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CYS Investments Inc. (CYS)
Q3 2012 Earnings Call
October 18, 2012 9:00 am ET
Kevin Grant – President, Chief Executive Officer
Frances Spark – Chief Financial Officer
Richard Cleary – Chief Operating Officer
William Sheehan – Managing Director, Investments
Steve Delaney – JMP Securities
Stephen Laws – Deutsche Bank
Mark Devries – Barclays
Douglas Harter – Credit Suisse
Joel Houck – Wells Fargo
Mike Widner – Stifel Nicolaus
Ken Bruce – Bank of America Merrill Lynch
Jasper Burch – Macquarie
Eugene Fox – Cardinal Capital Management
Kevin Barry (ph) - Caxton
Jim Fowler – Harvest Capital
Allan Weinstein – (firm inaudible)
Previous Statements by CYS
» CYS Investments' CEO Presents at Barclays Capital Global Financial Services Conference (Transcript )
» Cypress Sharpridge Investments' CEO Discusses Q2 2012 Results - Earnings Call Transcript
» Cypress CEO Discusses Q3 2010 Results - Earnings Call Transcript
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, 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 condition, liquidity and results of operations may vary materially from those expressed, anticipated or contemplated in any 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 reports on Form 10-K and quarterly reports on Form 10-Q 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, October 18, 2012. 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.
Thank you, Gary. Good morning and welcome to CYS’ 2012 Third 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 cysinv.com beginning at 3 pm Eastern time this afternoon.
To better understand our results, it would be helpful to have the press release that we issued last night. The release includes information regarding non-GAAP financial measures, including a reconciliation of those measures to GAAP measures, which will be discussed on this call.
I’d now like to turn the call over to our CEO, Kevin Grant.
Thank you, Rick, and good morning to everybody. Welcome to our third quarter 2012 earnings conference call. With me this morning is also our CFO, Frances Spark; Bill Sheehan from the investment team; and of course, our Chief Operating Officer, Rick Cleary. As always, we are keen to get to your questions, but first it’s been another very busy and interesting quarter so I wanted to offer some opening remarks.
I think you all know that we have been very close watchers of the Fed. This continues to pay off by giving us the insight to position the company for the distortions created by the heavy hand of the Fed. We had a very strong quarter. We declared a $0.45 dividend and delivered $0.94 of NAV appreciation. We feel very good about the quarter.
For the year-to-date period, the NAV is up $1.44 on top of very nice dividend distribution so far in 2012. We also realized capital gains of $27 million during the quarter and over $93 million year-to-date. Lastly, we’ve gotten the expense ratio down to 93 basis points for the quarter, down from 133 in Q2 and 152 in Q4 of 2011. I said to you all a little over a year ago that I was moving the bar on our expense ratio by internalizing management, and we have accomplished that goal. This expense savings goes straight to over dividend.
We’ve positioned the company nicely for the environment, and we still see good opportunities. During the third quarter, we were very active maneuvering the portfolio to avoid high prepayment sectors and to further set up for QEIII and everything that’s going on. We aggressively culled the portfolio of bond exposed to fast prepayments and we reinvested into bonds with much better prepayment protection, especially if the pay-up was low and, in some cases, zero.
We’ve found plenty of places to reinvest. You’ll notice in our earnings release that our prepayments were very well behaved. This is because we actively manage our portfolio and our asset size is very, very manageable. Dollar prices are high in the mortgage market and everyone is trying to buy prepayment protection. I’d like to say that many specified pool strategies entail very big pay-ups, probably too big, and in some cases these sectors are priced for perfection. We have been a seller into this frothy market and we have been able to find much better bonds away.