CYS Investments : 15-20% d'upside, 11% de rendement sur dividendes

Je crois que cet article a un lien avec le sujet, je me permets de le poster même si je ne suis pas directement intéressé :

Will Mortgage Bonds Enter the Vortex? - Bloomberg View

Sergio --

Si je comprends bien, vous dites que la valo des reits c’est très compliqué, d’où prudence. Mais je suis bien d’accord avec vous.

CdA disait "c’est impossible" -- mais si c’était le cas alors tout le monde serait à la même enseigne et au fond, investir dans ces trucs là sans trop comprendre ne serait à la limite pas si négatif que cela, puis qu’il n’y aurait rien à comprendre.

C’est bien là que je tenais à souligner que non, ce n’est pas impossible, et c’est justement pour cette raison qu’il faut traiter tout ça avec prudence. Si vous faites partie de "ceux qui savent", très bien. Sinon, il est primordial de réaliser qu’il y a des gens qui en savent plus que vous et que donc cela devient un investissement risqué (if you don’t know who the sucker is…).

Elle ne semble pas en ligne, toutes les confs sont dispos ici :

http://www.wsw.com/webcast/kbw10/

Je n’ai pas trop le temps (ainsi que les compétences) pour comprendre parfaitement la couverture de CYS. Quelqu’un a t-il une vision claire sur la qualité du hedging de CYS ?
En quoi CMO serait plus sûre que CYS par exemple ?
Enfin, connaissez-vous la valeur moyenne de marché des RMBS de CYS ?

sergio8000 a écrit :

En caricaturant un peu (à peine, car la majorité des actifs sont effectivement des obligs US chez AIG) : Je me sens plus à l’aise en estimant la valeur d’US bonds au pair que de MBS à la valeur marché. Cela n’est bien sûr que mon humble avis.
A titre de remarque, je n’ai jamais payé plus de la moitié de la book pour AIG, malgré mes nombreux renforcements à la hausse sur le titre.

Je caricaturais un peu également Mais ce type d’investissement dans les mREITs est un peu similaire à ceux qui investissent dans un assureur ou une banque pour cause de book value qui décote. Dans les 2 cas on sait qu’il y a décote, mais il y a de l’incertitude sur la valorisation présente et future des actifs.

Crosby, je dirais que ça reste de la modélisation comme dans tout type d’activité, seulement avec des paramètres différents.

Dans une société de type "cash machine" avec des barrières à l’entrée, si vous prenez simplement les marges opérationnelles en bas de cycle et en haut de cycle, vous avez un modèle avec toutes les incertitudes quantifiées aussi (les barrières à l’entrée, si vous ne vous êtes pas planté dans l’analyse, garantissent une certaine pérennité des marges).

Dans un "business à spread" à opérations efficaces basé sur la matière première (Oil & Gas E&P, Refining, et même production de pièces plastique, de canettes ou d’emballages… y en vraiment plein), vous avez le même genre de considérations que ce que vous venez de faire, souvent en un peu plus simple. Vous pouvez même déterminer à partir de quel prix de matière première vous serez profitable ou non avec une précision non négligeable…

Bref, je pense en fait que ces histoires de mREITs c’est une analyse comme plein d’autres selon les affinités de chacun : les vôtres ont l’air d’être dans ce domaine (je ne suis pas assez compétent pour en juger précisément de toute manière car je n’ai jamais réussi de toute ma vie d’investisseur à faire une valo basée sur des paramètres aussi techniques que ceux que vous citez).

@ SirConstance : Oui, il y a des similitudes dans tous les véhicules financiers avec cette histoire de valo par rapport à la BV. Le tout est de bien savoir avec quelle(s) BV et quel niveau de BV vous êtes à l’aise, et d’incorporer les différentes incertitudes (j’avais aussi fait une analyse somme des parties sur AIG et j’ai un niveau de disclosure vraiment élevé à mon avis dans les rapports annuels. C’est en tout cas bien mieux que ce que j’ai l’habitude de voir et disons que je suis confortable avec les incertitudes sur la TBV).

