Is the Recent Dip in CYS a Buying Opportunity?
Adnan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
CYS Investments (NYSE: CYS) commenced its operations in 2006 as a mortgage REIT that exclusively invests in Agency mortgage backed securities backed by single family residential mortgage loans. The company’s investment strategy includes fixed rate securities, adjustable rate securities and hybrid ARMs. The company finances its investment portfolio by borrowing short-term using repurchase agreements.
At the end of the fourth quarter of the prior year, CYS Investments reported that 15-year fixed rate MBS have the largest proportion in its investment portfolio. The graph above shows they were 56%, while Hybrid ARMs are 19% of the entire portfolio at the end of the most recent quarter. It is evident from the above graph that the company is invested in relatively shorter duration MBS as compared to Annaly Capital Management (NYSE: NLY).
The MBS portfolio, inclusive of MBS forwards, dropped 8% from the linked quarter to $20.9 billion as the management at CYS sold off assets. The total earning assets totaled $16 billion during the most recent quarter.
Asset Yields, Interest Expense & Net Interest Income
During the fourth quarter, the company earned 1.97% yield on its interest yielding assets, down 28 basis points. As a result, the company earned an interest income of $79.6 million during the fourth quarter. The company paid 1.03% as cost of funds. This is up 2 basis points from the linked quarter. As a result, the company paid $16.4 million in interest expenses during the most recent quarter. The company earned 0.94% in interest rate spread, down 30 basis points from the prior quarter. The decline in net interest spread was a result of decline in asset yields compounded by sale of interest yielding assets during the quarter. Also, higher MBS forward balance impacted the spread negatively. As a result, the company earned $58.4 million in net interest income, down 1.7% from the prior quarter.
Total revenues or total investment income of $79.6 million surged 4% quarter over quarter, largely due to a hike in interest income from Agency mortgage backed securities. During the quarter, the total expense of $21.2 million surged 23% over the same time period, largely due to a hike in interest expense the company paid on its interest bearing liabilities, partially offset by a decline in compensation and benefits and general, administrative and other expenses. During the quarter, the company experienced $206.5 million in net unrealized depreciation on its investments, which translated into the bottom line. The company reported a loss of $0.24 per share.
At the end of the third quarter, the company increased the percentage of repurchase agreements swapped from 50% at the end of the third quarter to 54%. During the fourth quarter the percentage of repurchase agreements for American Capital Agency (NASDAQ: AGNC) swapped was 63%, unchanged from last quarter. This is against 40% swapped by Annaly Capital Management during the fourth quarter. The duration of American Capital Agency’s swaps was flattish at 4.4 years.
CYS Investments recorded $949.6 million in both scheduled and unscheduled prepayments and principal repayments during the most recent quarter. This is equal to a constant prepayment rate of 17.6%, up from 17.3% in the third quarter.
In comparison, American Capital Agency reported 10% CPR for its investment portfolio, while the CPR for Annaly Capital at the end of the most recent quarter was 19%. American Capital’s CPR increased from 9%, while Annaly Capital’s CPR decreased from 20% in the linked quarter.
During the most recent quarter, the company’s book value decreased 8% or $1.15 to $13.31 per share. The decline is believed to be the result of lower asset prices. In comparison, American Capital Agency’s book value decreased 2.6%, while Annaly Capital Management reported a 4.5% decline in its book value at the end of the fourth quarter.
CYS Investments yields 13.13% while analysts have a consensus mean price target of $13.73 for a stock that is currently changing hands at $12.19 per share. This is an upside of 12.6%. Therefore, I believe the recent dip in CYS presents a buying opportunity. Credit Suisse has a price target of $13.5 for CYS.
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