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Crexus Investment Corp Reports Operating Results (10-K)

February 29, 2012 | About:
10qk

10qk

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Crexus Investment Corp (CXS) filed Annual Report for the period ended 2011-12-31.

Crexus Investmt has a market cap of $865.8 million; its shares were traded at around $11.21 with a P/E ratio of 7.7 and P/S ratio of 56. The dividend yield of Crexus Investmt stocks is 12.4%.

Highlight of Business Operations:

Interest Income and Average Earning Asset Yield We had average earning assets of $866.7 million, $290.2 million and $63.4 million for the years ended December 31, 2011 and 2010 and the period commencing September 22, 2009 through December 31, 2009, respectively. Our interest income was $105.7 million, $20.7 million and $325 thousand for the years ended December 31, 2011and 2010 and the period commencing September 22, 2009 through December 31, 2009, respectively. The yield on our portfolio, excluding cash, was 12.19% , 7.13% and 9.67% for the years ended December 31, 2011 and 2010 and the period commencing September 22, 2009 through December 31, 2009, respectively. For the year ended December 31, 2011 compared to the year ended December 31, 2010 our interest income increased $84.9 million primarily due to the purchase of additional assets at a discount and the accretion income related to refinancing, settlements and accretion to maturity associated with that discount. Interest Expense and the Cost of Funds We had average borrowed funds of $82.8 million, $173.3 million and $25.6 million and total interest expense of $2.4 million, $5.3 million and $26 thousand for the years ended December 31, 2011 and 2010 and the period commencing September 22, 2009 through December 31, 2009, respectively. Our average cost of funds was 2.86%, 3.60% and 3.62% the years ended December 31, 2011 and 2010 and the period commencing September 22, 2009 through December 31, 2009, respectively. Our interest expense decreased $2.9 million primarily due to the financing of fewer assets and a lower cost of funds for the year ended December 31, 2011 when compared to the year ended December 31, 2010. Net Interest Income Our net interest income, which equals interest income less interest expense, totaled $103.3 million, $15.4 million and $253 thousand for the years ended December 31, 2011 and 2010 and the period commencing September 22, 2009 through December 31, 2009, respectively. Our net interest income increased $87.8 million primarily due to the purchase of additional assets at a discount and the accretion income associated with that discount for the year ended December 31, 2011, when compared to the year ended December 31, 2010. Our net interest spread, which equals the yield on our average assets for the period less the average cost of funds for the period, was 9.33%, 3.53% and 6.05% for the years ended December 31, 2011 and 2010 and the period commencing September 22, 2009 through December 31, 2009, respectively. The increase in net interest spread is primarily due to the reduced financing costs for the year ended December 31, 2011 when compared to the year ended December 31, 2010. The table below shows our average assets held, total interest income, weighted average yield on average interest earning assets for the period; average balance of repurchase agreements, interest expense, weighted average cost of funds for the period; net interest income, and net interest rate spread for the years ended December 31, 2011 and 2010, the period commencing September 22, 2009 through December 31, 2009, and for each of the quarters in in 2011.

We had average earning assets of $866.7 million, $290.2 million and $63.4 million for the years ended December 31, 2011 and 2010 and the period commencing September 22, 2009 through December 31, 2009, respectively. Our interest income was $105.7 million, $20.7 million and $325 thousand for the years ended December 31, 2011and 2010 and the period commencing September 22, 2009 through December 31, 2009, respectively. The yield on our portfolio, excluding cash, was 12.19% , 7.13% and 9.67% for the years ended December 31, 2011 and 2010 and the period commencing September 22, 2009 through December 31, 2009, respectively. For the year ended December 31, 2011 compared to the year ended December 31, 2010 our interest income increased $84.9 million primarily due to the purchase of additional assets at a discount and the accretion income related to refinancing, settlements and accretion to maturity associated with that discount.

