CYS Investments, Inc. (NYSE: CYS) ("CYS", "we", "us", "our", or
the "Company") today announced financial results for the quarter
ended March 31, 2018 (the "First Quarter").
First Quarter 2018 Summary Results
- March 31, 2018 book value per
common share of $7.41, after declaring a $0.22 dividend per common
share, down from $8.38 at December 31, 2017.
- GAAP net income (loss) available to
common stockholders of $(113.7) million, or $(0.74) per diluted
common share.
- Core Earnings plus Drop Income of $37.9
million ($34.0 million Core Earnings and $3.9 million Drop Income),
or $0.24 per diluted common share ($0.22 Core Earnings and $0.02
Drop Income).
- Interest rate spread, net of hedge,
including Drop Income, of 1.31%.
- Operating expense ratio of 1.59%, or
1.48%, excluding a $0.4 million non-recurring charge.
- Weighted-average amortized cost of
Agency RMBS and U.S. Treasuries (collectively, "Debt Securities")
of $102.95.
- Leverage ratio of 8.06:1 at
March 31, 2018.
- Constant Prepayment Rate ("CPR") of
7.1% (weighted-average experienced 1-month).
- Total stockholder return (loss) on
common equity of (8.95)%.
- Expanded the nature and size of the
hedge portfolio and added $1.25 billion in notional of swaptions
and established an $800 million 10-year U.S. Treasury short
position.
Market Commentary
2018 opened with a roar as interest rates staged their biggest
quarterly change since the 2016 presidential election. Short and
long-term U.S. Treasury yields moved significantly higher and
equity markets surged to new peaks in January (at its First Quarter
peak, the S&P 500 had gained 7% in late January) as markets
digested the effects of tax reform and the likelihood of higher
growth and inflation. The 10-year U.S. Treasury yield ended the
month of January at 2.71%, 30 basis points ("bps") higher on a
year-to-date basis and the highest yield recorded on a close since
early 2014. The equity markets took a dive in the first weeks of
February, decreasing almost 12% from the then year-to-date peak to
trough based on intraday trading. The "mini correction" appears to
have been spurred by inflation concerns. Treasury markets initially
rallied as equities declined, and the 10-year U.S. Treasury yield
dropped from 2.84% to 2.71% during the first weeks of February
while equities hit their quarterly low. Thereafter, equity markets
recovered somewhat and the 10-year U.S. Treasury yield traded in a
tight range between 2.80% and 2.95%, as markets anticipated at
least three and possibly four rate hikes by the Federal Reserve
(the "Fed") this year, a moderate acceleration in inflation and
falling unemployment. The equity markets closed the First Quarter
slumping again in late March, as newly announced tariffs, talk of
trade wars and technology sector disappointments again caused
market fear. The S&P 500 closed the First Quarter down 1% and
the 10-year U.S. Treasury yield closed at 2.74%, 33 bps higher than
where it started the year.
Over the course of the First Quarter, U.S. Treasury yields
shifted higher across maturities and the yield curve flattened
marginally by 6 bps between 2-year and 10-year bonds. In the
backdrop, Congress was able to agree to a budget in early February,
and members of the Federal Open Market Committee (the "FOMC")
sounded somewhat more hawkish.
Jerome (Jay) Powell took the helm of the Fed in early February.
As expected, the transition from Chair Yellen to Powell appeared
quite smooth. In his first Humphrey Hawkins testimony before
Congress in late February, the new Chair expressed views similar to
those expressed by Yellen, but he sounded slightly more hawkish
than markets had anticipated. On March 21, 2018, the FOMC announced
its first 25 bps rate hike of 2018 and indicated two more hikes
this year. The ‘dots’ for 2019 and 2020 moved higher, however,
indicating three and two hikes in each of the next two years,
respectively. Interestingly, the dots imply that the Federal Funds
Rate (the "Fed Funds Rate") in 2020 will be 50 bps higher than the
Fed’s own estimate of the long-run neutral rate.