Interview de Kevin grant par db securities

CYS Investments, Inc. (CYS)

Deutsche Bank dbAccess Global Financial Services Investor Conference (Transcript)

June 05, 2013, 07:30 AM ET

Executives

Kevin E. Grant - Chief Executive Officer and President

Richard E. Cleary - Chief Operating Officer

Analyst

Stephen A. Laws - Deutsche Bank Securities

Presentation

Stephen A. Laws - Deutsche Bank Securities

Good morning. Thanks for joining us today. I am Stephen Laws, the mortgage trade analyst for Deutsche Bank. Excited to introduce Kevin Grant, CEO of CYS Investments, also here today is Rick Cleary, COO of CYS Investments. CYS is a $1.8 billion market cap company; invest in agency mortgage backed securities. With that, I will turn it over to Kevin for a quick presentation and then we will follow that with Q&A on this sector. Thanks Kevin.

Kevin E. Grant

Okay. Good morning, everybody. Thanks Stephen and thanks to Deutsche Bank. For those listening to the webcast, this presentation we’ve got here in New York is just filed in an 8-K this morning. So if you like to follow along, please pull it down from our website or the SEC and have a look.

I will spend a couple of minutes going through this deck and I really want to leave a lot of time for questions with Stephen and you all. So as Stephen mentioned, we are an agency mortgage REIT and we formed the company in 2006 and raised our first capital then and the company was private until 2009 and we brought it public in 2009.

So we’ve been public almost four years now. So we’ve got a lot of history and of course we started this company just before the financial crises. So learning through that and that period of time was really I would say irreplaceable. So a very valuable experience for us especially being private.

The company was upscale or internally managed and we can really benefit from the sole nature of this business and you will see that in a moment. We have 47 lenders right now, so we move on borrow around pretty much at will and we diversify our counter party risk pretty significantly.

So here on page four, on the left side you’ve got that compound total return since we brought the company public. Now the company came public at ’11 and yes, because of stock in this sector has been weak the past couple of weeks. So despite the weakness in stock price, you can see from the left side, that this you know, you generally return this business through distribution and that’s really where the returns come from and if your only stock, you really have to understand that it’s a very advantaged cost structure and the REIT structure basically causes us to pay out all our earnings in the form of dividend.

So if you reinvest those dividends which is what this compound total return shows, you are generating I think very attractive long term total returns. One thing that what people [pay] price graph, they forget about the $0.52 special dividend that we paid at the end of last year kind of glass over that, so if just look at the price and the stock, you really got to adjust for that $0.52 special dividend.

On the right side you see the expense ratio. We’ve got the expense ratio way down and as I mentioned it is a scale business. When we were first public, we were call it $200 million of capital and that’s just very expensive expense structure at that size and these are public company expenses and it’s just not -- it’s not inexpensive to have one of these vehicles public. So our expense ratio now is below 100 basis points.

Let’s just touch on the investing environment a bit. So as people who have followed us over the years, we have a lot of 15-year mortgages. We really like the 15-year structure. The short cash flows really are generally inside the five year part of the yield curve and we really like that. The stable cash flows really are a nice fit. The 15-year structure also has a benefit of not having the extension risk of a 30-year mortgage. So if rates go up, it just cannot get that long and what that does is that makes the hedging expense, the hedging problem, the calculus that much easier to solve. So we really like the 15-year market.

In the past several weeks, essentially the fed has I would describe it as preannounced, the end of quantitative even and what’s uncertain is the pacing of that i.e. the taper, we call it operation taper, but effectively they’ve announced that whether it’s six months or 12 months, the QE is likely to be over. Let’s see what they say next week about that.

The market reacted very quickly and we will show you several graphs in here that will kind of demonstrate that. The 15-year market has cheapened a bit in the past couple of weeks. We see the net interest spread on a hedged strategy, that’s the blue line in this graphs a little north of 120, which is better than we’ve had in prior quarters.

