Cypress Sharpridge Investments, Inc. Announces Third Quarter 2009 Financial Results
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NEW YORK--(BUSINESS WIRE)-- Cypress Sharpridge Investments, Inc. (NYSE: CYS) ("CYS" or the "Company") today announced financial results for the quarter ended September 30, 2009.
Third Quarter 2009 Highlights
-- Net asset value of $13.58 per share after declaring a $0.35 dividend per
share on September 25, 2009. This represents an increase of $0.92 per
share compared to $12.66 per share on June 30, 2009.
-- GAAP net income of $23.2 million or $1.28 per diluted share, compared to
$20.6 million or $2.22 per diluted share in the second quarter of 2009.
-- Core Earnings of $5.6 million or $0.31 per diluted share, compared to
$6.8 million or $0.74 per diluted share in the second quarter of 2009,
before the effects of forward settling purchases.
-- Interest rate spread net of hedge of 2.67%, compared to 3.88% in the
second quarter of 2009, before the effects of forward settling
purchases.
-- Weighted-average amortized cost of Agency RMBS of $101.3, consistent
with the second quarter of 2009.
-- Non-investment expenses as a percentage of net assets of 3.31%, compared
to 4.38% in the second quarter of 2009.
Forward Settling Purchases
During the second and third quarters of 2009, the Company utilized forward settling purchases to deploy a portion of the proceeds from its initial public offering. The benefit of purchasing assets in forward settling transactions is that the Company can obtain an asset at a discount to its current market value because it doesn't receive any interest income on the asset until it settles. Obtaining the asset at a discount to market value reduces the impact of prepayments and is accretive to net asset value.
For example, at June 30, 2009 the Company had a forward settling purchase contract for a $150 million Agency RMBS pool backed by 15-year, 4.5% fixed-rate mortgages settling on September 17, 2009 with a market price of $101.36. A settled 15-year 4.5% fixed-rate pool as of June 30, 2009 had a market price of $102.09. The difference in price between the settled and forward settling contract of $0.73 is known as the drop. This $0.73 will flow through our net asset value by increasing the market value of the security rather than through interest income. In addition, the lower purchase price of $100.29 for the security on June 18, 2009 reduces the impact of prepayments.
Below is a summary of our forward settling purchases as of September 30, 2009 and June 30, 2009.
Forward Settling Purchases
As-of September 30, 2009 Settle Par
Date
FHLMC - 15 Year 4.5% Fixed 10/19/2009 $ 68,520,299
FNMA - 15 Year 4.5% Fixed 10/19/2009 75,000,000
$ 143,520,299
As-of June 30, 2009 Settle Par
Date
FNMA - 15 Year 4.5% Fixed 7/16/2009 $ 52,429,867
FNMA - 15 Year 4.5% Fixed 8/18/2009 60,000,000
FNMA - 15 Year 4.5% Fixed 9/17/2009 150,000,000
FNMA - 5X1 4.084% Hybrid ARM 7/22/2009 25,055,082
FNMA - 5X1 3.9% Hybrid ARM 9/23/2009 150,000,000
FNMA - 5X1 4.03% Hybrid ARM 9/23/2009 50,000,000
FNMA - 5X1 4.1% Hybrid ARM 9/23/2009 100,000,000
FNMA - 5X1 4.05% Hybrid ARM 9/24/2009 50,000,000
$ 637,484,949
Third Quarter 2009 Results
The Company had net income of $23.2 million during the third quarter of 2009, or $1.28 per diluted share, compared to$20.6 million or $2.22 per diluted share in the second quarter of 2009. During the third quarter of 2009, the Company had Core Earnings of $5.6 million, or $0.31 per diluted share, compared to $6.8 million, or $0.74 per diluted share in the second quarter of 2009. Core Earnings represents a non-GAAP financial measure and is defined as net income (loss) excluding (i) net realized gain (loss) on investments and termination of swap contracts and (ii) net unrealized appreciation (depreciation) on investments and swap contracts. The quarter-over-quarter decrease in Core Earnings was generally the result of utilizing forward settling purchases which benefited our net asset value, but not our Core Earnings for the third quarter. In addition, while our second quarter forward settling purchases were largely set to settle in September 2009, we entered into interest rate swaps on both June 24 and June 30, 2009, each with a notional value of $200 million.
The Company's average Agency RMBS increased to $958.1 million in the third quarter of 2009 from $789.5 million in the second quarter of 2009, and the interest rate spread net of hedge decreased to 2.67% for the third quarter of 2009 from 3.88% in the second quarter of 2009. The second quarter spread of 3.88% was higher than our original expectations due to elevated levels of 3-month LIBOR at the end of the first quarter of 2009. Additionally, the third quarter of 2009 spread of 2.67% was lower due to the costs of hedging the forward settling purchases prior to their settling and much lower levels for 3-month LIBOR. The Company incurred $2.0 million of non-investment expenses in the third quarter of 2009, compared to $1.4 million during the second quarter of 2009. This increase was due to a larger asset base and therefore an increase in asset based expenses such as management fees. However, the non-investment expenses as a percentage of net assets decreased to 3.31% in the third quarter of 2009 compared to 4.38% in the second quarter of 2009.
