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CYS Investments (CYS)
Presentation at Barclays Capital Global Financial Services Conference
September 11, 2012 4:15 p.m. ET
Kevin Grant- Founder, President, Chairman and CEO
Frances Spark - CFO and Treasurer
Rick Cleary - COO
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CYS is one of these companies - agency-only mortgage REITs - that’s built a great track record, and I think one of the most notable things about them that really differentiates them is the fact that they’ve done something extremely shareholder friendly by internalizing the structure and generating more operating leverage now than I think you’ll see in the average mortgage REIT. That, in addition to great security selection.
So with that, I’ll hand it over to Kevin for his comments.
Thank you very much. Good afternoon everybody. Thanks for coming to the presentation and listening in. If you’re following the webcast, this presentation we’ve got here in New York is available in an 8-K which was just filed. So please pull it up and follow along.
Also, thanks to Barclays. Barclays took us public in 2009 and we think we’ve delivered a good result for our shareholders and a good result for everybody involved. So thanks to Barclays for hosting and continuing to be a supporter of the company.
So yes, CYS is an agency-only mortgage REIT, and I’ll bring your attention to our forward looking statement cautionary paragraph. I’ll let you read this at your leisure. But suffice it to say, I’ll make some forward looking statements and we could change our mind in five minutes. Just be aware the markets change very quickly, and we react.
So the company is an agency-only mortgage REIT. We actually started privately in 2006, and at the time it was a hybrid strategy. And that was something that at the time we felt a lot of value could come from. But very early on in our life, we realized that the credit markets were changing drastically. We changed our investment guidelines in 2007 to be agency-only, and that was very prescient. We got that right. And even today the residential mortgage market really is an agency-only world.
I’m the founder of the company. Started the company in 2006. The team that started the company, really including Frances, has been in place right since the beginning. As Mark mentioned, we are self-managed. Our view on this is that when the company was small it was valuable to have an external manager, really for resources, because you could lean on the external manager. It’s very expensive to start one of these companies.
But as you scale, it really makes sense to become self-managed, and we brought management inside just about a year ago, a little over a year ago, and essentially that transaction was for free. The company had to pay for computers and office buildout and so forth, but essentially it was pretty close to a for-free transaction. We think this is the right structure for us, our particular circumstances, and it really does deliver economies of scale as the business grows.
We’ve got a lot of financing in place, with a lot of different counterparties. We’ve got over 34 counterparties in place now. Believe it or not, we’ve got more counterparties in the works for financing and interest rate swaps. It’s very important to manage these counterparties. The capacity moves around.
The capacity is very good right now in the repo markets, but it does move around. And all of our counterparties have all their own issues, and we like to diversify our sources of financing and types of financing. And, of course, we’re a REIT, so whatever we earn we’ve got to pay out, and it goes out to you all in the form of dividends to our shareholders.
We’re now three years plus as a public company, and we’re very proud of the track record thus far. And we hope to continue to deliver these results. Essentially, since our IPO we’ve just about doubled our initial public investors’ investments, since that June 2009 IPO.
On the expense ratio side, I actually said in the IPO roadshow that our goal was to become the most efficient provider of access to these markets, to our investors. And by these markets I mean the agency mortgage market, the repo market, which is very difficult for you to access yourself, and the interest rate derivatives, basically the hedging markets, the swaps markets.
So if we’re the most efficient provider of access to these markets than anyone else, then we will always be able to generate a better return. And when returns were in the 15%, 16%, 17% neighborhood, the investor base really didn’t focus on expense ratio.
But now we’re in a low teens investment environment, and I think the market is beginning to realize that this expense ratio load and efficiency and quality of management really is a pretty significant differentiator, and we think this really matters to our shareholders and ultimately, obviously, the multiple on the stock.
So let’s move to the mortgage investing environment. Rates are low. The Fed is our biggest competitor for assets, in a very significant way. And the Fed’s activities in the markets and the expectations of more activity in the market is driving the absolute level of rates. A 7/1 hybrid ARM, par priced - this is very theoretical - would yield about 1.4% right now. There really is no such thing. The entire market is a premium market.