CYS Investments Inc. (CYS) is an REIT that invests in agency RMBS collateralized by fixed rate single family residential mortgage loans (typically 15, 20, or 30 years), ARMS, , or hybrid ARMs. CYS also can make investments in collateralized mortgage obligations issued from a government agency or government sponsored entity that are collateralized by agency RMBS.
In Q1 2012 CYS had GAAP income of $69.1 million or $0.66 per diluted share. CYS has core earnings of $41.9 million, or $0.39 per diluted share. On March 31, 2012 it had a net asset value of $13.14 per share after declaring a $0.50 per share dividend on March 8, 2012. This was an increase of $0.12 per share in NAV from Q4 2012. CYS's interest rate spread net of hedges was 1.88% for Q1. On Feb. 1, 2012 CYS completed a public offering of 28,750,000 shares of common stock at a price of $13.28 per share. It raised approximately $377.3 million of net proceeds, which it promptly invested. The $2.00 annualized dividend amounts to a 14.34% dividend.
On July 11, 2012 CYS announced another public offering of 40,000,000 shares of its common stock at a price to the public of $13.70 per share. CYS has granted the underwriters an option for 30 days to purchase up to an additional 6,000,000 shares of common stock. The stock offering is expected to close on July 16, 2012. The company's preliminary Q2 financial results say the NAV at the end of Q2 will be in the range of $13.50 to $13.54 per share. Using $13.52 as the value, the NAV will be just $0.18 below the stock offering price. The NAV gain comes to $0.50 for 1H. Annualized this is $1.00. Using the Jan. 1, 2012 stock price of $13.20, the projected $1.00 gain in NAV would amount to a +7.58% gain in NAV for the year. Together with the 14.34% dividend, this amounts to a total annualized gain of 21.92%. This is quite good for a company that should be fairly stable, even in the current troubled world economic environment.
To some it may seem counterintuitive to invest in the residential real estate market. It has been falling for years now. However, this may be one of the safest areas to invest in. In the US it has fallen roughly 35% from its highs. However, it has not popped back up as much of the rest of the market has from its 2009 lows. It has only recently seemed to stop falling. At worst it seems to be near the end of its drop. In another recession, it might fall a bit more; but it is not likely to see the bottom fall out a second time. It is already finding that bottom; and the current mortgage interest rates are so low that they make buying a home a cost saving measure compared to renting in many areas. The 30-year fixed mortgage today, Monday July 9, 2012, averaged only 3.57%. The 15-year fixed averaged only 2.93%. The replacement cost of many homes is buoying the price of the home, after an approximate 35% drop in home prices since 2006. On top of this the Fed is holding Fed Funds rates at near 0%, and it has said that it will keep them there at least into 2014. Further the Fed has extended Operation Twist until the end of 2012. This is designed specifically to keep mortgage interest rates low (long term bond rates low). The entire situation is sounding much more stable than just about any other industry. "Don't fight the Fed" is perhaps a doubly true saying when an industry is also in the bottoming process, and the Fed is specifically targeting the industry for health.
CYS sells at a PE of 10.66 and an FPE of 7.15. These multiples are quite good. It carries a mean analysts' recommendation of 1.9 (a BUY). It has a Beta of 0.16, and a market cap of 1.62B, which will grow to over $2B soon with the new stock offering. These factors should make CYS stable even in the coming tough world economic times. The only real fault I found was the interest spread. It was 1.88% at the end of Q1 2012. The end of Q2 2012 preliminary guidance calls for an interest rate spread of 1.50% to 1.70% for Q3 2012. If you use 1.60% as the rough value, this amounts to a 280 bps drop in interest rate spread. This is bad. I tend to think this may be presupposing events that may not occur. However, it still leaves the company as a solid performer, although the dividend may decrease. The leverage level is forecast to be 7.5 - 7.7 to 1.0 in Q3 2012. This is comparable to the 7.7 to 1.0 leverage ratio at the end of 2011. It is good to see that CYS is not increasing its risk level.
Another point of interest is the constant prepayment rate. CYS managed to trim its CPR to 17.2% for Q1 2012 from 19.6% for Q4 2011. I will be interested to read the final Q2 2012 results, which I am hoping will show a further decrease in constant prepayment rates. For those interested the agency RMBS portfolio at the end of Q1 2012 was made up of 1.7% 2007 production, 4.9% 2009 production, 16.9% 2010 production, 49.8% 2011 production, and 26.7% 2012 production.
The two year chart of CYS lends some technical direction to the trade.
The slow stochastic sub chart shows that CYS is near overbought levels. The main chart shows that CYS is in a weak uptrend. From the little information the company has provided about Q2 2012, that report should contain little damaging information. The worrisome information has likely already been provided in the Q3 guidance for an interest rate spread of 1.50% to 1.70%. With the gain in NAV to approximately $13.52 at the end of Q2 2012, the stock should be a solid buy at the offering price of $13.70 or even a bit more. Averaging in is a good strategy for these troubled times.
If you are interested in mortgage REIT's, a few of the better ones are: American Capital Agency Corp. (AGNC), Two Harbors Investment Corp. (TWO), and American Capital Mortgage Investment Corp. (MTGE). If you are interested, you should look into these yourself.
NOTE: some of the fundamental financial data came from Yahoo Finance.
Good Luck Trading.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CYS over the next 72 hours.