So here is a 30-year market. We said on the earnings call in April that we really like the 30-year market. There has been a very substantial cheapening in the 30-year market. The 30-year market is what the fed has been buying. So not surprisingly this is a market that would be the most sensitive to each hedging said policy and 30-year mortgages are now once again on a hedged basis as cheap as they’ve been probably in two years and given the supply picture there, we think this is a really good opportunity because the supply picture is pretty light for new supply.

We think that at the beginning of the year, with numerous speeches from various fed folks that operation taper really got priced in very early in the year and they’ve continued to make speeches. Yesterday Fisher made another speech and they discontinued to you know get the balloons up in the air about operation taper, which is what my label for it.

So you can see in the middle plot, this is a graph of the yield on the 30-year mortgage versus a 15-year mortgage. 30 years really cheapened out and if you look at the dates, that’s back in February. This was a real opportunity for us because going into this cheapening, we had very senior 30-year mortgage. We had a lot of 15-years.

So we really didn’t have the impact on our mark-to-market at the beginning of the year, but we had a real opportunity. Now surprisingly at exactly the same time, this is very strange, the options market in interest rates you know, there is implied volatility in the cap and floor market and this options market as well, just like the mix in equities.

So this right plot shows you the implied volatility of the long dated cap market and we actually executed and bought a bunch of caps in the middle of February at that low point in implied volatility and you got to think about that because we’ve locked in low volatility in those options for seven years, unlike swaption which expires in three years six months, caps are very long dated.

So you look at this and think you know, is there an arbitrage here and I would say yes. So why was nobody taking out this ARM and I think the answer is that using now Fannie and Freddie when they were in the portfolio business, they would have. They would have been all over this, but they are not in the portfolio business anymore. The big buyer in the mortgage market has been the fed and the fed doesn’t hedge. The fed doesn’t go out and buy caps. So this created an opportunity for us and this is really executed and this is a pretty low reason for us doing a capital raise in preferred stock, the preferred stock market in April.

So what does this do for our ROEs? This is one of my favourite graphs you know on page eight. So on the left side, we’ve got the volatility of the different assets and we’ve just simplified it here and put 15-year and 30-year and what the spread widening has done for our pro forma ROEs, put new investments and you can see that of course volatility is down on all these assets and this is because the fed has taken out volatility so obviously we think that volatility is going to return to more normal levels, but the 15-year market ROE is up about a 100 basis points over the past year.

So that’s nice, but the third year ROE is up by over 350 basis points and we think at this point you are paid very, very well for taking the incremental risk in a 30-year market. So we’ve been reallocating to 30-year mortgages with hedges.

So in the testimony, this is I think an important question. With Chairman Bernanke intentional about the Q&A and the confusing message during the Q&A or was an accident and we are kind of doing a pole of what people think and I think it’s kind of 50-50. Some people think it was intentional. We don’t really know, but if you look at the right graph, this is the primary mortgage rate.

So this is what the homeowner sees, it’s about 4% right now. This is a 60 basis point back up. This is the biggest one month back up in the primary mortgage rate since 2003. This is very, very significant. We didn’t even have a back up in the mortgage rates during the financial crises of this magnitude. So what is this going to do? But this is why I think a lot of you know the vast majority of operation taper is already priced in.

So this is going to have some very significant consequences. Refi in 2003 dropped 80% after this rates by cap in 2003. So Refi you got to turn off. In 2003, purchase activity was pretty stable, but don’t forget in 2003, it was still above market in residential housing, so it’s hard to really know what’s going to happen, just go around.

In this environment, if you look at housing starts, the big list in housing starts is the multi family, it hasn’t been single family. So it’s -- you know a multifamily housing start is more of a ROE decision on the project with the cap rate on the building and we are working to finance that project. So I think a lot of multifamily projects are probably not going to get through the go, no-go decision at this point.