The FOMC remains short-handed. Former President of the Federal
Reserve Bank of San Francisco, John Williams, was named to the
important post of President of the Federal Reserve Bank of New York
in early April. In addition, plans have been announced to nominate
Richard Clarida and Michelle Bowman to the Federal Board of
Governors in April, with Clarida being nominated as vice chairman,
which will take time to be confirmed by Congress. The Federal
Reserve President of San Francisco remains vacant. Prior to Clarida
and Bowman being confirmed by Congress, the FOMC currently has
seven voters compared with twelve voters for a fully-staffed FOMC.
As the remaining open positions are filled, there is potential for
the consensus view of the FOMC to change. Views likely will be
swayed by economic data as it is released.
During the First Quarter, 3-month London Interbank Offered Rate
("LIBOR") rose sharply and was one of the more notable market moves
through February and March. The increase in 3-month LIBOR
outstripped other short-term rate changes during the quarter,
increasing 62 bps during the First Quarter versus a 25 bps increase
in the Fed Funds Rate. The rapid rise in LIBOR has largely been
attributed to a surplus of U.S. Treasury bill issuance post-budget
agreement as well as a notable increase in commercial paper
issuance (typically quoted in LIBOR) at a time when prime money
market funds and corporations have less demand for these
instruments as they redeploy their cash post-tax reform. The higher
LIBOR rates increase the receive rates and our cash flow on both
our interest rate swap and cap portfolios. At March 31, 2018, all
except four of our existing interest rate swap and cap positions at
March 31, 2018 were net cash flow positive to us. We expect all of
our swap and cap positions to be cashflow positive to us by June of
2018 if 3-month LIBOR remains at current levels.
Prices of Agency residential mortgage-backed securities ("Agency
RMBS") were soft during the First Quarter, dropping as rates rose
and mortgage spreads to U.S. Treasuries increased. 30-year Fannie
Mae yields widened by 4 bps relative to 7-year swap rates and by 11
bps relative to 7-year U.S. Treasuries. 15-year Fannie Mae yields
widened by 3 bps relative to 5-year swaps and 15 bps relative to
5-year U.S. Treasuries. The vast majority of our Agency RMBS
holdings decreased in price during the First Quarter. The increase
in rates during the First Quarter served to reduce prepayment
speeds on our Agency RMBS. As a result, we experienced a $2.1
million decrease in net premium amortization during the First
Quarter relative to the fourth quarter of 2017 (the "Prior
Quarter").
First Quarter 2018 Results
The Company generated net income (loss) available to common
stockholders of $(113.7) million in the First Quarter, or $(0.74)
per diluted common share, compared to $3.6 million, or $0.02 per
diluted common share, in the Prior Quarter. The Company’s book
value per common share on March 31, 2018 was $7.41, down from
$8.38 at December 31, 2017, after declaring a $0.22 dividend
per common share on March 8, 2018. The book value performance
emanates from an increase in interest rates during the First
Quarter and an increase in Agency RMBS Option Adjusted Spreads
("OAS"), resulting in a sharp decline in the price of Agency RMBS.
The decline in the value of the Company's Debt Securities during
the First Quarter was partially offset by a net realized and
unrealized gain in the value of our derivative instruments as a
direct result of an increase in swap rates. The key components
driving the First Quarter’s performance are described further
below.
In the First Quarter, the Company generated Core Earnings plus
Drop Income (defined below) of $37.9 million, or $0.24 per diluted
common share, comprised of Core Earnings of $34.0 million, or $0.22
per diluted common share, and Drop Income of $3.9 million, or $0.02
per diluted common share. This compares to Core Earnings plus Drop
Income of $33.6 million, or $0.22 per diluted common share during
the Prior Quarter, comprised of Core Earnings of $29.0 million, or
$0.19 per diluted common share, and Drop Income of $4.6 million, or
$0.03 per diluted common share. The increase in Core Earnings
during the First Quarter relative to the Prior Quarter largely
resulted from a $7.3 million increase in total interest income, a
$3.3 million decrease in interest rate hedge expense, net, and a
$0.3 million decrease in total expenses, all of which are described
in more detail below.