The Company's net asset value per share on September 30, 2009 was $13.58 after declaring a $0.35 dividend per share on September 25, 2009, compared with $12.66 at June 30, 2009, an increase of $0.92 per share.
Key Portfolio Statistics* Three Months Ended
September 30, 2009 June 30, 2009
Average Agency RMBS (1) $ 958,108,753 $ 789,520,805
Average securities sold under agreement to 771,241,276 693,518,835
repurchase
Average net assets 239,130,371 129,484,724
Average yield on Agency RMBS (2) 4.28% 4.75%
Average cost of funds & hedge (3) 1.61% 0.87%
Interest rate spread net of hedge (4) 2.67% 3.88%
Leverage ratio (at period end) (5) 5.7:1 5.9:1
(1) The Company's average Agency RMBS for the period was calculated by
averaging the cost basis of the Company's settled Agency RMBS during the
period.
(2) The Company's average yield on Agency RMBS for the period was calculated
by dividing the Company's interest income from Agency RMBS by the Company's
average Agency RMBS.
(3) The Company's average cost of funds and hedge for the period was
calculated by dividing our total interest expense, including the Company's
net swap interest income (expense), by the Company's average securities sold
under agreement to repurchase.
(4) The Company's interest rate spread net of hedge for the period was
calculated by subtracting the Company's average cost of funds & hedge from
our average yield on Agency RMBS.
(5) The Company's leverage ratio was calculated by dividing total liabilities
by net assets.
* All percentages are annualized.
Portfolio
At September 30, 2009, the Company's $1.6 billion portfolio of Agency RMBS was backed by: hybrid adjustable-rate mortgages ("ARMs") with 24 or fewer months to reset ("Short Reset ARMs") (10.9%), hybrid ARMs with 25 to 60 months to reset (44.3%), fixed-rate mortgages (35.5%) and monthly reset ARMs ("MTA") (9.3%). Additional information about our Agency RMBS portfolio at September 30, 2009 is summarized below:
Par Value Weighted Average
Asset Type (in thousands) Cost Price MTR1 Coupon CPR2
MTA $ 145,436 $ 103.65 $ 102.60 1 3.4 % 13.5 %
Short Reset ARMs 170,593 101.57 103.06 6.1 4.2 % 22.1 %
Hybrid ARMs 693,218 101.02 104.65 47.7 4.7 % 21.5 %
Fixed Rate 557,055 100.90 103.91 NA 4.7 % 12.8 %
Total/Weighted-Average $ 1,566,302 $ 101.28 $ 104.02 33.9 4.6 % 18.2 %
(1) "Months to Reset" is the number of months remaining before the fixed rate on
a hybrid ARM becomes a variable rate. At the end of the fixed period, the
variable rate will be determined by the margin and the pre-specified caps of the
ARM.
(2) "Constant Prepayment Rate" is a method of expressing the prepayment rate for
a mortgage pool that assumes that a constant fraction of the remaining principal
is prepaid each month or year. Specifically, the constant prepayment rate is an
annualized version of the prior three month prepayment rate. Securities with no
prepayment history are excluded from this calculation.
Financing, Leverage & Liquidity
At September 30, 2009, the Company had financed its portfolio with approximately $1.2 billion of borrowings with securities sold under agreement to repurchase ("repurchase agreements") with a weighted-average interest rate of 0.37%. These repurchase agreements had a weighted-average maturity of approximately 27.6 days. In addition, the Company had payable for securities purchased of $145.8 million. The Company's leverage ratio at September 30, 2009 was 5.7 to 1. At September 30, 2009, the Company's liquidity position was approximately $150.5 million, consisting of unpledged Agency RMBS, cash and cash equivalents. Below is a list of outstanding repurchase agreements at September 30, 2009.
