April 30, 2018

Income Strategy Update for Week Ended 4/27/18

CYS Investments Advances on Acquisition from Two Harbors While SunCoke Energy Falls on Earnings, Dividend Cut

Last week, the Income Strategy advanced 0.59%, outperforming both the Merrill Lynch U.S. High Yield Master II Index’s -0.37% decline and the S&P 500’s flat performance (Exhibit 1). The strategy ended the week up 2.41% YTD, or 268 basis points ahead of the high yield index and 197 basis points ahead of the S&P 500.

Exhibit 1: Preliminary Performance of Income Strategy Versus High Yield, Equity Indices, Through 4/27/181

Time Period Income Strategy ML HY II S&P 500
Last Week (4/20- 4/27) 0.59% -0.37% 0.00%
MTD 3.41% 0.65% 1.21%
QTD 3.41% 0.65% 1.21%
YTD 2.41% -0.27% 0.44%
Inception (annualized since 4/2/2009-3/31/18) 14.92% 11.76% 16.67%

Source: Bloomberg, Miller Value Partners

Five equities comprised last week’s top five contributors (Exhibit 2). CYS Investments (CYS) had an eventful week, first announcing Q1 EPS of $0.24, surpassing estimates of $0.22, mainly driven by higher asset yields, while book value fell -11.6% to $7.41 (0.87x P/B). Further, the company announced it has entered into a definitive agreement under which Two Harbors Investment Corp (TWO) will acquire CYS for stock and cash, equating to $7.79/share at current exchange rates, a 17.7% premium to the prior day’s close. The combined company will have a $5B pro forma equity base, which will allow Two Harbors to benefit from additional capital, supporting continued growth in target assets. Mall REIT Washington Prime Group (WPG) jumped after reporting Q1 FFO of $0.39, surpassing consensus estimates of $0.37 and their dividend of $0.25 (15.1% annualized yield). Management reiterated FY18 FFO guidance of $1.48-$1.56 and same-store net operating income of flat to -1%. CenturyLink (CTL) continued its advance as the stock’s 50-day moving average moved above its 200-day moving average. Mortgage finance firm New Residential Investment (NRZ) gained after reporting Q1 EPS of $0.58, beating estimates of $0.55 and covering their dividend of $0.50/share (11.4% annualized yield). Book value rose 10.4% to $16.85, which can be attributed to positive marks on their MSR portfolio as rates moved higher. There was no price-changing news on Arlington Asset Investment Corp (AI).

Exhibit 2: Significant Contributors to Performance, 4/20/18 – 4/27/18

Name Type Return
CYS Investments Equity 10.2%
Washington Prime Group Inc Equity 14.4%
CenturyLink Inc Equity 7.3%
New Residential Investment Corp Equity 4.8%
Arlington Asset Investment Corp Equity 2.9%

Source: Miller Value Partners

Four equities and a preferred comprised last week’s top five detractors (Exhibit 3). SunCoke Energy Partners (SXCP) fell after reporting Q1 EPS of $0.26, missing estimates of $0.31, but beat on revenues of $214.8M versus consensus of $205.7M. The company cut their dividend -32.3% to $0.40/share (10.3% annualized yield), which will enable SunCoke to replenish cash and reduce debt so they can achieve their 3.5x target leverage ratio. Compass Diversified Holdings (CODI) fell below its 50-day moving average. There was no price changing news on Carlyle Group (CG), Apollo Global Management (APO) or AmTrust Financial Services (AFSI).

Exhibit 3: Significant Detractors from Performance, 4/20/2018 – 4/27/18

Name Type Return
SunCoke Energy Partners LP Equity -14.1%
Carlyle Group LP Equity -3.0%
Apollo Global Management LLC Equity -2.7%
AmTrust Financial Services 6.95% Preferred -2.5%
Compass Diversified Holdings Equity -5.9%

Source: Miller Value Partners


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1The performance figures reflect the results of a representative account net of management fee and certain other expenses. For important additional information about Income Strategy performance, please click on the Income Strategy Composite Performance Disclosure. The performance returns shown in this report are preliminary and are subject to revision. Past performance is no guarantee of future results.

Significant Contributors and Significant Detractors are the Strategy holdings that had the greatest effect on Strategy performance for the week. Holdings that have been in the Strategy since the end of the most recent calendar quarter are identified by name. For information on how Contributor/Detractor data were calculated and a list showing the contribution to the Strategy’s weekly performance of each investment held at such quarter end, contact us.

Any views expressed are subject to change at any time, and Miller Value Partners disclaims any responsibility to update such views. The information presented should not be considered a recommendation to purchase or sell any security and should not be relied upon as investment advice. It should not be assumed that any purchase or sale decisions will be profitable or will equal the performance of any security mentioned. Past performance is no guarantee of future results, and there is no guarantee dividends will be paid or continued.

©2018 Miller Value Partners, LLC

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