CYS Investments, Inc. (NYSE: CYS) ("CYS", "we", "our", or the
"Company") today announced financial results for the quarter ended
March 31, 2017 (the "First Quarter").
First Quarter 2017 Summary Results
- March 31, 2017 book value per
common share of $8.26, after declaring a $0.25 dividend per common
share, down from $8.33 at December 31, 2016.
- GAAP net income (loss) available to
common stockholders of $28.8 million, or $0.19 per diluted common
share.
- Core Earnings plus Drop Income of $41.8
million ($32.4 million Core Earnings and $9.4 million Drop Income),
or $0.28 per diluted common share ($0.21 Core Earnings and $0.07
Drop Income).
- Interest rate spread, net of hedge,
including Drop Income, of 1.57%.
- Operating expense ratio of 1.61%, or
1.46%, excluding non-recurring charges.
- Weighted-average amortized cost of
Agency RMBS and U.S. Treasuries (collectively, "Debt Securities")
of $103.26.
- Leverage ratio of 7.15:1 at
March 31, 2017.
- Constant Prepayment Rate ("CPR") of
8.1%.
- Total stockholder return on common
equity of 2.16%.
Market Commentary
Following the fourth quarter of 2016’s (the "Prior Quarter")
sell-off in rates, the First Quarter of 2017 (the "First Quarter")
was relatively quiet as the markets continued to price in optimism
for accelerating economic growth in the U.S. under the new
administration’s (the "New Administration") proposed policies. This
was expressed most plainly in the strong U.S. equity markets while
the U.S. bond markets traded in a relatively narrow range, having
already repriced in the Prior Quarter. The U.S. 10 year Treasury
traded in a 30 basis point (“bps”) range over the quarter. Equity
returns (at current leverage levels) on our target assets remain in
the low teens.
Although details have yet to be made clear, markets initially
anticipate that the New Administration’s fiscal policy measures
will likely pull forward economic growth, and increase the federal
budget deficit. However, these growth expectations became more
tempered after President Trump took office and it became clear that
the proposed new policies would be challenging to enact.
Nevertheless, based on ongoing statements and comments, the Federal
Open Market Committee (the "FOMC") seems compelled to continue with
its interest rate normalization program and raised the federal
funds rate (the "Fed Funds Rate") 25 basis points ("bps") in March
2017. As this move was largely anticipated, longer-term interest
rates changed only slightly. Additionally, in late March of 2017,
several Federal Reserve (the "Fed") officials signaled that they
would likely consider reducing or eliminating the Fed’s asset
reinvestment activities late in 2017, allowing the Fed’s balance
sheet to begin to wind down in 2018.
During the First Quarter, the 5-year U.S. Treasury yield fell
less than 1 bp, ending the quarter at 1.92%. Similarly, the yield
on the 10-year U.S. Treasury fell 5 bps, ending the quarter at
2.39%. For the same period, the price of Agency RMBS increased
marginally. For example, the price of 30-year FNMA 3.5% Agency RMBS
increased from $102.33 on December 31, 2016 to $102.36 on March 31,
2017, while the price of 15-year FNMA 3.0% Agency RMBS increased
from $102.48 on December 31, 2016 to $102.55 on March 31, 2017.
On the financing side of our business, during the First Quarter
we continued to benefit from money market reforms put in place
during the prior year, which served to increase cash in a financial
system seeking government securities as collateral for short-term
investments. Concurrently, a notable reduction in Treasury bill
issuance in response to the U.S. debt ceiling dynamics created a
relative shortage of short-dated U.S. Treasuries for these funds
seeking U.S. Treasuries. This benefited the financing side of our
business by supporting Agency RMBS repo funding costs, and reducing
our net hedging costs relative to where we believe costs would have
been absent the increased liquidity in the short term borrowing
markets.
In addition to the March 2017 25 bps hike in the Fed Funds Rate,
the FOMC and the financial markets are anticipating two to three
additional rate hikes in 2017. The financial markets and the FOMC
will continue to closely watch the New Administration’s fiscal
policy plans to better gauge inflation and interest rate
expectations. The current outlook is characterized by a
considerable amount of uncertainty. Despite this outlook, financial
markets exhibited low levels of volatility during the First
Quarter.