So we think this is very significant -- has very significant implications for the economy. It’s going to take three months for us all to see it in the numbers because they will lag and so forth on what the consumer response is to these higher rates.

What’s the guidance? The most important thing to my business is where we finance the book and the guidance on the fed funds rate, the short end of the curve has not changed. They still are standing or stood by this even in 2015 for the rates guidance and this is very significant.

So it means, we’ve got two years of cheap financing and the fed has an awful lot of stuff to stop doing before we get to any sort of change in that policy. So this is a very good environment for us because we’ve got a steeper curve, cheap financing and the fed is getting out of our sandbox, which is good news for us.

So I am not going to spend a lot of time on the different fed positions. I will just point out a couple of things. We’ve been talking about [Shannon] for over a year. She seems to be the front runner now that the presidential election is behind us, I think we got clarity in that. So we’ve got essentially somebody who is even more [bullish] than Chairman Bernanke coming in as Chairperson.

Fisher and Plosser are not voters on the committee this year. They will be next year. So if we got two hocks making speeches in the marketplace next year and we’ve got a very [bullish] Chairperson running the fed, then we’ve got a very interesting situation and potentially greater volatility in the bond markets next year. Frankly for us I think this is good news because it creates -- volatility creates more opportunities for us in our business.

Central banks around the world, you know we are all following Japan these days and the liquidities of the Central bank in Japan is putting into the system, you know it’s a global system. So capital funds returns and I think this changes the calculus for the U.S. fed because of the yen flight that’s basically the capital is coming to the U.S. avoiding the yen and the currency risk.

So this is an important observation, but there are central banks around the world have adopted QE and everybody has taken a page out of the U.S. fed and Bernanke right now, we’ve got a question mark on him because we are not sure exactly where he is coming out in terms of the timing of our operation taper.

I am actually going to wrap it up here. We do have some more slides in the deck, the supply picture I will just -- one last comment supply picture on page 14, and you got to realize that the mortgage market is shrinking and Refi’s have been running 75% of production and the Refi switch is pretty much turned off at this point.

So the mortgage market is really going to continue to shrink for a lot of reasons that we all know. The big one is of course the value of the underlying assets that shrunk and the second biggest one is the credit lending standards, particularly under close QM rules, which are government rules are just much tighter these days.

And Stephen, I think I am going to -- we got 20 minutes so I think I am going to just end and go to questions.

Stephen A. Laws - Deutsche Bank Securities

Great. I have -- well I have definitely got a couple of questions for you and then we can open it up to the audience in just a few minutes. Appreciate the prepared remarks Kevin. You know, sticking may be to some of the stuff out of DC, can you talk may be you know, you touched on the operation taper, what is your expectation of how the line now is going to go, kind of how do you think timing of that is going to play out?

Kevin E. Grant

Well if you think about the prior guidance before this single noise, the prior guidance was that QE3 would go through the end of 2013 and I think Chairman Bernanke and this is just we kind of sensing it, probably is still in that camp and I think he probably again some sort of acceleration to that. I don’t think they are going to sell mortgages. I think they are going to let him roll off, which is kind of good news, bad news. It’s certainly going to keep volatility lower.

And keep in mind that they are still $85 billion a month. So there is still a shortage of cash bonds and you will have to realize that the mortgage market is a forward market. It’s kind of like a futures market. It really is a futures market. So it behaves more like derivatives. What does this mean? Well, the volume of trading in the derivative is many, many, many multiples of the underlying cash market. So that means when the sentiment changes about a market, it re-prices instantly because the derivatives just you know, you can put on basically an infinite number of shorts along.

We actually got this settlement day and the shorts actually have to deliver the cash bonds then you get some very strange distortion and this is the TBA market, the dollar old market and so forth and this is one of the reasons that the dollar old market has just been so attractive. So I think Bernanke is probably going to rule the day on the timing.