During the First Quarter, our total interest income increased to
$88.7 million from $81.4 million in the Prior Quarter due to the
combined impact of a decrease in the weighted-average experienced
CPR and an increase in the weighted average coupon, partially
offset by a decrease in the average settled Debt Securities. During
the First Quarter, the weighted average experienced CPR declined to
7.1% from 9.3% in the Prior Quarter with a corresponding $2.1
million decrease in net premium amortization expense relative to
the Prior Quarter. The weighted-average coupon on our settled Debt
Securities increased to 3.59% in the First Quarter, from 3.38% in
the Prior Quarter. The increase in total interest income was
partially offset by a decrease in the average settled Debt
Securities to $11.7 billion during the First Quarter
from $11.9 billion during the Prior Quarter.
The increase in interest expense largely stems from the Fed's 25
bps rate hikes in December 2017 and March 2018, resulting in an
increase in the average cost of funds to 1.61% in the First
Quarter, from 1.36% in the Prior Quarter. The increase in total
interest expense was partially offset by a decrease in the average
repo borrowings to $10.2 billion in the First Quarter, from $10.3
billion in the Prior Quarter. The Company's net interest income of
$47.6 million in the First Quarter, up approximately $1.4 million
from $46.2 million in the Prior Quarter, is due to the increase in
total interest income, partially offset by the increase in total
interest expense described above.
Interest rate hedge expense, net decreased $3.3 million during
the First Quarter relative to the Prior Quarter, resulting from a
combination of repositioning a portion of our hedge portfolio (as
further described below) and an increase in the 3-month LIBOR
during the First Quarter, the index for the receive-leg of our
swaps and caps, which resets quarterly.
Total operating expenses decreased $0.3 million due to a
decrease in incentive compensation accrual during the First
Quarter, partially offset by a $0.4 million non-recurring charge
during the First Quarter. Non-recurring charges are not necessarily
a part of the Company’s ongoing operations. The Company’s operating
expense ratio as a percentage of average stockholders' equity was
1.59% in the First Quarter, or 1.48% excluding the effect of a $0.4
million non-recurring charge, compared to 1.57% and 1.49%,
respectively, in the Prior Quarter. The increase in the operating
expense ratio during the First Quarter is largely due to a decrease
in average stockholders' equity to $1.48 billion during First
Quarter from $1.58 billion in the Prior Quarter.
Drop Income decreased by $0.7 million in the First Quarter
relative to the Prior Quarter as a combined result of the timing of
TBA trades, more forward sales and less specialness during the
First Quarter relative to the Prior Quarter. "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.
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 manage our financing costs, which represents a
significant portion of our total expenses. Economic Interest
Expense consists of interest expense, as computed in accordance
with GAAP, plus interest rate hedge expense, net 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 Net Interest Income, and
Economic Interest Expense to provide an economic measure of our
interest income and expense net of borrowing and hedge expense,
which management uses to evaluate the Company's investment
portfolio. We believe providing users of our financial information
with such measures in addition to the related GAAP measures gives
users additional transparency into the information used by our
management in its financial and operational decision-making, which
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 net interest income and 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, 2018 December 31, 2017 Net
interest income $ 47,561 $ 46,179 Interest rate hedge expense, net
2,508 5,841 Economic Net Interest Income $ 45,053 $
40,338 Total interest expense $ 41,117 $ 35,242
Interest rate hedge expense, net 2,508 5,841 Economic
Interest Expense $ 43,625 $ 41,083
The Company's Economic Net Interest Income, which reflects
interest rate hedge expense, net, as well as interest expense on
repo borrowings, was $45.1 million in the First Quarter, an
increase of approximately $4.8 million from $40.3 million in the
Prior Quarter. The increase in Economic Net Interest Income was
primarily due to the increase in total interest income and lower
interest rate hedge expense, net, partially offset by the increase
in total interest expense, described above.
In the First Quarter, Economic Interest Expense totaled $43.6
million, compared to $41.1 million in the Prior Quarter. Interest
expense on repo borrowings increased to $41.1 million in the First
Quarter from $35.2 million in the Prior Quarter due to two separate
25 bps Fed rate hikes in December 2017 and March 2018, while
interest rate hedge expense, net decreased by $3.3 million during
the First Quarter as previously described.