First Quarter 2017 Results
The Company’s book value per common share on March 31, 2017
was $8.26, compared to $8.33 at December 31, 2016, after
declaring a $0.25 dividend per common share on March 9, 2017.
The Company generated net income available to common
stockholders of $28.8 million in the First Quarter, or $0.19 per
diluted common share, compared to a net loss of $(185.4) million,
or $(1.23) per diluted common share, in the Prior Quarter, the key
components of which are explained below.
In the First Quarter, the Company generated Core Earnings
(defined below) plus Drop Income (defined below) of $41.8 million,
or $0.28 per diluted common share, 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. This compares
to Core Earnings plus Drop Income of $36.2 million, or $0.24 per
diluted common share during the Prior Quarter, comprised of Core
Earnings of $28.1 million, or $0.19 per diluted common share, and
Drop Income of $8.1 million, or $0.05 per diluted common share.
Core Earnings increased in the First Quarter from the Prior Quarter
primarily as a result of a $4.7 million increase in total interest
income and a $1.8 million decrease in swap and cap interest
expense. The increase in total interest income largely resulted
from a decrease in prepayment speeds, coupled with a decrease in
the weighted-average amortized cost basis of our Debt Securities.
The decrease in prepayment speeds and weighted-average cost of our
Debt Securities portfolio during the First Quarter resulted in a
$9.0 million decrease in net premium amortization expense compared
to the Prior Quarter. The decrease in swap and cap interest expense
results from an increase in the 3-month London Interbank Offered
Rate ("LIBOR") during the First Quarter, the index for the
receive-leg of our swaps.
The increase in Core Earnings in the First Quarter was offset by
(i) a $1.1 million increase in interest expense on borrowings due
to an increase in the average cost of funds and average borrowings
under repurchase agreements ("repo borrowings") and (ii) a $1.0
million increase in operating expenses which is further described
below. Drop Income increased by $1.3 million in the First Quarter
driven by the relative attractiveness of the TBA securities market
during the First Quarter while volume of forward purchase settling
transactions from which we derive Drop Income remained mostly
unchanged.
In the First Quarter, total interest income increased to $73.3
million from $68.6 million in the Prior Quarter as noted above,
causing the average yield on our settled Debt Securities to
increase to 2.71% in the First Quarter from 2.39% in the Prior
Quarter. The First Quarter weighted-average experienced CPR
decreased to 8.1% from 14.2% in the Prior Quarter and amortization
expense decreased $9.0 million to $14.5 million from $23.5 million
in the Prior Quarter for the reasons described above.
The Company's net interest income of $52.1 million in the First
Quarter, up approximately $3.7 million from $48.4 million in the
Prior Quarter, is largely due to the increase in total interest
income described above. The increase in total interest income was
partially offset by a $1.1 million increase in interest expense on
our repo borrowings as a direct result of an increase in the
average cost of funds to 0.92% in the First Quarter, as compared to
0.81% in the Prior Quarter.
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 also present the non-GAAP measures, Economic Interest Expense,
and Economic Net Interest Income to provide an economic measure of
our interest income net of borrowing and hedge expense, which
management uses to evaluate the Company's investments 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 costs of financing our
investment portfolio. The following table presents a reconciliation
of GAAP net interest income and total interest expense to Economic
Net Interest Income and Economic Net Interest Expense,
respectively, for each respective period.
(dollars in thousands)
Three Months Ended March
31, 2017 December 31, 2016 Net interest income $
52,092 $ 48,400 Swap and cap interest expense 8,327 10,128
Economic Net Interest Income $ 43,765 $ 38,272 Total
interest expense $ 21,221 $ 20,168 Swap and cap interest expense
8,327 10,128 Economic Interest Expense $ 29,548 $
30,296
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 $43.8 million in the First Quarter, an
increase of approximately $5.5 million from $38.3 million in the
Prior Quarter. The increase in the Economic Net Interest Income was
primarily due to higher net interest income and a decrease in swap
and cap interest expense as further explained above. The increase
in 3-month LIBOR during the First Quarter resulted in a $1.8
million decrease in swap and cap interest expense to $8.3 million
in the First Quarter, from $10.1 million in the Prior Quarter. The
weighted-average receive rate on our interest rate swaps was 1.04%
at March 31, 2017, compared to 0.89% at December 31,
2016.