Stephen A. Laws - Deutsche Bank Securities

As far as you know other headlines we’ve seen out of Washington, you know can you talk about the [White] nomination, you know also kind of QM rules, may be what we are going to see out of any qualified mortgage definition there?

Kevin E. Grant

Well starting with QM rules, so these rules are in place. The big constraint on -- this QM creates is this 43% that the income test and that’s really cut out an awful lot of home buyers and so all the income verification and the complete loan file stuff that’s kind of been in place in practice for quite a while, but the 43% EPI rule, which allows originators safe harbor protection for being pursued for aggressive lending.

It’s not a QM. It’s probably not going to get created. I wasn’t very, very niche kind of lenders. So it basically turns off the subprime market, it turns off all -- you know anything where the income cannot be completely distinctly verified. So QM is really going to -- it’s really putting a dapper on potential supply and probably should.

And know what, my only read on that is no other than public statements that he has made in his positions and so forth is that no hearing confirmation hearing is even scheduled yet. So I think they were public and really not supportive at all and I think it relates to his position on principal forgiveness and so forth, but some of our principal forgiveness is for balance sheet loans. So these are generally bad loans that are now on Fannie’s and Freddie’s balance sheet. They can really do whatever they want because there is no outside investor. It’s just tax payer dollars and I think this is what the republic and it’s choke on. It’s tax payer dollars, it’s linked to bad credit essentially.

Stephen A. Laws - Deutsche Bank Securities

I guess one last question kind of out of the news from Washington, even with mortgage rates only being about 6% of the CMBS market seems that the growth in recent years has led some to make comments about whether or not it’s a risk to the system of earnings and new regulations on mortgage REIT, do you have any thoughts or comments on that? Is it a size issue? Is it a growth issue, financing issue, kind of where do you come on comments being made about central regulations?

Kevin E. Grant

Well, as I go to Washington and just kind of get the level in and talk to people that are informed on this, the more informed people recognize that it’s really a repo issue, it’s really a system issue. It’s not a mortgage REIT issue. Mortgage -- the growth in mortgage REITs just highlight some of the weaknesses in the tri-party system and so forth.

So I think the day to day regulators that are trying to improve the system are really focused on bolstering the repo system and this will be good for us. I don’t think there is any inclination in Washington to slow down the REIT structure holding these assets because it’s widely recognized that this is really the best structure to hold the assets. It’s permanent capital and you know provides access in so many different ways.

Stephen A. Laws - Deutsche Bank Securities

Great. Shifting gears a little bit, you know and I think you covered a good bit of this in your prepared remarks, but as we think about the shift in rates, you know may be bringing it back to your portfolio, what are your thoughts on leverage as you enter rising rate environment obviously as your assets are marked some offset to your hedge position, but are you more conservative from a leverage standpoint or are there other parts of the business with the higher rates really have you more concerned with on the risk side as opposed to the benefits?

Kevin E. Grant

You know we are very, very disciplined on leverage and you got to realize that every month we get principle coming in and that actually takes down the leverage. So if you go to rate spike and if it goes down a little bit, leverage pops up, then we’ve got prepayments coming in and scheduled principal coming in and leverage comes back down. So it’s really all about the pace of a rate move.

The rate news that we had in May was really big. It’s very, very big and if you -- actually Stephen if you go to our 10-Q on pave 44, there is a Nifty little interest rate risk activity table and it shows that in the up 50 scenario, which is roughly what we had on the quarter, the up 50 scenario, the mark-to-market on the assets including the hedge would go down 1.26%, multiply that by the leverage and don’t forget the piece that’s on leverage, so multiply that by the leverage plus one and you get about 11%.

Now our assumption model I think are very conservative and I think you can ascribe some value to effective management because we’ve been pretty effective at this, but that kind gives you the kind of order of magnitude of this and you know that is a pretty good model to help us gauge that. So I think that gives you a sense, but once again actually Friday is pre-pay day, so on Friday, our leverage goes down.

