Patrick Harden's  Instablog

Have you missed the awesome run in agency-backed mortgage REITs?  There may still be time to get in on the great returns by picking a sleeper stock that is poised to break out.

Cypress Sharpridge Investments, Inc. (CYS) is a recent entrant to the mortgage REIT world.  The Company, which primarily invests in agency residential mortgage-backed securities, came public in June 2009, raising $100 million by offering 9.1 million shares at $11.00, the low end of the proposed $11.00 to $13.00 range.

Since June, the Company has traded slowly but steadily upwards along with the market while quietly deploying its IPO proceeds into agency-backed RMBS.  However, the Company has yet to announce a dividend, which may be keeping it under the radar and in the shadow of the other amREITs.

Based on a recent price to book analysis of the major amREITs, CYS appears to be a better value play than some of the hotter amREITs, which were recently downgraded by JMP Securities on valuation.

Market Price to 6/30/09 Book Value

Hatteras Financial (HTS)	1.35x
American Capital Agency (AGNC)	1.44x
Annaly Capital Management (NLY)	1.19x
Capstead Mortgage (CMO)	1.33x
MFA Financial (MFA)	1.08x
CypressSharpridge Investments (CYS)	1.12x

The biggest question surrounding CypressSharpridge is the dividend.  As of June 30, 2009, the Company had no distributable taxable income, so the third quarter dividend would be based solely on Q3 taxable earnings. 

CYS disclosed Q2 core earnings of $0.74 per diluted share, compared to $4.3 million or $0.57 per diluted share in the first quarter of 2009.  This increase was primarily due to an increase in the interest rate spread net of hedge of 3.88%, compared to 2.94% in the first quarter of 2009. Leverage remained relatively constant at about 6:1.

If I had to guess, I would say that CYS is capable of delivering a $0.60/share dividend going forward, giving it a forward annual dividend yield of 17% at current market prices. Coupled with a price target of $16.50 once the P/B multiple catches up with peers, I believe CYS has some nice returns to deliver.

Disclosure:  No positions in any company mentioned.