In the First Quarter, Economic Interest Expense, comprised of
interest expense on repo borrowings, was $29.5 million, compared to
$30.3 million in the Prior Quarter. Interest expense on repo
borrowings increased to $21.2 million in the First Quarter from
$20.2 million in the Prior Quarter due to an 11 bp increase in the
average cost of funds, while swap and cap interest expense
decreased by $1.8 million during the First Quarter as previously
noted. Overall, the adjusted average cost of funds and hedge
increased to 1.08% during the First Quarter, compared to 1.04%
during the Prior Quarter. The Company’s interest rate spread net of
hedge including Drop Income increased to 1.57% in
the First Quarter, from 1.28% in the Prior Quarter as a result
of the increase in total interest income and decrease in swap and
cap interest expense during the First Quarter.
The Company recognized an aggregate net realized and unrealized
loss from investments of $(2.6) million in the First Quarter,
compared to a net realized and unrealized loss from investments of
$(323.4) million in the Prior Quarter. The change between the First
Quarter and Prior Quarter is largely due to the change in U.S.
Treasury yields and the corresponding decrease in the prices of our
Agency RMBS during the Prior Quarter, as compared to the First
Quarter. To illustrate, during the First Quarter, the 10-year U.S.
Treasury yield decreased by 5 bps, ending the quarter at 2.39% as
compared to an 85 bp increase during the Prior Quarter, or 2.44% as
of December 31, 2016. During the First Quarter, the price of a
15-year 3.0% Agency RMBS increased $0.07 to $102.55, and during the
Prior Quarter, it decreased $2.50 to $102.48. Furthermore, during
the First Quarter, the price of a 30-year 3.5% Agency RMBS
increased $0.03 to $102.36, and during the Prior Quarter, the price
decreased $3.22 to $102.33.
The Company recognized a net realized and unrealized gain (loss)
on derivative instruments of $(1.0) million in the First Quarter,
comprised of $7.2 million of net realized and unrealized gain on
swap and cap contracts, and $(8.2) million of net realized and
unrealized loss 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 gain on derivative instruments of $110.0 million in the
Prior Quarter, comprised of $157.0 million net realized and
unrealized gain on swap and cap contracts, and a $(47.1) million
net realized and unrealized loss on TBA Derivatives. The change in
realized and unrealized gains (losses) on derivative instruments is
primarily due to changes in swap rates. To illustrate, during the
First Quarter 5-year and 7-year swap rates increased by 7 bps and 6
bps, whereas they increased by 80 bps and 86 bps during the Prior
Quarter, respectively. The change in net realized and unrealized
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 1.61% in the
First Quarter, compared to 1.26% in the Prior Quarter. During the
Prior Quarter, we recognized a $1.6 million reduction in incentive
compensation. 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. The Prior Quarter includes a $1.7 million
non-recurring prior period tax charge. Excluding non-recurring
charges, the Operating Expense Ratio during the First Quarter and
Prior Quarter was 1.46% and 0.85%, respectively.