With respect to the asset portfolio, during the First Quarter,
the Company recognized an aggregate net realized and unrealized
gain (loss) from investments of $(237.2) million, compared to
$(80.3) million in the Prior Quarter. The asset portfolio
performance during the First Quarter emanates from an increase in
interest rates and Agency RMBS OAS spread widening during the First
Quarter, resulting in a sharp decrease in the prices of our Agency
RMBS.
On the hedge side of the portfolio, the Company recognized a net
realized and unrealized gain (loss) on derivative instruments of
$89.5 million in the First Quarter (comprised of $115.8 million of
net realized and unrealized gain on swap, swaptions and cap
contracts, $(16.0) 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") and $(10.3) million net realized and
unrealized loss on the U.S. Treasury short position), compared to a
net realized and unrealized gain on derivative instruments of $55.0
million in the Prior Quarter (comprised of $57.3
million of net realized and unrealized gain on swap and cap
contracts, and $(2.3) million of net realized and
unrealized loss on TBA Derivatives). During the First Quarter we
repositioned a portion of the hedge portfolio by terminating swaps
with a $1.0 billion notional, a weighted-average pay rate of 0.99%,
and a weighted-average remaining maturity of 52 days, and replaced
them with 3-month, 7-year swaptions with a combined notional of
$1.25 billion, and a weighted average strike rate of 2.89%. We
strategically rolled forward a few of these swaptions toward the
end of the First Quarter, prior to the end of the option period,
and simultaneously realized a gain of $2.0 million in the
First Quarter. In addition, during the First Quarter, in an effort
to reduce the volatility in book value in a rising interest rate
environment, we established an $800 million short position on
10-year U.S. Treasuries.
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, 2018 December 31, 2017 Average settled
Debt Securities (1) $ 11,701,609 $ 11,910,563 Average total Debt
Securities (2) $ 13,185,053 $ 13,068,179 Average repurchase
agreements (3) $ 10,215,763 $ 10,346,783 Average Debt Securities
liabilities (4) $ 11,699,207 $ 11,504,399 Average stockholders'
equity (5) $ 1,480,291 $ 1,581,986 Average common shares
outstanding (6) 155,198 155,009 Leverage ratio (at period end) (7)
8.06:1 7.33:1 Liquidity as % of stockholders' equity (8) 61 % 65 %
Hedge Ratio (9) 101 % 99 % Net duration gap (10) 0.76 0.61 Book
value per common share (at period end) (11) $ 7.41 $ 8.38
Weighted-average amortized cost of Agency RMBS and U.S. Treasuries
(12) $ 102.95 $ 102.92
Key Performance Metrics*
Average yield on settled Debt Securities (13) 3.02 % 2.73 % Average
yield on total Debt Securities including Drop Income (14) 2.80 %
2.63 % Average cost of funds (15) 1.61 % 1.36 % Average cost of
funds and hedge (16) 1.71 % 1.59 % Adjusted average cost of funds
and hedge (17) 1.49 % 1.43 % Interest rate spread net of hedge (18)
1.31 % 1.14 % Interest rate spread net of hedge including Drop
Income (19) 1.31 % 1.20 % Operating expense ratio (20) 1.59 % 1.57
% Total stockholder return on common equity (21) (8.95 )% 0.35 %
Constant prepayment rate (weighted-average experienced 1-month)
(22) 7.1 % 9.3 %
__________
(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 unsettled Debt Securities (inclusive of TBA
Derivatives) during the period.(3) The average repurchase
agreements balance is 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 is 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, plus or
minus the net TBA Derivatives
positions by (ii) stockholders' equity at period end.(8) Liquidity
as % of stockholders' equity is calculated by dividing unencumbered liquid assets by
stockholders' equity at period end.(9) The hedge ratio for the
period is calculated by dividing the
combined total interest rate swaps, swaptions and interest rate
caps notional amount by total repurchase agreements balances.(10)
Net duration gap is calculated as a weighted-average of the total
portfolio including the aggregate notional amount on our interest
