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CYS Investments, Inc. (CYS)
Deutsche Bank dbAccess Global Financial Services Investor Conference (Transcript)
June 05, 2013, 07:30 AM ET
Kevin E. Grant - Chief Executive Officer and President
Richard E. Cleary - Chief Operating Officer
Stephen A. Laws - Deutsche Bank Securities
Stephen A. Laws - Deutsche Bank Securities
Previous Statements by CYS
» CYS Investments' CEO Discusses Q1 2013 Results - Earnings Call Transcript
» CYS Investments' CEO Discusses Q4 2012 Results - Earnings Call Transcript
» CYS Investments' CEO Discusses Q3 2012 Results- Earnings Call Transcript
Kevin E. Grant
Okay. Good morning, everybody. Thanks Stephen and thanks to Deutsche Bank. For those listening to the webcast, this presentation we've got here in New York is just filed in an 8-K this morning. So if you like to follow along, please pull it down from our website or the SEC and have a look.
I will spend a couple of minutes going through this deck and I really want to leave a lot of time for questions with Stephen and you all. So as Stephen mentioned, we are an agency mortgage REIT and we formed the company in 2006 and raised our first capital then and the company was private until 2009 and we brought it public in 2009.
So we've been public almost four years now. So we've got a lot of history and of course we started this company just before the financial crises. So learning through that and that period of time was really I would say irreplaceable. So a very valuable experience for us especially being private.
The company was upscale or internally managed and we can really benefit from the sole nature of this business and you will see that in a moment. We have 47 lenders right now, so we move on borrow around pretty much at will and we diversify our counter party risk pretty significantly.
So here on page four, on the left side you've got that compound total return since we brought the company public. Now the company came public at '11 and yes, because of stock in this sector has been weak the past couple of weeks. So despite the weakness in stock price, you can see from the left side, that this you know, you generally return this business through distribution and that's really where the returns come from and if your only stock, you really have to understand that it's a very advantaged cost structure and the REIT structure basically causes us to pay out all our earnings in the form of dividend.
So if you reinvest those dividends which is what this compound total return shows, you are generating I think very attractive long term total returns. One thing that what people [pay] price graph, they forget about the $0.52 special dividend that we paid at the end of last year kind of glass over that, so if just look at the price and the stock, you really got to adjust for that $0.52 special dividend.
On the right side you see the expense ratio. We've got the expense ratio way down and as I mentioned it is a scale business. When we were first public, we were call it $200 million of capital and that's just very expensive expense structure at that size and these are public company expenses and it's just not -- it's not inexpensive to have one of these vehicles public. So our expense ratio now is below 100 basis points.
Let's just touch on the investing environment a bit. So as people who have followed us over the years, we have a lot of 15-year mortgages. We really like the 15-year structure. The short cash flows really are generally inside the five year part of the yield curve and we really like that. The stable cash flows really are a nice fit. The 15-year structure also has a benefit of not having the extension risk of a 30-year mortgage. So if rates go up, it just cannot get that long and what that does is that makes the hedging expense, the hedging problem, the calculus that much easier to solve. So we really like the 15-year market.
In the past several weeks, essentially the fed has I would describe it as preannounced, the end of quantitative even and what's uncertain is the pacing of that i.e. the taper, we call it operation taper, but effectively they've announced that whether it's six months or 12 months, the QE is likely to be over. Let's see what they say next week about that.
The market reacted very quickly and we will show you several graphs in here that will kind of demonstrate that. The 15-year market has cheapened a bit in the past couple of weeks. We see the net interest spread on a hedged strategy, that's the blue line in this graphs a little north of 120, which is better than we've had in prior quarters.
So here is a 30-year market. We said on the earnings call in April that we really like the 30-year market. There has been a very substantial cheapening in the 30-year market. The 30-year market is what the fed has been buying. So not surprisingly this is a market that would be the most sensitive to each hedging said policy and 30-year mortgages are now once again on a hedged basis as cheap as they've been probably in two years and given the supply picture there, we think this is a really good opportunity because the supply picture is pretty light for new supply.