Counterparty Total Outstanding % of Total Weighted Average
Borrowings Maturity in Days
Bank of America Corp. $ 94,304,000 7.6 % 14
Barclays Capital, Inc. 114,195,472 9.2 26
Cantor Fitzgerald & Co 48,460,000 3.9 26
Daiwa Securities America Inc. 51,187,000 4.1 19
Deutsche Bank Securities, Inc. 131,665,000 10.7 13
Goldman Sachs Group, Inc. 138,895,000 11.2 37
Greenwich Capital Markets, Inc. 135,614,505 11.0 23
ING Financial Markets LLC 49,186,000 4.0 26
Jefferies & Company, Inc. 60,879,000 4.9 22
LBBW Securities LLC 58,700,000 4.8 22
MF Global, Ltd 127,541,143 10.3 61
Mizuho Securities USA, Inc. 49,049,000 4.0 19
Morgan Keegan & Co 44,775,000 3.6 15
Pershing, LLC 40,743,000 3.3 19
South Street Securities LLC 91,863,736 7.4 38
Total $ 1,237,057,856 100.0 %
Hedging
The Company utilizes interest rate swap contracts to hedge the interest rate risk associated with the financed portion of its Agency RMBS portfolio. At September 30, 2009, the Company had entered into three interest rate swap contracts with an aggregate notional amount of $640.0 million and a weighted average fixed rate of 2.006%. These interest rate swaps are described below:
Interest Rate Swap Contracts at September 30, 2009
Counterparty Expiration Pay Rate Receive Rate Notional Fair Value
Date Amount
Deutsche April 2012 1.691% 3-Month LIBOR $ 240,000,000 $ (514,090)
Bank Group
Deutsche June 2012 2.266% 3-Month LIBOR 200,000,000 (2,852,238)
Bank Group
The Royal
Bank of July 2012 2.125% 3-Month LIBOR 200,000,000 (2,096,854)
Scotland plc
Total $ 640,000,000 $ (5,463,182)
Conference Call
The Company will host a conference call at 9:00 AM EDT on Thursday, October 22, 2009, to discuss its financial results for the quarter ended September 30, 2009. To participate in the event by telephone, please dial 866.510.0707 at least 10 minutes prior to the start time and reference the conference passcode 30156740. International callers should dial 617.597.5376 and reference the same passcode. The conference call will also be webcast live over the Internet and can be accessed at the Company's Web site at www.cysinv.com. To listen to the live webcast, please visit www.cysinv.com at least 15 minutes prior to the start of the call to register, download, and install necessary audio software. A dial-in replay will be available on Thursday, October 22, 2009 at approximately 3:00 PM EDT through Thursday, October 29 at 11:00 AM EDT. To access this replay, please dial 888.286.8010 and enter the conference ID number 28580733. International callers should dial 617.801.6888 and enter the same conference ID number. A replay of the conference call will also be archived on the Company's website at www.cysinv.com.
About Cypress Sharpridge Investments, Inc.
Cypress Sharpridge Investments, Inc. is a specialty finance company that invests on a leveraged basis in whole-pool residential mortgage pass-through certificates for which the principal and interest payments are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. The Company refers to these securities as Agency RMBS. Cypress Sharpridge Investments, Inc. has elected to be taxed as a real estate investment trust for federal income tax purposes.
CYPRESS SHARPRIDGE INVESTMENTS, INC.
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
September 30, 2009 December 31,
(Unaudited) 2008*
ASSETS:
Investments in securities, at fair value
(cost, $1,626,780,975 and $723,814,995, $ 1,635,893,519 $ 690,509,973
respectively)
Cash and cash equivalents 741,907 7,156,140
Receivable for securities sold 3,140,500 885,009
Interest receivable 6,456,355 3,828,586
Prepaid insurance 358,608 65,851
Prepaid and deferred offering costs 638 -
Total assets 1,646,591,527 702,445,559
LIABILITIES:
Securities sold under agreement to 1,237,057,856 587,485,241
repurchase
Interest rate swap contracts, at fair value 5,463,182 12,503,520
Payable for securities purchased 145,750,436 -
Distribution payable 6,374,456 -
Accrued interest payable (including accrued
interest on securities sold under
agreement to repurchase of $193,958 and 3,789,225 2,327,208
$1,598,881, respectively)
Related party management fee payable 373,020 220,045
Accrued offering costs - 510,569
Accrued expenses and other liabilities 396,522 598,127
Total liabilities 1,399,204,697 603,644,710
NET ASSETS $ 247,386,830 $ 98,800,849
Net Assets consist of:
Common Stock, $0.01 par value, 500,000,000
shares authorized $ 182,127 $ 76,627
(18,212,732 and 7,662,706 shares issued and
outstanding, respectively)
Additional paid in capital 309,189,688 201,941,407
Accumulated net realized gain (loss) on (82,922,877 ) (68,887,694 )
investments
Net unrealized appreciation (depreciation) 3,649,363 (45,808,542 )
on investments
Undistributed net investment income 17,288,529 11,479,051
NET ASSETS $ 247,386,830 $ 98,800,849
NET ASSET VALUE PER SHARE $ 13.58 $ 12.89
________
* Derived from audited financial statements.
