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CYS Investments’ book value per share holds steady in Q3

Brent Nyitray, CFA, MBA

CYS Investments is a mortgage REIT that focuses on agency mortgage-backed securities

CYS is a REIT that invests in agency (or government-guaranteed) mortgages collateralized by fixed-rate mortgages, adjustable-rate mortgages, and hybrid adjustable-rate mortgages. Its ARM mortgages reset monthly, while the hybrid ARMs have a fixed rate for a period of five to seven years and then reset annually. It’s permitted to invest in CMOs, but it doesn’t currently have any exposure there. CYS hedges its interest rate risk and uses leverage to increase returns. Because it’s an agency REIT, it doesn’t bear credit risk. However, the lack of credit risk means that its portfolio yields are generally lower, and as a result, its use of leverage makes it very sensitive to interest rate movements.

Highlights of the quarter

Book value fell to $10.10 a share from $10.20 a share in Q2, after taking into account a $0.34 dividend. The company’s leverage ratio fell to 6.5 from 7.5. Net income was $0.14 a share. The interest rate spread net of hedging was 1.66% and its expenses were 1.13% of net assets. It repurchased 5.9 million shares with a weighted average of $7.77 a share.

During the quarter, the company reduced its Agency RMBS portfolio from $17.2 billion to $14.4 billion. The company shortened duration considerably, as it sold 20- and 30-year fixed-rate mortgages and purchased 15-year mortgages. By reducing its duration, it reduced its interest rate exposure. As rates rise, the adjustable-rate mortgages will be relatively insensitive because the rates it pays will increase with interest rates. The 30-year fixed-rate mortgages will be the most sensitive, followed by the 20-year and then the 15-year.

Read-across for the other REITs

CYS isn’t a good comp for the big names, like Annaly (NLY) and American Capital Agency (AGNC), which have large exposure in 30-year fixed-rate mortgages. It isn’t really a comp for Capstead (CMO) or MFA Financial either, as those REITs invest primarily in adjustable-rate mortgage-backed securities.

Given that the ten-year yield increased about 20 basis points over the quarter, CYS did a good job of managing its interest rate risk, as evidenced by its largely unchanged book value. CYS is the first of the REITs to announce third quarter numbers. We should hear from the others shortly.

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