Liquidity and Capital Resources Liquidity measures our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain our assets and operations, make distributions to our stockholders and other general business needs. We will use significant cash to purchase our targeted assets, repay principal and interest on our borrowings, make distributions to our stockholders and fund our operations. Our primary sources of cash will generally consist of the net proceeds equity offerings, payments of principal and interest we receive on our portfolio of assets, cash generated from our operating results and unused borrowing capacity under our financing sources. We have financed our triple net lease portfolio with non-recourse financings, which generally limit the recoverability of the loan to the property. These financings will be specific to a particular property or secured by a portfolio of our properties. We anticipate that the loan to value ratio for these financing will be between 40% and 65% but would likely not exceed 80%.We intend to utilize structural leverage through securitizations of commercial real estate loans or CMBS. We will, however, also seek to finance the acquisition of Agency RMBS using repurchase agreements with counterparties, which are recourse. With regard to securitizations or selling the senior portion of the loan, the leverage will depend on the market conditions for structuring such transactions. We anticipate that leverage for Agency RMBS would be available to us, which would provide for a debt-to-equity ratio in the range of 2:1 to 4:1 but would likely not exceed 8:1. Based on current market conditions, we expect to operate within the leverage levels described above in the near and long term. We can provide no assurance that we will be able to obtain financing on favorable terms, or not at all. Securitizations We intend to seek to enhance the returns on our commercial mortgage loan investments, especially loan acquisitions, through securitization. If available, we intend to securitize the senior portion, expected to be equivalent to AAA-rated CMBS, while retaining the subordinate securities in our portfolio. Other Sources of Financing We expect to use repurchase agreements to finance acquisitions of Agency RMBS with a number of counterparties. In the future, we may also use other sources of financing to fund the acquisition of our targeted assets, including warehouse facilities and other secured and unsecured forms of borrowing. We may also sell the senior portion or A-Note and retain the subordinate or junior position in a B-Note or other subordinate loan. We may also seek to raise further equity capital or issue debt securities in order to fund our future asset acquisitions. For our short-term (one year or less) and long-term liquidity, which include investing and compliance with collateralization requirements under our repurchase agreements (if the pledged collateral decreases in value or in the event of margin calls created by prepayments of the pledged collateral), we also rely on the cash flow from investments, primarily monthly principal and interest payments to be received on our CMBS and mortgage loans, cash flow from the sale of securities as well as any primary securities offerings authorized by our board of directors. 65 Based on our current portfolio, leverage ratio and available borrowing arrangements, we believe our assets will be sufficient to enable us to meet anticipated short-term (one year or less) liquidity requirements such as to fund our investment activities, pay fees under our management agreement, fund our distributions to stockholders and pay general corporate expenses. However, a decline in the value of our collateral or an increase in prepayment rates substantially above our expectations could cause a temporary liquidity shortfall due to the timing of the necessary margin calls on the financing arrangements and the actual receipt of the cash related to principal pay-downs. If our cash resources are at any time insufficient to satisfy our liquidity requirements, we may have to sell debt or additional equity securities in a common stock offering. If required, the sale of CMBS or mortgage loans at prices lower than their carrying value would result in losses and reduced income. Our ability to meet our long-term (greater than one year) liquidity and capital resource requirements will be subject to obtaining additional debt financing and equity capital. Subject to our maintaining our qualification as a REIT, we expect to use a number of sources to finance our investments, including repurchase agreements, warehouse facilities, securitization, commercial paper and term financing CDOs. Such financing will depend on market conditions for capital raises and for the investment of any proceeds. If we are unable to renew, replace or expand our sources of financing on substantially similar terms, it may have an adverse effect on our business and results of operations. Upon liquidation, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our common stock. We held cash and cash equivalents of approximately $202.8 million and $31.0 million at December 31, 2011 and 2010, respectively. Our operating activities provided net cash of approximately $34.2 million for the year ended December 31, 2011 and proceeds of $8.9 million for the year ended December 31, 2010. Our investing activities used net cash of $305.0 million and $330.7 million for the years ended December 31, 2011 and 2010, respectively, primarily