rate swaps, swaptions, caps and U.S. Treasury short positions using
DV01 methodology. Duration estimates in the table are calculated
utilizing Yield Book® software and may reflect adjustments based on
our judgment.(11) 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.(12) The weighted-average amortized cost of Agency RMBS
and U.S. Treasuries is calculated using the weighted-average
amortized cost by security divided by
the current face at period end.(13) The average yield on settled
Debt Securities for the period is calculated by dividing total interest income by average settled
Debt Securities.(14) 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 $3.9 million and $4.6 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. Drop Income is the difference between the spot price
and the forward-settlement price for the same security on the trade
date.(15) The average cost of funds for the period is calculated by
dividing repurchase agreement interest
expense by average repurchase agreements for the period.(16) The
average cost of funds and hedge for the period is calculated by
dividing repurchase agreement interest
expense and interest rate hedge expense, net by average repurchase
agreements for the period.(17) The adjusted average cost of funds
and hedge for the period is calculated by dividing repurchase agreement interest expense and
interest rate hedge expense, net by average Debt Securities
liabilities.(18) 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.(19) 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.(20) The operating expense ratio for the period is
calculated by dividing annualized
operating expenses by average stockholders' equity.(21) 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.(22) 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, decreased to approximately $12.9
billion at March 31, 2018 from $13.1 billion at
December 31, 2017. During the First Quarter, we sold a portion
of our lower coupon 30-year 3.5%, and 15-year 2.5% and 3.0%
holdings in addition to all of our U.S. Treasuries as the special
financing that was available when we initially purchased the U.S.
Treasuries faded. We redeployed substantially all proceeds from
these sales into higher coupon 15-year 3.5% and 30-year 4.5% Agency
RMBS due to relative attractive yields and duration profile of the
new cohorts, resulting in an increase in the overall portfolio
weighted average coupon. As a result of the aforementioned
repositioning, seasonal factors and the increase in interest rates,
we experienced a decrease in weighted-average 1-month prepayment
speeds during the First Quarter, as further described above. The
decrease in prepayment speeds, coupled with the portfolio
repositioning during the First Quarter, resulted in a 29 bps
increase in the average yield on Debt Securities during the First
Quarter to 3.02% from 2.73% in the Prior Quarter. The
weighted-average cost basis of our Agency RMBS portfolio decreased
to $102.95 at March 31, 2018 from $103.20 at December 31,
2017.
The following tables detail the Company's Debt Securities
portfolio, inclusive of $1.4 billion and $0.5 billion of net TBA
Derivatives at March 31, 2018 and December 31, 2017,
respectively (dollars in thousands):
March 31, 2018 December 31,
2017 Fair Value % of Total Fair
Value % of Total 15-Year Fixed Rate $
4,797,653 37 % $ 3,037,625 23 % 20-Year Fixed Rate 30,474 — %
32,748 — % 30-Year Fixed Rate 7,611,158 59 % 8,479,862 65 % Hybrid
ARMs 479,377 4 % 498,630 4 % U.S. Treasuries — — % 1,046,934
8 % Total $ 12,918,662 100 % $ 13,095,799 100
%
Key metrics related to the Company ’s Debt Securities portfolio,
inclusive of net TBA Derivatives, as of March 31, 2018 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
$ 4,741,199 $ 4,797,653 $ 102.15 $ 101.19 2.95 % 3.30 % 9.0 %
20-Year Fixed Rate 29,007 30,474 102.50 105.06 3.10 % 4.50 % 15.0 %
30-Year Fixed Rate 7,472,560 7,611,158 103.49 101.85 3.48 % 3.81 %
5.1 % Hybrid ARMs (3) 475,571 479,377 102.42
100.80 2.96 % 3.06 % 7.7 % Total $ 12,718,337 $
12,918,662 $ 102.95 $ 101.58 3.26 % 3.59 % 6.5
%
__________
(1) Represents a forward yield and is calculated based on the
cost basis of the security at March 31, 2018.