Set forth below are summary financial data for the First Quarter
and Prior Quarter:
Summary Financial Data
(dollars in thousands except per share data)
Three Months
Ended Key Balance Sheet Metrics March 31, 2017
December 31, 2016 Average settled Debt Securities (1)
$ 10,819,433 $ 11,484,017 Average total Debt Securities (2) $
12,485,920 $ 13,207,856 Average repurchase agreements (3) $
9,264,522 $ 9,905,199 Average Debt Securities liabilities (4) $
10,931,009 $ 11,629,038 Average stockholders' equity (5) $
1,539,245 $ 1,646,903 Average common shares outstanding (6) 151,572
151,434 Leverage ratio (at period end) (7) 7.15:1 7.06:1 Hedge
Ratio (8) 99 % 92 % Book value per common share (at period end) (9)
$ 8.26 $ 8.33 Weighted-average amortized cost of Agency RMBS and
U.S. Treasuries (10) $ 103.26 $ 103.78
Key Performance
Metrics* Average yield on settled Debt Securities (11) 2.71 %
2.39 % Average yield on total Debt Securities including Drop Income
(12) 2.65 % 2.32 % Average cost of funds (13) 0.92 % 0.81 % Average
cost of funds and hedge (14) 1.28 % 1.22 % Adjusted average cost of
funds and hedge (15) 1.08 % 1.04 % Interest rate spread net of
hedge (16) 1.43 % 1.17 % Interest rate spread net of hedge
including Drop Income (17) 1.57 % 1.28 % Operating expense ratio
(18) 1.61 % 1.26 % Total stockholder return on common equity (19)
2.16 % (12.36 )% Constant prepayment rate (weighted-average
experienced 1-month) (20) 8.1 % 14.2 %
(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 $9.4 million and
$8.1 million for the First Quarter and Prior 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 end
of the prior 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 $12.5
billion at March 31, 2017, from $12.3 billion at
December 31, 2016. During the First Quarter we continued to
sell lower yielding, and purchased higher yielding, Agency RMBS by
selectively acquiring and increasing our holding of 30-Year 4.0%
Agency RMBS, which represent approximately 19% of the overall
portfolio at March 31, 2017 as compared to 15% at December 31,
2016, and marginally increasing our 15-Year 3.0% Agency RMBS
exposure to 24% of the total portfolio at March 31, 2017 from 23%
at December 31, 2016.
The following tables detail the Company's Debt Securities
portfolio, inclusive of $1.4 billion and $(0.3) billion of net TBA
Derivatives at March 31, 2017 and December 31, 2016,
respectively (dollars in thousands):
March 31, 2017 December 31, 2016
Fair Value % of Total Fair Value
% of Total 15-Year Fixed Rate $ 4,232,639 34 % $ 4,443,735
36 % 20-Year Fixed Rate 40,054 — % 42,348 — % 30-Year Fixed Rate
7,846,908 63 % 7,418,624 60 % Hybrid ARMs 282,451 2 % 385,502 3 %
U.S. Treasuries 49,688 1 % 49,686 1 % Total $
12,451,740 100 % $ 12,339,895 100 %
Key metrics related to the Company’s Debt Securities portfolio,
inclusive of net TBA Derivatives, as of March 31, 2017 are
summarized below:
Face Value Fair Value
Weighted-Average Asset Type (in thousands)
Cost/Face Fair Value/Face
Yield(1) Coupon
CPR(2) 15-Year Fixed Rate $ 4,117,754 $ 4,232,639 $
102.46 $ 102.79 2.31 % 3.08 % 9.4 % 20-Year Fixed Rate 37,265
40,054 102.64 107.48 2.49 % 4.50 % 14.4 % 30-Year Fixed Rate
7,599,092 7,846,908 103.74 103.26 3.13 % 3.66 % 6.6 % Hybrid ARMs
(3) 273,758 282,451 102.73 103.18 2.28 % 2.88 % 18.1 % U.S.
Treasury Securities 50,000 49,688 99.92 99.38
1.13 % 0.63 % n/a Total $ 12,077,869 $ 12,451,740
$ 103.26 $ 103.10 2.82 % 3.43 % 8.2 %
__________
(1) Represents a forward yield and is calculated based on the
cost basis of the security at March 31, 2017.
(2) Represents CPR for those bonds held at March 31, 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 60.2 at March 31, 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 7.15:1 at the end of the First Quarter,
compared to 7.06:1 at the end of the Prior Quarter. As of
March 31, 2017 and December 31, 2016, the Company
financed its portfolio with approximately $9.0 billion and $9.7
billion, respectively, of repo borrowings and recognized a payable
for securities purchased net of receivable for securities sold of
approximately $0.5 billion and $1.5 billion, respectively.
At March 31, 2017 and December 31, 2016, the Company’s
liquidity position, consisting of unpledged Agency RMBS, U.S.
Treasuries, and cash and cash equivalents, was approximately $1.05
billion, or 68.8%, and $0.94 billion, or 61.0%, of stockholders'
equity, respectively.
