2 New REIT IPOs

Two new recent REIT IPOs launched in June. Government Properties Income Trust (GOV) began trading earlier this month. The company priced 10 mm shares @ $20.00 per share. The company is a subsidiary of HRPT Properties Trust, an office REIT based in Massachusetts. HRPT owns 49.9% of GOV.

GOV will focus on owning office properties leased to the US government. The company currently has 29 office properties with 3.3 million square feet. 25 of the company’s properties are leased to the US government, and the remainder are leased to various state governments.

The shares are about 7% off their IPO price, and the current yield (based on estimated dividend) is near 9%. With little to no credit risk, GOV could be worth a look, and the company should be able to capitalize on continued government expansion. Big government is back, so office companies that lease to the US could have good fortunes over the next couple of years. 35% of GOV’s income comes from properties in D.C.

Cypress Sharpridge Investments (CYS) priced 9.1 mm shares @ $11.00 per share on June 11. Cypress invests exclusively in agency fixed and adjustable rate RMBS, which are mortgages guaranteed by the US government or a government agency, Freddie Mac (FRE) and Fannie Mae (FNM).

With mortgages guaranteed by the government, the company has no credit risk. Agency lenders are the only mortgage REITs left with a viable business, and have held up comparatively well to other residential and commercial mortgage companies.

For investors looking to get the attractive mortgage REIT yields, which are well above equity yields, we would stick with agency lenders - yields are high and risk is muted due to assets that are backed by the government.

Commercial mortgage REITs face an uncertain future due to a continued deterioration in fundamentals and increasing defaults. However, there is still the risk in agency lenders from pre-payments. Pre-payments are generally not good for mortgage lenders, who then have to re-invest the money.

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