CYS Investments, Inc. (CYS)

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Start Time: 08:15

End Time: 08:53

CYS Investments, Inc. (CYS)

Company Conference Presentation

September 10, 2013, 08:15 AM ET


Kevin E. Grant - President and CEO


Mark DeVries - Barclays Capital Inc.


Mark DeVries - Barclays Capital Inc.

Okay. Good morning. Next up we have CYS. We're very pleased to have Kevin Grant up here with us. We also have Rick Cleary upfront. For those of you who aren't familiar, CYS is an agency mortgage REIT. A little background on Kevin. Kevin helped found the company. He is the CEO. And before founding this, he had a long career at Fidelity in their fixed income department.

So now I'll hand it over to Kevin.

Kevin E. Grant

Thank you, Mark. Good morning, everybody. I hope everybody's doing well. Here our cautionary paragraph. I'll let you read it on your own. For those listening to the webcast or dialing in, we just filed an 8-K with this deck that we're using here in New York, so feel free to pull it down and follow along. I'll try to remember to give you the page numbers so we can kind of keep in sync.

But just remember that I'll make comments today that by nature are forward-looking and we can work out the draft of this meeting, conditions could change or our views of the market could change and we could change the strategy of the business, so bear that in mind.

So I think a lot of people here are probably very familiar with this story. We're an agency only mortgage REIT. We invest in agency mortgage-backed securities. We've had a heavy focus over the years on 15-year mortgages. That really is a sweet spot for us. I found that the company is based just outside of Boston.

One important distinction for our company is we're self managed, so we are an internally managed company and that has lots of important implications. The management team does not get paid for AUM. We get paid for performance. So that means when it comes to capital allocation decisions, we have really a lot more choices in how we choose to allocate capital.

It also has implications for our expense ratio. Over the years I've always said that in a lower rate environment or lower spread environment when the returns are lower on this business, the market really should distinguish between companies that are efficiently run and companies, particularly external guys, with a flat management fee. So we're run highly efficiently and that makes the business very scalable.

On capital allocation, on any given day we look at the choices available to us in the marketplace. We can buy assets. We can obviously hold or trade the assets that we've got. We can buy back stock. On dividend declaration days we can decide how much of cash dividends to distribute to our shareholders within the guidelines of the REIT rules.

In the past six months or so, there have been periods of time where by far the cheapest fixed income asset, the cheapest bond, bond of vehicle in the entire world frankly has been companies in the agency mortgage REIT space. So that tells us pretty loudly and clearly that that's a good place for us to allocate.

We don't tell the market when we're in the market buying back our stock. It would really disadvantage our existing shareholders and the people that are sticking around for us, but you'll certainly see it in the Q.

On the dividends, this is further onto the discussion of capital allocations. Last night we declared $0.34. We maintain the dividend from the prior quarter. The earnings power in this spread environment is very, very good. The question is how much of that earnings power do we choose to distribute. And we've got a lot of flexibility this year and certainly going into next year to retain capital.

From a corporate finance mathematical perspective, anybody that would sit down and do the math, we'd say, well, you could distribute as penny at NAV of cash dividend or you could take a penny and reallocate that and just deploy it and stock buyback what have you. So on a go-forward basis, one of the things that we do every fall is we review what we think the dividend ought to be in the coming several quarters.

So as we go into earnings season here in October, you should expect on the earnings call in October for us to give you some good visibility on what the Board's view is on retention of earnings. Keep in mind that over the years, we've had the practice of basically paying out all the earnings of the business.

This past quarter, Q2, we retained several cents and we've messaged that as part of the earnings call in July. Going forward given the volatility of the market, it's certainly possible that the Board will choose to retain more. But keep in mind that the earnings power is there, it stays in the NAV, it's just a question of what the distribution is.

All right, let's turn to the investing environment. As we all know the bond market has backed up a lot and there are a lot of implications for this – we're calling it a normalization of the yield curve. What we have here is a graph of spreads for the 15-year market. There's two graphs here.

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