CYS Investments: Another REIT With Core Earnings Up And Increasing Book Price

Jun. 5.14 | About: CYS Investments, (CYS)

Summary

We anticipate strong dividend for the second quarter.

We anticipate stock price will continue to appreciate through 2014.

It has seen its book value increase, and is still at discount of .93.

CYS Investments (CYS) is a REIT, specialty finance company. The company invests in whole-pool residential mortgage pass-through securities collateralized by residential mortgage loans that are issued or guaranteed by a federally chartered corporation, such as the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation, or an agency of the U.S. government, such as the Government National Mortgage Association, collateralized by fixed rate single-family residential mortgage, adjustable-rate residential mortgage loans (ARM), which have coupon rates that reset monthly, or hybrid ARMs, which have a coupon rate that is fixed for an initial period and thereafter resets at regular intervals.

CYS has two preferred stocks, series A and series B. Series A pays a quarterly dividend of 7.750 original coupon, and at the current stock price opening on June 5, 2014 of $23.95, would be an annualized return of just over 8%, while the series B dividend is 7.50%, and for the open of June 5, the stock price is $23.15 for an annualized return of 8.1%. Although both are paying over 8% annualized return right now, I recommend the common stock, as the dividend is paying well over 10% and the stock price is expected to climb throughout 2014.

CYS released a Supplemental Earnings Presentation on the first quarter, 2014, on April 22, 2014. (The presentation is on the company website; to view the slides, select the 4/22/14 report.)

There were several positives I found that should propel the company in 2014. The net income per common share basic and diluted income for the first quarter was a gain of $0.78, compared to the first quarter 2013's loss of $0.10. Fourth-quarter 2013 also displayed a loss of $0.59, so the question is, what did CYS do to change its financial picture around? Mostly the GAAP accounting procedures, but on chart 15 of the presentation, the numbers stand out in the Net unrealized gain/loss on investments. In the first quarter of 2014, it reported an unrealized gain of $89.234 million, whereas in the fourth quarter of 2013, it posted a $176.671 million loss.

In 2013, CYS reported losses realized of $595 million and unrealized losses of $314 million. In the first quarter of 2014, it reported a gain of $130 million net income, which represents the core earnings of $0.78 per share. The positive factors were that the realized gain was $16 million and the unrealized was $89 million, after the losses in 2013, with much of the impact from the Federal Reserve scare when they announced the beginning of the tapering. Since then, the effects have been negligible to the market and the REIT's operations. The Federal Reserve took several steps to calm the markets, and each Fed announcement since then has started with keeping interest rates low to support the economic growth in the housing market, which is perceived as an influencer in the economy as a whole.

Slide 16 reports the non-GAAP bottom line core earnings, which is, in my opinion the best hard look at a company's profitability mechanism. The last 5 quarters saw its core earnings per share at $0.17, $0.18, $0.23, $0.31 and $0.28. These numbers suggest that despite the way the company reports unrealized gains and losses (GAAP), the basic income producing process is present to make money (read in this, the ability to pay dividends to investors).

CYS Investments opened on June 5, 2014 at $9.05, with a 52-week high and low of $10.87 and $6.74 respectively. The high was in July 13, just prior to the 2Q report when the company released a loss of $2.32 per share, which was driven by a realized loss of $211.418 million and unrealized loss of $444.877 million. In the first quarter of 2014, the company posted positive numbers in both net realized gain of $16.670 million and unrealized gain of $89.234. The financial reports are improving, and the stock price is regaining its value.

The first quarter also saw the book value climb from $9.24 to $9.68, a $0.44 increase. With the stock trading at $9.05, the stock is trading at a discount of .93 of its value. We anticipate the book value will continue to climb through 2014. The company's investment portfolio was reported at $13.3 billion at the end of the first quarter. The common book value total return for the quarter was 8.23%.

CYS reported its leverage ratio was 6.32 to 1. This is lower than many REITs, which helps controls the costs on paying interests, and the savings goes straight to the bottom line.

The company hedges, like most REITs, with interest rate swaps. The combination of interest rate swaps and caps totaled $9.7 billion, and covered 97% of the company's repurchase agreements on March 31, 2014, compared to 91% on December 31, 2013.

The company paid a dividend of $0.32 per share, and we anticipate the company will continue near that same figure for the second quarter. The annualized returned for the dividend, based on today's stock price, is near 14%. In December 2012, the company paid its dividend with an additional catch-up amount to retain its status of a REIT. We will continue to track CYS earned income that is taxable, and may see the company have to pay a catch-up later this year if their financial reports stay strong.

We see CYS Investments as a solid investment opportunity for stock price appreciation and a double-digit dividend. Our recommendation is a buy and hold for an increase in the value of your portfolio. The dividend can be a cash cow that pays a nice quarterly dividend, or if you reinvest your dividends for growth, you should have a great 2014 and beyond. The second quarter is 2 months complete, and we expect another positive quarter for the company.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.