(2) Represents CPR for those bonds held at March 31, 2018.
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 3-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 84.0 at March 31, 2018. 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 8.06:1 at the end of the First Quarter, up from
7.33:1 at the end of the Prior Quarter. As of March 31, 2018
and December 31, 2017, the Company financed its portfolio
through repo borrowings approximating $10.1 billion, and recognized
a payable for securities purchased net of receivable for securities
sold, of approximately $20 million and $0.99 billion,
respectively.
At March 31, 2018 and December 31, 2017, the Company’s
liquidity position, consisting of unpledged Agency RMBS, U.S.
Treasuries, and cash and cash equivalents, was approximately $0.87
billion, or 60.7%, and $1.02 billion, or 64.6%, respectively, of
stockholders' equity.
Financing
During the First Quarter, the Company financed its investment
portfolio with average repo borrowings of $10.2 billion and an
average cost of funds of 1.61%, compared to $10.3 billion and
1.36%, respectively, during the Prior Quarter.
During the First Quarter the Company did not experience a
decline in the availability of repo borrowings. At March 31,
2018, repo borrowings with any individual counterparty were less
than 6.1% of our total repo borrowings. As of March 31, 2018,
we had 36 active counterparties and 53 total counterparties
available to finance the Company's operations through repo
borrowings.
Below is a summary, by region, of our outstanding borrowings at
March 31, 2018 (dollars in thousands):
Counterparty Region Number of
Counterparties Total Outstanding
Borrowings % of Total North America 22
$5,572,963 55.2% Europe 8 2,436,690 24.2% Asia 6 2,074,990 20.6%
Total 36 $10,084,643 100.0%
Hedging
The Company utilizes interest rate swap (cancellable and
non-cancellable), swaption and cap contracts (a "swap", a
"swaption" or "cap", respectively) to manage interest rate risk
associated with the financing of its Debt Securities portfolio.
Effective during the First Quarter, we began shorting 10-year U.S.
Treasuries as an economic hedge aimed at reducing volatility in
book value in a rising interest rate environment. At March 31,
2018 we had an $800 million short position on 10-year U.S.
Treasuries with a fair market value of $767.1 million.
As of March 31, 2018, the Company held swaps with an
aggregate notional amount of $6.5 billion, a weighted-average fixed
pay rate of 1.69%, a weighted-average receive rate of 1.91%, a
weighted-average net pay rate of (0.22)% and a weighted-average
remaining maturity of 4.0 years. The receive rate on the Company's
swaps was 1.91% at March 31, 2018, up from 1.45% at
December 31, 2017. At March 31, 2018, the Company held
caps with a notional amount of $2.5 billion, all of which are now
cash flow positive to us, with a weighted-average cap rate of
1.28%, a weighted-average receive rate of 2.02% and a
weighted-average remaining maturity of 1.8 years. As of
March 31, 2018, the Company held swaptions with an aggregate
notional amount of $1.3 billion, a weighted-average strike rate of
2.89% and an underlying swap term of 7 years.
As of December 31, 2017, the Company held swaps with an
aggregate notional amount of $7.5 billion, a weighted-average fixed
pay rate of 1.59%, a weighted-average receive rate of 1.45%, a
weighted-average net pay rate of 0.14% and a weighted-average
remaining maturity of 3.7 years. At December 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 2.0 years. We did not hold any swaptions at
December 31, 2017.