Financing
During the First Quarter, the Company financed its investment
portfolio with average repo borrowings of $9.3 billion, with an
average cost of funds of 0.92%, compared to $9.9 billion and 0.81%,
respectively, during the Prior Quarter. Total interest expense
increased $1.1 million to $21.2 million in the First Quarter,
compared to $20.2 million in the Prior Quarter, primarily due to a
lower average cost of funds and average repo borrowings during the
First Quarter.
During the First Quarter, the Company did not experience a
decline in the availability of repo borrowings. At March 31,
2017, repo borrowings with any individual counterparty were less
than 8% of our total repo borrowings. As of March 31, 2017, we
had 51 counterparties available to finance the Company's operations
through repo borrowings.
Below is a summary, by region, of our outstanding borrowings at
March 31, 2017 (dollars in thousands):
Counterparty Region Number of Counterparties
Total Outstanding Borrowings % of Total
North America 21 $5,201,272 57.7% Europe 8 2,113,994 23.4% Asia 5
1,700,328 18.9% Total 34 $9,015,594 100.0%
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 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
expiration of 2.8 years. The receive rate on the Company's swaps is
the three-month LIBOR, which resets quarterly and stood at 1.04% at
March 31, 2017, up from 0.89% at December 31, 2016. 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 expiration of 2.8 years. Our weighted-average
fixed pay rate on swaps was unchanged at 1.23% at March 31,
2017, while the net pay rate on swaps decreased to 0.19% at
March 31, 2017 from 0.34% at December 31, 2016 due to an
increase in 3-month LIBOR during the First Quarter.
As of December 31, 2016, 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 0.89%, a weighted-average net pay rate
of 0.34% and a weighted-average remaining expiration
of 3.0 years. The receive rate on the Company's swaps is
the three-month LIBOR, which resets quarterly and stood at 1.00%
at December 31, 2016. At December 31, 2016, 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 expiration of 3.0 years.
Key provisions of the Company's outstanding swaps and caps at
March 31, 2017 are summarized below (dollars in
thousands):
Interest Rate Swaps Weighted-Average
Expiration Year Fixed Pay Rate
Receive Rate Net Pay (Receive) Rate
Notional Amount Fair Value 2017 0.82% 1.08% (0.26)% $
1,000,000 $ 2,324 2018 1.00% 1.05% (0.05)% 1,500,000 5,263 2020
1.45% 1.01% 0.44% 1,750,000 26,451 2021 1.21% 1.03% 0.18% 1,700,000
50,663 2022 1.98% 1.03% 0.95% 500,000 2,946 Total 1.23%
1.04% 0.19% $ 6,450,000 $ 87,647
Interest Rate
Caps Weighted-Average Expiration Year Cap
Rate Receive Rate Cap Rate Notional Amount
Fair Value 2019 1.34% n/a 1.34% $ 800,000 $ 7,156 2020 1.25%
n/a 1.25% 1,700,000 31,170 Total 1.28% n/a 1.28% $ 2,500,000
$ 38,326
Duration Gap
Our net duration gap decreased to 0.93 at March 31, 2017,
from 1.02 at December 31, 2016.
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 First Quarter and Prior Quarter
follow (dollars in thousands):
March 31, 2017 December 31, 2016
$ Change Drop Income $ 9,382 $ 8,061 $ 1,321 Average market
value of all TBAs $ 1,513,532 $ 1,534,878 $ (21,346 )
Prepayments
We received $330.5 million in principal repayments and
prepayments from our Agency RMBS portfolio during the First
Quarter, representing a weighted-average CPR of approximately 8.1%
and net amortization expense of $14.5 million. During the Prior
Quarter, we received $534.7 million in principal repayments and
prepayments from our Agency RMBS portfolio, representing a
weighted-average CPR of approximately 14.2% and net amortization
expense of $23.5 million. The decrease in CPR in the First Quarter
was principally due to lower mortgage interest rates persisting
during the First Quarter, subdued mortgage financings and bond
seasoning factors.
Dividend
The Company declared a common dividend of $0.25 per share for
the First Quarter, unchanged from the Prior Quarter. Using the
closing share price of $7.95 on March 31, 2017, the First
Quarter dividend equates to an annualized dividend yield of
12.6%.