Stephen A. Laws - Deutsche Bank Securities

And it leads to our next question, when you do receive the pre-pays back, I guess there are a few more options but I really look at three options as far as what’s do with your capital and it’s the run-off as you mentioned and let the leverage come down, reinvest given new market spreads, which are as you showed in the prepared remarks more attractive now than a few weeks ago or your third one is potentially the buyback stock and I know that’s something you guys have authorised to repurchase, but I kind of look at those as your three options, how do you manage and decide between those three outcomes for what to do with your prepayment cash flow.

Kevin E. Grant

Well, I think one of the unique features at CYS is we are internally managed and management is compensated based on total return. So we are completely aligned with shareholders to drive total returns. So we are can do any kind of transaction that drives total return up, so what we are going to do.

So we are very disappointed about this too and we calculate all those options every day to see what’s the best driver of total return and by the way, the comp plan and the bonus pool calculation, you saw the public document, you can go look at the 8-K and you can pull down the compensation plan, you can figure out exactly how are incentives.

So if the stock is cheap enough, wonderful. We can go in the market and do that. If ROE on new assets is better, we can retain the capital and reinvest. So all these choices are available to us.

Stephen A. Laws - Deutsche Bank Securities

And I guess to follow up on that you know you guys are really the only internally managed company in the agent CMBS sector and your expense is below a 100 basis points really or below that of all your peers and can you talk about may be expand a little on how that gives you different decision making process as far as how you manage the company and it always surprises me a little bit personally that you guys don’t get -- seem to get any type of valuation premium for really having a better requirement with shareholders as opposed to others that may be incentivised strictly to grow their balance sheet.

Kevin E. Grant

Yeah, that’s the big difference. We are motivated to drive shareholder return. It’s really as simple as that. If we can do a capital raise and it’s accretive, that’s great because that’s going to drive shareholder return and everybody including employees are going to benefit.

Everybody in the company own stock. I own a lot of stock and I love it, it’s great, it’s a great long term wealth creator. So you know, it’s very different than other models. I think the internal, external thing, it’s so circumstance dependent. There are some external structures that to me make perfect sense and it has to do with the circumstances and the resources that can be provided and ultimately on growing the business and capital raises, the Board makes the decision on whether the go, no-go on raising equity any other kind of financing.

So I think you really got to look to the Board to be the governor on capital raises and you know some companies are more aggressive than others. One last comment on this, when you are small, you really got to get your expense ratios down, so you are going to be more motivated to raise capital. We are at scale, which is 0.3 billion of capital something like that and we are at scale, so we’ve got our expense ratio very competitive at this point.

Stephen A. Laws - Deutsche Bank Securities

Great. And I guess switching back to the asset side and you touched on both of the sides of this decision process, but you’ve historically like 15-year fix, it really reduces extension risk versus 30. At the same time, you show the chart that really illustrates more attractive returns change -- the return profile changing on a 30-year increasing to I believe couple hundred basis points, can you talk about how you weigh the pros and cons of continuing to invest in 15-year for extension risk reasons versus the more attractive returns available in 30 where it seems like you’ve deployed a little more capital there recently.

Kevin E. Grant

Yeah, the -- it’s all about risk and return and what we are really trying to do is get to -- is kind of the efficient frontier, you know how much return for the incremental amount of volatility and in this market right now there is more than -- much more than normal compensation to go out to the 30-year market.

The other thing about the 30-year market is it’s still largely a premium market. So we own a lot of three and half. Three and half are still a premium. With prepayment slow down and the market sees that, the deal that is going to go up and the market is going to re-price for that and the thing about the premium in this kind of scenario is the price can just go up without any sort of interest rate movement, but the price can just go up.

And 15-year two and halves that price is not going up when prepayment slow down. So there is actually upside in the price of 30-year premiums because the extension risk benefits premium.