Key provisions of the Company's outstanding swaps, swaptions and
caps at March 31, 2018 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 2020 2,250,000 57,267 1.60% 1.83% (0.23)% 2021
1,700,000 73,093 1.21% 1.80% (0.59)% 2022 1,500,000 37,787 2.12%
2.06% 0.06% 2024 625,000 31,874 1.88% 2.02% (0.14)% 2027 400,000
19,919 2.21% 2.14% 0.07% Total $ 6,475,000 $
219,940 1.69% 1.91% (0.22)%
Interest Rate Caps
Weighted-Average Expiration Year Notional
Amount Fair Value Cap Rate Receive Rate
Net Cap Pay Rate 2019 $ 800,000 $ 10,978 1.34% 1.71% (0.37)%
2020 1,700,000 43,691 1.25% 2.17% (0.92)% Total $
2,500,000 $ 54,669 1.28% 2.02% (0.74)%
Interest Rate Swaptions Weighted-Average
Expiration Year Notional Amount Fair Value
Premium Strike Rate Term 2018 $ 1,250,000 $
4,876 $10,393 2.89% 7 years
The net duration gap increased to 0.76 at March 31, 2018
from 0.61 at December 31, 2017 as a direct result of the
increase in interest rates during the First Quarter and the
resulting asset portfolio duration extension, partially offset by
the hedge portfolio expansion during the First Quarter.
Drop Income
The Company's Drop Income and average market value of all TBAs
outstanding during the First Quarter and Prior Quarter follow
(dollars in thousands), the changes in which, are further describe
above:
March 31, 2018
December 31, 2017 $ Change Drop Income $ 3,899 $
4,641 $ (742 ) Average market value of all TBAs $ 1,430,334 $
1,034,786 $ 395,548
Prepayments
We received $295.1 million in principal repayments and
prepayments from our Agency RMBS portfolio during the First
Quarter, representing a weighted-average CPR of approximately 7.1%,
which resulted in net amortization expense of $11.6 million. During
the Prior Quarter, we received $349.9 million in principal
repayments and prepayments from our Agency RMBS portfolio,
representing a weighted-average CPR of approximately 9.3%, which
resulted in net amortization expense of $13.7 million. The decrease
in CPR in the First Quarter was principally due to an increase in
interest rates, bond seasoning factors and the portfolio
repositioning that took place during the First Quarter.
Dividend
The Company declared a common dividend of $0.22 per share for
the First Quarter, down from $0.25 in the Prior Quarter. Using the
closing share price of $6.72 on March 31, 2018, the First
Quarter dividend equates to an annualized dividend yield of
13.1%.
Dividend Reinvestment and Direct Stock Purchase Plan
("DRSPP")
On September 15, 2017, the Company renewed its DRSPP,
whereby stockholders may reinvest cash dividends and purchase up to
10,000,000 shares of our common stock. Stockholders may also make
optional cash purchases of shares of common stock subject to
certain limitations detailed in the respective plan prospectus.
During the First Quarter, the Company did not issue any shares
under the DRSPP. As of March 31, 2018, $9.7 million shares of
common stock remained available for issuance under the DRSPP.
Conference Call
The Company will host a conference call at 9:00 AM Eastern Time
on Thursday, April 26, 2018, to discuss its financial results
for the First Quarter. To participate in the call by telephone,
dial (888) 317-6016 in the domestic United States, (855) 669-9657
in Canada or (412) 317-6016 outside North America, at least 10
minutes prior to the call’s start time. Please inform the operator
that you are dialing into the CYS Investments, Inc. conference
call.
The conference call will also be webcast live over the Internet
and can be accessed at the Company's website
at http://www.cysinv.com. To listen to the live webcast,
please visit http://www.cysinv.com at least 10 minutes
prior to the start of the call in order to register, download and
install necessary audio software.