Share Repurchase Program
The Company did not repurchase any shares of its common stock in
the First Quarter or Prior Quarter under its share repurchase
program. As of March 31, 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, April 20, 2017, to discuss its financial results
for the First 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 5264945. 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,
April 20, 2017, at approximately 12:00 PM Eastern Time through
Thursday, May 4, 2017 at approximately 11:00 AM Eastern Time. To
access this replay, please dial (855) 859-2056 and enter the
conference ID number 5264945. 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, and the
effect of actions of the U.S. government, including the New
Administration, 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)
March 31, 2017 December 31,
2016* (unaudited) Assets: Cash and cash
equivalents $ 584 $ 1,260 Investments in securities, at fair value:
Agency mortgage-backed securities (including pledged assets of
$9,482,227 and $10,233,165, respectively) 11,011,163 12,599,045
U.S. Treasury securities (including pledged assets of $26,334 and
$44,469, respectively) 49,688 49,686 Receivable for securities sold
and principal repayments 573 409,849 Receivable for cash pledged as
collateral — 600 Interest receivable 31,401 31,825 Derivative
assets, at fair value 136,552 142,556 Other investments 8,028 8,028
Other assets 2,929 2,419 Total assets $ 11,240,918
$ 13,245,268
Liabilities and stockholders'
equity: Liabilities: Repurchase agreements $ 9,015,594 $
9,691,544 Payable for securities purchased 524,482 1,881,963
Payable for cash received as collateral 101,819 91,503 Accrued
interest payable 25,457 27,908 Accrued expenses and other
liabilities 3,559 6,170 Dividends payable 42,337 4,410 Derivative
liabilities, at fair value — 6,051 Total liabilities
$ 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 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 Common Stock, $0.01 par value, 500,000 shares authorized
(151,708 and 151,435 shares issued and outstanding, respectively)
1,517 1,514 Additional paid in capital 1,945,966 1,944,908 Retained
earnings (accumulated deficit) (685,713 ) (676,603 ) Total
stockholders' equity $ 1,527,670 $ 1,535,719
Total
liabilities and stockholders' equity $ 11,240,918 $
13,245,268
Book value per common share $ 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)
March 31, 2017 December 31,
2016 Interest income: Agency RMBS $ 73,227 $ 66,996 Other 86
1,572 Total interest income 73,313 68,568
Interest expense: Repurchase agreements 21,221 20,168
Total interest expense 21,221 20,168 Net
interest income 52,092 48,400 Other income (loss):
Net realized gain (loss) on investments (66,044 ) (36,253 ) Net
unrealized gain (loss) on investments 63,478 (287,161 ) Other
income 47 203 Net realized and unrealized gain (loss)
on investments and other income (2,519 ) (323,211 ) Swap and cap
interest expense (8,327 ) (10,128 ) Net realized and unrealized
gain (loss) on derivative instruments (1,012 ) 109,951 Net
gain (loss) on derivative instruments (9,339 ) 99,823 Total
other income (loss) (11,858 ) (223,388 ) Expenses: Compensation and
benefits 3,776 1,885 General, administrative and other 2,438
3,287 Total expenses 6,214 5,172 Net income
(loss) $ 34,020 $ (180,160 ) Dividends on preferred stock
(5,203 ) (5,203 ) Net income (loss) available to common
stockholders $ 28,817 $ (185,363 ) Net income (loss) per
common share basic & diluted $ 0.19 $ (1.23 )
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)
March 31, 2017 December 31, 2016
Net income (loss) available to common stockholders $ 28,817 $
(185,363 ) Net realized (gain) loss on investments 66,044 36,253
Net unrealized (gain) loss on investments (63,478 ) 287,161 Net
realized and unrealized (gain) loss on derivative instruments 1,012
(109,951 ) Core Earnings $ 32,395 $ 28,100
Core Earnings per average share $ 0.21 $ 0.19 Drop
Income $ 9,382 $ 8,061 Core Earnings plus Drop Income
$ 41,777 $ 36,161 Core Earnings plus Drop Income per
average share $ 0.28 $ 0.24
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CYS Investments, Inc.Richard E. Cleary, 617-639-0440Chief
Operating Officer
Cys Investments, Inc. (NYSE:CYS)
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