Stephen A. Laws - Deutsche Bank Securities

Great. And I guess to follow-up on that with MBS prices you know, when you talked about refinance volume declining significantly, how do you expect may be intermediate term when we do see that dramatic slowdown in supply as the Refi volume really cuts off you know and may be in conjunction with fed reducing their demand as well, but how do you expect to see that play out as supply diminishes and how will that have any impact on TBA forward market where you guys like to play?

Kevin E. Grant

Well I think for the period where the fed is still actually buying and trying to settle their purchases, they need cash bonds. They don’t do dollar, they are trying to take cash bonds out in the market. So the attractiveness in the dollar old market is going to continue probably for a long time.

And historically I have been doing this a long, long time. Historically the dollar old market has always been somewhat attractive, but in this environment, it’s just sort of very outsized because of the fed activity. So I think it’s going to continue for quite a while, certainly the rest of the year, but let’s see what the guidance from the fed is.

Stephen A. Laws - Deutsche Bank Securities

Yes, outside of the fed, who are the other big players that as we buy MBS, but as we see the curve shift, you know that you think may exit the market or is any that will find it more attractive?

Kevin E. Grant

I don’t know that anybody is going to exit the market. It’s a preferred asset class and your Basel III, so global bags are if anything that are pushed into the government bonds and mortgages count. It’s a bit of a risk weighting but governments count in that basket and they really are pushed into it.

On repo, you know from a bank’s perspective, a government bond is collateral is a preferred piece of collateral for repo lending. This is why liquidity in the repo market is continuing to be very good. I don’t see anybody exiting.

There is foreign demand, I was in Japan and Asia two weeks ago and this weakening yen, you know it’s -- I said this on the earnings call, it’s creating yen flight, those yen are searching for basically the liquid financial assets with good returns to avoid the currency exposures of the yen and I think the U.S. is a natural place for those assets to come.

Stephen A. Laws - Deutsche Bank Securities

Okay. And you mentioned repo market there, can you may be just a quick update, how are you seeing -- how are things your counterparty you know discussions with them, any change to haircuts that you’ve seen or those remain pretty sticky in the 4% to 5% range?

Kevin E. Grant

Haircuts broadly are 5%. I haven’t really heard any news that the market is going to some other different level. We have had -- these are one offs, we’ve had people basically trying to get some market share with us and give us some better haircuts and I don’t know whether that will stay or not, but if you think about in the past, in May this is a very outsized month, the price of 30-year three and halves went down one in seven eight and that was a re-creative month.

So if haircuts are 5%, you know haircuts are just way too big for the volatility in this market, but they are probably going to stay there.

Stephen A. Laws - Deutsche Bank Securities

Okay. Well we’ve got a couple of minutes left. So happy to take some questions from the audience.

Question-and-Answer Session

Unidentified analyst

Hi, (inaudible) Capital. I have a question on your thoughts on taper and the impact on MBS market. Obviously the last month, you have seen a large rate move, but it seems that people have interest rate hedges in place so that hasn’t been as much of a concern.

Yesterday one of your -- one of the other REITs mentioned that part of the underperformance was really based on spread widening and gave a concern that the increase in volatility aspect begins to taper as may the asset class may be less attractive from high perspective and your market charter has also been -- there has been selling of agent CMBS by REIT.

So what are your perspectives, is there a tipping point at some point if you see a strong payroll or let’s say that you see enough evidence as you get that to taper more aggressively that you could see a event or something that would drive the market substantially wider and do you perceive that to be a problem from your perspective?

Kevin E. Grant

There are -- thank you for the question, there are some very important differences in today’s market than even five years ago. In the REIT space, these companies are much less levered than they’ve been historically. You know, we are just under eight times some of the hybrid models are -- you know, they are four times it’s something like that.

So there is not a liquidity issue because that’s really -- this is what we would force you to sell. If you did have a liquidity of the margin call, this is what we would, so I don’t see any of the companies that are going to have a liquidity issue. It’s really all about the pace of the rise in rates. We actually -- we want rates to rise. We want a better investment environment.

