CYS Investments, Inc. (CYS)

CYS 
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Industry: Consumer Services
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Cypress Sharpridge Investments, Inc. (CYS)

Q1 2010 Earnings Call

April 23, 2010 9:00 am ET

Executives

Kevin Grant - Chairman and CEO

Frances Spark - CFO

Rick Cleary - COO

Bill Shean - MD of Investments

Analysts

Steven Delaney - JMP Securities

Henry Coffey - Sterne Agee

Mike Widner - Stifel Nicolaus

Lee Yee - Private Investor

Steve Covington - Stieven Capital

Dean Choksi - Barclays Capital

Presentation

Operator

Welcome to the Cypress Sharpridge Investments, Inc. first quarter 2010 earnings conference call. During management’s presentation your line will be in a listen-only model. At the conclusion of management remarks there will be a question-and-answer session. (Operations instructions)

For opening remarks and introductions I am turning the conference over to Rick Cleary CYSs Chief Operating Officer.

Rick Cleary

Good morning and welcome to CYSs 2010 first quarter earnings conference call. Today’s call is being recorded and access to the recording of today’s call will be available on the company’s website commencing at 3:00 PM this afternoon.

With me today are Kevin Grant, the company’s Chairman and CEO, Frances Spark, the company’s CFO and Bill Shean, Managing Director of Investments.

As always, I'm obliged to note 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 our future performance taking into account information currently in our possession.

Of course, beliefs 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 us or within our control.

If our underlying beliefs, assumptions and expectations prove incorrect or change than the company's performance, in our business, financial condition, liquidity and result of operations may vary materially from those expressed anticipated or contemplated in any of our forward-looking statements. In any events actual results may differ.

I am requesting you refer to the forward-looking statements disclaimer contained in the company's annual report on Form 10-K filed with the SEC, which provides the descriptions of some of the factors that could have material impact on the company's performance and could cause actual results to differ from those that maybe expressed in forward-looking statements.

Also kindly note that content of this conference call does contain time-sensitive information that is accurate only as of today, Friday, April 23, 2010. The company does not intend to and undertake no duty to update the information to reflect future events or circumstances.

Finally, to better understand the results it maybe helpful to have the press release that we issued yesterday. As usual, the earnings release includes information regarding non-GAAP financial measures, including reconciliation of those measures to GAAP measures, which will be discussed on today's call. The earnings release is available at the investor relations section of our website.

I'm now pleased to turn the call over to Kevin.

Kevin Grant

Thanks, Rick, and good morning everybody on the call to CYS's first quarter earnings conference call. We are pleased to report a strong first quarter to start 2010. We continue to benefit from the interest rate environment and spread environment currently in our market.

The average market price in our portfolio at March 31 was $103.62 and we of course provide the breakdown by asset type in the earnings release. I think you'll note still reasonable prices for the fixed rate 15-year paper, which in our case is almost $15 year paper.

The highest prices in the market generally continue to be in the Hybrid ARMs state. We have actually seen bonds in this market trade well above 105, which is frankly just shocking and that suggests to us that some of our hybrids still have some upside. However, hybrid prices seems pretty high to us already, so we are looking elsewhere to reinvest our capital.

ARMs generally also suffer from the highest delinquencies and therefore are much more vulnerable to the Fannie Mae and Freddie Mac buyout activities. 15-year mortgages rather are exhibiting the lowest delinquencies by far and their prices continue to be quite reasonably, especially in the forward market.

The 30 year market is changing somewhat as the distortions created by the Fed have dissipated. The Fed buying, which was focused on the 30-year current coupon market and that market has cheapened reasonably.

Hedging along cash flows of the 30 year current coupon mortgage is still very expensive to us, so we still don’t see the value for CYS in the 30-year market. We continue to see the 15-year market is offering the best opportunities.

In our financing markets, borrowing availability remains stable in Q1, Repo rates were stable throughout the quarter. Term Repo is still not widely readily available, but we continue to seek them under term financing.

We continue to feel the agency market is the place to be as a non-agency securitization market is trying to find its footing but really is still not functioning properly, with only one rating agency, willing to step up and put AAA on anything.

The Fed's distortive behavior has ended and now the markets have to find their own level. The agencies buyout activities will shrink the market by an amount equal to about three or four months of the Fed buy program activity which has ended. So we don’t expect a significant cheapening in the agency market anytime soon.

The pace of bank closing has accelerated in 2010, though they have tended to be much smaller bank. We look at every bid list in the market every week, but so far the market seems happy to absorb the bid at current prices.

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