for the purchase of investments. Our financing activities for the year ended December 31, 2011 consisted of net proceeds of $442.6 million including our common stock offering and a $16.6 million dollar loan. Our financing activities for the year ended December 31, 2010 consisted of net proceeds of $140.7 million from our secured financing agreement with the Federal Reserve Bank of New York, or FRBNY. At December 31, 2011, 2010 and 2009, our financing agreements of $16.6 million, $172.8 million and $25.6 million, respectively, had remaining maturities of greater than 120 days. We are not required to maintain any specific debt-to-equity ratio as we believe the appropriate leverage for the particular assets we are financing depends on the credit quality and risk of those assets. At December 31, 2011 our total recourse debt was approximately $16.6 million which represented a debt-to-equity ratio of approximately 0.02:1 as compared to December 31, 2010 our total debt was approximately $172.8 million which represented a debt-to-equity ratio of approximately 0.6:1. Stockholders' Equity Our charter provides that we may issue up to 1,100,000,000 shares of stock, consisting of up to 1,000,000,000 shares of common stock having a par value of $0.01 per share and up to 100,000,000 shares of preferred stock having a par value of $0.01 per share. On March 28, 2011, we announced the sale of 50,000,000 shares of common stock at $11.50 per share for estimated proceeds, less the underwriters discount and offering expenses, of $577.0 million. Concurrently with the sale of these shares Annaly purchased 5,000,000 shares at the same price per share as the public offering, for proceeds of approximately $57.5 million. These sales settled on April 1, 2011. On April 5, 2011, the underwriters exercised their option to purchase an additional 3,500,000 shares of common stock at $11.50 per share for estimated proceeds, less the underwriters discount and offering expenses, of $38 million. In total, we raised net proceeds of approximately $634.3 million in these offerings. 66 There was no preferred stock issued or outstanding as of December 31, 2011, 2010 and 2009, respectively. Related Party Transactions Management Agreement We have entered into a management agreement with FIDAC, pursuant to which FIDAC is entitled to receive a management fee and, in certain circumstances, a termination fee and reimbursement of certain expenses as described in the management agreement. Such fees and expenses do not have fixed payments. The management fee is payable quarterly in arrears, and currently is 1.50% per annum, of our stockholders equity (as defined in the management agreement). FIDAC uses the proceeds from its management fee in part to pay compensation to its officers and employees who, notwithstanding that certain of them also are our officers, receive no cash compensation directly from us. Upon termination without cause, we will pay FIDAC a termination fee. We may also terminate the management agreement with 30-days prior notice from our board of directors, without payment of a termination fee, for cause or upon a change of control of Annaly or FIDAC, each as defined in the management agreement. FIDAC may terminate the management agreement if we or any of our subsidiaries become required to register as an investment company under the 1940 Act, with such termination deemed to occur immediately before such event, in which case we would not be required to pay a termination fee. FIDAC may also decline to renew the management agreement by providing us with 180-days written notice, in which case we would not be required to pay a termination fee. We are obligated to reimburse FIDAC for its costs incurred under the management agreement. In addition, the management agreement permits FIDAC to require us to pay for our pro rata portion of rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses of FIDAC incurred in our operation. These expenses are allocated between FIDAC and us based on the ratio of our proportion of gross assets compared to all remaining gross assets managed by FIDAC as calculated at each quarter end. We and FIDAC will modify this allocation methodology, subject to our board of directors approval if the allocation becomes inequitable (i.e., if we become very highly leveraged compared to FIDAC s other funds and accounts). FIDAC has waived its right to request reimbursement from us of these expenses until such time as it determines to rescind that waiver. Purchases of Common Stock by Affiliates Annaly purchased 5,000,000 shares at $11.50 per share for estimated proceeds of approximately $57.5 million. This purchase settled on April 1, 2011. As of December 31, 2011, Annaly owned approximately 12.4% of our outstanding shares of common stock. Restricted Stock Grants There were no stock grants for the years ended December 31, 2011 and 2010. Clearing Fees We use RCap Securities Inc., or RCap, a SEC registered broker-dealer and a wholly-owned subsidiary of Annaly, to clear trades for us and RCap receives to customary market-based fees and charges arising from such services. 67 Contractual Obligations and Commitments As of December 31, 2011 we financed a portion of our real estate purchase with a recourse loan. As of December 31, 2010 we financed our CMBS portfolio with non-recourse financings under the TALF. Please see table below to summarize our contractual obligation at December 31, 2011 and 2010.

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