CYPRESS SHARPRIDGE INVESTMENTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended September Nine Months Ended September 30,
30,
2009 2008 2009 2008
INVESTMENT
INCOME - $ 10,709,920 $ 12,631,559 $ 29,758,640 $ 44,977,310
Interest income
EXPENSES:
Interest 898,891 4,758,157 3,399,458 19,578,363
Management fees 1,049,462 717,807 2,548,230 1,901,498
Related party
management 267,515 293,115 800,733 887,067
compensation
General,
administrative 679,449 359,608 1,624,039 1,081,235
and other
Total expenses 2,895,317 6,128,687 8,372,460 23,448,163
Net investment 7,814,603 6,502,872 21,386,180 21,529,147
income
GAINS AND
(LOSSES) FROM
INVESTMENTS:
Net realized
gain (loss) on - 1,699,099 1,415,931 (2,518,056)
investments
Net unrealized
appreciation
(depreciation) 24,410,936 (14,410,024) 42,417,567 (29,076,275)
on
investments
Net gain (loss) 24,410,936 (12,710,925) 43,833,498 (31,594,331)
from investments
GAINS AND
(LOSSES) FROM
SWAP CONTRACTS:
Net swap
interest income (2,225,747) (2,040,760) (4,646,991) (5,363,263)
(expense)
Net gain (loss)
on termination - - (10,804,123) (29,927,526)
of swap
contracts
Net unrealized
appreciation
(depreciation) (6,781,362) (736,737) 7,040,338 14,829,535
on swap
contracts
Net gain (loss)
from swap (9,007,109) (2,777,497) (8,410,776) (20,461,254)
contracts
NET INCOME $ 23,218,430 $ (8,985,550) $ 56,808,902 $ (30,526,438)
(LOSS)
NET INCOME
(LOSS) PER
COMMON SHARE:
Basic $ 1.28 $ (1.19) $ 4.86 $ (4.35)
Diluted $ 1.28 $ (1.19) $ 4.84 $ (4.35)
WEIGHTED AVERAGE
COMMON SHARES:
OUTSTANDING
Basic 18,110,134 7,530,300 11,683,639 7,020,598
Diluted 18,180,134 7,530,300 11,726,050 7,020,598
Core Earnings:
Core Earnings represents a non-GAAP financial measure and is defined as net income (loss) excluding net realized gain (loss) on investments, net unrealized appreciation (depreciation) on investments, net realized gain (loss) on termination of swap contracts and unrealized appreciation (depreciation) on swap contracts. In order to evaluate the effective yield of the portfolio, management uses Core Earnings to reflect the net investment income of our portfolio as adjusted to reflect the net swap interest income (expense). Core Earnings allows management to isolate the interest income (expense) associated with our swaps in order to monitor and project our borrowing costs and interest rate spread. In addition, management utilizes Core Earnings as a key metric in conjunction with other portfolio and market factors to determine the appropriate leverage and hedging ratios, as well as the overall structure of the portfolio.
The Company adopted Accounting Standards Codification ("ASC") 946, Clarification of the Scope of Audit and Accounting Guide Investment Companies ("ASC 946"), prior to its deferral in February 2008, while most, if not all, other public companies that invest only in Agency RMBS have not adopted ASC 946. Under ASC 946, the Company uses financial reporting specified for investment companies, and accordingly, its investments are carried at fair value with changes in fair value included in earnings. Most other public companies that invest only in Agency RMBS include most changes in the fair value of their investments within shareholders' equity, not in earnings. As a result, investors are not able to readily compare the Company's results of operations to those of most of its competitors. The Company believes that the presentation of its Core Earnings is useful to investors because it provides a means of comparing its Core Earnings to those of its competitors. In addition, because Core Earnings isolates the net swap interest income (expense) it provides investors with an additional metric to identify trends in the Company's portfolio as they relate to the interest rate environment.
The primary limitation associated with Core Earnings as a measure of the Company's financial performance over any period is that it excludes the effects of net realized gain (loss) from investments. In addition, the Company's presentation of Core Earnings may not be comparable to similarly-titled measures of other companies, who may use different calculations. As a result, Core Earnings should not be considered as a substitute for the Company's GAAP net income (loss) as a measure of our financial performance or any measure of our liquidity under GAAP.
Three Months Ended September Nine Months Ended September 30,
30,
Non-GAAP 2009 2008 2009 2008
Reconciliation:
NET INCOME $ 23,218,430 $ (8,985,550 ) $ 56,808,902 $ (30,526,438 )
Net gain (loss)
from (24,410,936 ) 12,710,925 (43,833,498 ) 31,594,331
investments
Net (gain) loss
on termination - - 10,804,123 29,927,526
of swap
contracts
Net unrealized
appreciation
(depreciation) 6,781,362 736,737 (7,040,338 ) (14,829,535 )
on swap
contracts
Core Earnings $ 5,588,856 $ 4,462,112 $ 16,739,189 $ 16,165,884
Source: Cypress Sharpridge Investments
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