A dial-in replay of the call will be available on Thursday,
April 26, 2018 starting at approximately 12:00 PM Eastern Time
through Thursday, May 10, 2018 at approximately 11:00 AM Eastern
Time. To access the replay, please dial (877) 344-7529 in the
domestic United States, (855) 669-9658 in Canada or (412) 317-0088
outside North America, and enter conference ID number 10119401. A
replay of the conference call will also be archived on the
Company's website at http://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
invests on a leveraged basis primarily 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. The Company
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 market
expectations, interest rates and interest rate volatility, the
prices, supply and volatility of Agency RMBS, borrowing costs,
earnings, yields, investment environment, hedges, inflation,
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, 2017,
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, 2018 December 31,
2017 * (unaudited) Assets: Cash and cash
equivalents $ 6,206 $ 4,132 Investments in securities, at fair
value: Agency mortgage-backed securities (including pledged assets
of $10,377,167 and $9,287,317, respectively) 11,535,960 11,587,720
U.S. Treasury securities (including pledged assets of $0
and$1,046,934, respectively) — 1,046,934 Receivable for securities
sold and principal repayments 287,360 301,398 Receivable for
reverse repurchase agreements 767,422 — Interest receivable 38,559
32,890 Derivative assets, at fair value 281,528 159,629 Other
investments 9,765 9,765 Other assets 3,461 3,114
Total assets $ 12,930,261 $ 13,145,582
Liabilities
and stockholders' equity: Liabilities: Repurchase
agreements $ 10,084,643 $ 10,089,917 Obligation to return
securities borrowed under reverse repurchase agreements, at fair
value 767,062 — Payable for securities purchased 307,247 1,290,805
Payable for cash received as collateral 245,732 139,614 Accrued
interest payable 47,911 41,468 Accrued expenses and other
liabilities 2,371 4,969 Dividends payable 38,601 4,410 Derivative
liabilities, at fair value 9,749 152 Total
liabilities $ 11,503,316 $ 11,571,335
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 (155,416 and 155,010
shares issued and outstanding, respectively) 1,554 1,550 Additional
paid in capital 1,976,906 1,976,310 Retained earnings (accumulated
deficit) (817,415 ) (669,513 ) Total stockholders' equity $
1,426,945 $ 1,574,247
Total liabilities and
stockholders' equity $ 12,930,261 $ 13,145,582
Book value per common share $ 7.41 $ 8.38
__________________
* 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, 2018
December 31, 2017 Interest income: Agency RMBS $ 85,986 $
75,358 Other 2,692 6,063 Total interest income 88,678
81,421 Interest expense: Repurchase agreements 41,117
35,242 Total interest expense 41,117 35,242
Net interest income 47,561 46,179 Other income
(loss): Net realized gain (loss) on investments (71,191 ) (23,647 )
Net unrealized gain (loss) on investments (166,009 ) (56,651 )
Other income 39 39 Net realized and unrealized gain
(loss) on investments and other income (237,161 ) (80,259 )
Interest rate hedge expense, net (2,508 ) (5,841 ) Net realized and
unrealized gain (loss) on derivative instruments 89,468
54,969 Net gain (loss) on derivative instruments 86,960
49,128 Total other income (loss) (150,201 ) (31,131 )
Expenses: Compensation and benefits 3,192 3,985 General,
administrative and other 2,676 2,232 Total expenses
5,868 6,217 Net income (loss) $ (108,508 ) $ 8,831
Dividends on preferred stock (5,203 ) (5,203 ) Net income
(loss) available to common stockholders $ (113,711 ) $ 3,628
Net income (loss) per common share basic & diluted $ (0.74 ) $
0.02
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 additional 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 our 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, our
presentation of Core Earnings may not be comparable to
similarly-titled measures used by other companies, which may employ
different calculations. As a result, Core Earnings should not be
considered a substitute for our GAAP net income (loss), as 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 Earnings, plus Drop Income
for the periods presented.
Three Months Ended (dollars in thousands,
except per share data)
March 31, 2018
December 31, 2017 Net income (loss) available to common
stockholders $ (113,711 ) $ 3,628 Net realized (gain) loss on
investments 71,191 23,647 Net unrealized (gain) loss on investments
166,009 56,651 Net realized and unrealized (gain) loss on
derivative instruments (89,468 ) (54,969 ) Core Earnings $ 34,021
$ 28,957 Core Earnings per average share $ 0.22
$ 0.19 Drop Income $ 3,899 $ 4,641 Drop
Income per average share $ 0.02 $ 0.03 Core Earnings,
plus Drop Income $ 37,920 $ 33,598 Core Earnings,
plus Drop Income per average share $ 0.24 $ 0.22
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version on businesswire.com: https://www.businesswire.com/news/home/20180425006695/en/
CYS Investments, Inc.Richard E. Cleary, 617-639-0440Chief
Operating Officer
Cys Investments, Inc. (NYSE:CYS)
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