What we don’t want is you know an overnight 300 basis points spike in rates because that takes down -- this creates a tremendous volatility in the mark-to-market obviously and we don’t have enough time for the P&I that we get every month to reinvest at that higher spread.

May was a great test and this is a big event in May and you know I don’t know that there was much selling at all in the -- coming out of REITs. The street loves to talk about it. They just -- the traders on the street just love to kind of stir the pot and talk about it, but we really didn’t see it.

Unidentified analyst

Thank you.

Stephen A. Laws - Deutsche Bank Securities

One more question.

Unidentified analyst

So Kevin you’ve been adding 30 years and the feds have been buying predominantly two and halves and three’s, so that supply is pretty much going to go away, what if it goes the other way. So say the payroll numbers are terrible and all this tapering talk goes away, do you think that your focus will still be on the 30 years? Do you think your focus will still be on the 15 or are you still going to -- you are going to look at the official frontier and see what’s the cheapest?

Kevin E. Grant

Well if it’s a [weak] number, the 30-year market is going to just bounce back really hard and you are going to have to see what happens to the whole market at that point. You know it’s been pretty well if that actually happens, so it’s hard to just know -- who will look at the efficient frontier and figure out what the best place is to invest.

Unidentified analyst

Okay. Can your hedges keep up with this -- with these huge swings in movement?

Kevin E. Grant

Well the thing about our hedges is you noticed in the past quarter, we started out a cap and we actually have a lot of caps now. We have 4.1 billion of cap and cap is the cheapest way you can buy back the negative convexity you know, the extension risk in a 30-year market. This is really why we like the cap so much.

And the kind of working as expected, so if you go to our 10-Q and look at that sensitivity table, they really are working as expected, actually maybe a little bit better. That’s not to say that the NAV is pegged to a number. The NAV definitely moves around, but the hedges are being pretty effective here.

One last thought on different choices in the hedge market. Keep in mind that if vanilla swap is just as an [swap] so you got no positive convexity in that hedge. A swaption is an option on a vanilla hedge and they expire every three months or six months, generally can’t really buy much longer than that.

So what that means is if your strategy for hedging is to buy swaption that finally don’t really object to that, but in a environment when rates are spiking up, guess what, fall is going to go up and your strategy of buying swaption is going to cost you more, because you are constantly rolling swaption.

This way we like the caps because we can do a little queue to market timing and we can peg loads in volatility and lock it in for one time.

Stephen A. Laws - Deutsche Bank Securities

Great, well thanks everyone for joining us today. Kevin, thank you for attending the conference. Appreciate it, Rick as well.

Kevin E. Grant

Thanks everybody.

Il y a des indices sur l’évolution de la NAV a priori il semble dire qu’elle a fait environ -8/-11%

http://seekingalpha.com/article/1488032 … g-reit-but

Dans le cas ou les taux US recommenceraient à monter (le 30yr) je sortirai peu à peu de ma position sur CYS car ca deviendrait trop risqué (cela dit j’avais parié et je compte toujours sur une rechute du  taux 30 yr car à ce niveau cela risque de casser la reprise du marché immobilier)

Oui mais quid de la convexite neg ? C’est une bonne idee en tous cas mais je n’ai pas acces aux futures

Beb oui cqfd donc pour mon cas je prefere sortir de ma position si mon intuition sur le 30 ans ne se produit pas (= je pense que la fed bluffe). Dans mon cas je prefere faire -10% et couper pour aller les regagner ailleurs que cela se transforme en "long term trade".

Exemple de mon dernier investissement en date : veolia coupe a 29 euros, pourtant meme 4 ans apres je ne regrette pas !

Good news …mais j’attends la nav si la baisse est limitee dans les 8% ca serait une pas trop mauvaise news

Oui et un euro qui est haut ! Je suis tenté de reprendre une louche de CYS même si mon portif commence à être déséquilibré par rapport à mon niveau de conviction.

dividende à venir le 17/07 : 0.34$
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