CYS Investments, Inc. (CYS)

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CYS Investments, Inc. (CYS)

Q4 2012 Earnings Call

February 7, 2013 8:30 am ET


Richard E. Cleary – Chief Operating Officer and Assistant Secretary

Kevin E. Grant – Founder, Chief Executive Officer and CFA

Frances Spark – Chief Financial Officer, ACA and Treasurer


Bill Carcache – Nomura Securities International, Inc.

Douglas Harter – Credit Suisse

Mark C. DeVries – Barclays Capital Inc.

Steve C. DeLaney – JMP Securities LLC

Joel J. Houck – Wells Fargo Securities

Jim Young – West Family Investments

Stephen A. Laws – Deutsche Bank Securities

Michael Widner – Stifel Nicolaus

Arren Cyganovich – Evercore Partners



Good morning and welcome to the CYS Investments Inc. Fourth Quarter 2012 Earnings Conference Call. During management’s presentation, your line will be in a listen-only mode. At the conclusion of management’s remarks, there will be a question-and-answer session. I will provide you with instructions to enter the Q&A queue after management’s comments.

Management has asked me to remind you that certain information presented and certain statements made during management’s presentation with respect to future financial or business performance, strategies or expectations may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements indicate or are based on management’s beliefs, assumptions and expectations of CYS’ future performance, taking into account information currently in the Company’s possession. Beliefs and assumptions, and expectations are subject to change, risk and uncertainty as a result of possible events or factors, not all of which are known to management or within its control. If management’s underlying beliefs, assumptions and expectations prove incorrect or change, then the Company’s performance and its business, financial conditions, liquidity and results of operations may vary materially from those expressed, anticipated or contemplated in any form of their forward-looking statements.

In any event, actual results may differ. Management invites you to refer to the forward-looking statement disclaimer contained in the Company’s Annual Report on Form 10-K filed with the SEC, which provides a description of some of the factors that could have a material impact on the Company’s performance and could cause actual results to differ from those that may be expressed in forward-looking statements.

The company has asked me to note that the content of this conference call contains time-sensitive information that is accurate only as of today, Thursday, February 7, 2013. The company does not intend to and undertakes no duty to update the information to reflect future events or circumstances.

For opening remarks and introductions, I will now turn the call over to Rick Cleary, CYS’ Chief Operating Officer. Please go ahead, Mr. Cleary.

Richard E. Cleary

Thanks John and good morning. Welcome to the CYS 2012 fourth quarter earnings conference call. Today’s call is being recorded and access to the recording of the call will be available on the Company’s website at beginning at 3 pm eastern time this afternoon.

To better understand our results, it’d be helpful to have the press release that we issued last night. As in past releases the earnings release includes information regarding non-GAAP financial measures, including reconciliation of those measures to GAAP measures, which will be discussed on the call.

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

Kevin E. Grant

Thank you, Rick, and good morning everybody. Welcome to our fourth quarter earnings conference call. In addition to Rick, with me this morning is our CFO, Frances Spark; and Bill Sheehan from our investment team. As usual, we’d like to get to your questions, but first I have a few opening comments.

2012 was another solid year for CYS. We delivered $2.66 of shareholder value through a combination of $2.37 in dividends that includes the $0.52 special dividend and $0.29 of NAV appreciation through the year, producing a shareholder return on net asset value of over 20%.

Since our IPO in 2009, we delivered a total return of 95% or about 32 points better than the S&P500. We scaled the business well and now we’ve gotten the expense ratio to be very competitive. We think this cost efficiency for CYS is a very important differentiator, especially in current times, when returns in this industry are lower than the advent in the past several years.

We were able to deliver strong results last year, because we did a very good job positioning the company a year ago for what we saw coming. we delivered this performance in an environment, what I’ve said was competing for our target assets, and the entire Federal Government was trying to stimulate the economy through refinancing from the agency mortgage securities market. I’d say they’ve succeeded, but I also say that we succeeded last year and that we were successful in managing through the choppy waters of last year.

The environment today is a bit different than one year ago. net interest spreads are quite a bit tighter and the opportunities for security selection are quite a bit narrower. The Q4 adjusted net interest of about 108 basis points is actually a pretty good indicator of the current conditions in the marketplace and the impact that the Fed has had on our markets.

Some mortgage researchers have estimated that the available supply of agency mortgage-backed securities will contract by nearly $400 billion in 2013. We know the Fed is buying around $85 billion in a month, which is greater than the organic net supply. This involvement that Fed has had multiple effects on the markets and our business.

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