination of swap and cap 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 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 other comprehensive income 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 to compare its Core Earnings to those of its peers. 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, which 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
(In thousands) June 30, 2013 March 31, 2013
NET LOSS AVAILABLE TO COMMON SHARES $ (402,281 ) $ (17,656 )
Net (gain) loss from investments 656,295 78,811
Net (gain) loss on termination of swap (7,329 ) (8,630 )
and cap contracts
Net unrealized (appreciation) (215,546 ) (23,417 )
depreciation on swap and cap contracts
Core Earnings $ 31,139 $ 29,108
CYS Investments, Inc.
Richard E. Cleary, 617-639-0440
Chief Operating Officer
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