We published our research on CYS Investments (Cypress Sharpridge Investments, Inc: CYS) after it went ex-dividend. We were surprised that the company issued a secondary public offering of stock recently due to the fact that it has a small estimated market premium to book value, especially in relationship to two of our favorite mREITs (American Mortgage Capital:MTGE, and American Mortgage Agency: AGNC).

Our firm took advantage of the 2.7% decline in CYS’s stock price on July 11th to add to our position in CYS’s common stock. We believe that the market received this offering as well as we did because not only did CYS increase it from 30M to 40M, CYS’s stock price recovered to the July 10th pre-secondary closing price of $14.14 on July 17th. CYS’s stock price dealt with volatility when AGNC issued a secondary offering of its own, but has only shed $.02 net from the close of July 17th to the close of July 20th.

CYS Investments pays a $.50 per share quarterly dividend, which represents $2/share annually and a 14.2% dividend yield. Yield-hungry investors who invest in mREITs need to make sure that the company is able to maintain the dividend because what good is a 17% dividend if you end up losing 100% of your seed capital. We know people invested in Anthracite and Thornburg who can attest to getting burned with those mREITs.

Looking at CYS’s Net Interest Income Per share, we can see that the company generated $.513 in Q1 2012 and $.49165 in Q2 2012. While 100% net interest income to dividend may seem high at first glance, we also noticed the high level of realized and unrealized gains per share. We also note that CYS and other mREITs are pass-through entities for purpose of taxation. MREITs are similar to mutual funds for taxation purposes in that both entities must distribute 90-98% of pro forma taxable income to shareholders in order to avoid entity-related excise taxes.

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