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CreXus Investment Corporation (NYSE:CXS)

Q4 2012 Earnings Call

February 20, 2013, 09:00 am ET

Executives

Kevin Riordan - President & CEO

Dan Wickey - CFO

Bob Restrick - COO

Analysts

Steve Delaney - JMP Securities

Stephen Laws - Deutsche Bank

Operator

Good morning, and welcome to the Fourth Quarter Earnings Call for CreXus Investment. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. (Operator Instructions) At the request of the company, we will open the conference up for questions and answers after the presentation.

Unidentified Company Representative

This earnings call may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements which are based on various assumptions, some of which are beyond our control, may be identified by reference to a future period or periods or by use of forward-looking terminology, such as may, will, believe, expect, anticipate, continue or similar terms or variations on those terms or the negative of those terms.

Actual results could differ materially from those set forth in forward-looking statements due to a variety of factors, including, but not limited to, our business and strategy; our projected financial and operating results; our ability to obtain and maintain financing arrangements and the terms of such arrangements; general volatility of the securities markets and commercial real estate in which we invest; the implementation, timing and impact of and changes to various government programs affecting the capital markets and the economy; our expected investments; changes in the value of our investments and in the assets securing our investments; interest rate mismatches between our assets and our borrowings used to fund such assets; changes in interest rates and mortgage prepayment rates; risks relating to our counterparties; rates of default or decreased recovery rates on our investments; the degree to which our hedging strategies may or may not protect us from interest rate volatility; impact of and changes in governmental regulations, tax law and rates, accounting guidance and similar matters; availability of investment opportunities in real estate-related and other securities; availability of qualified personnel; estimates relating to our ability to make distributions to our stockholders in the future; the amount of commercial mortgage loans requiring refinancing; the amount of debt financing from lenders; the volume of short-term loan extensions; the demand for new capital to replace maturing loans; our understanding of our competition and market trends in our industry, interest rates, the debt securities markets or the general economy.

For a discussion of the risks and uncertainties, which could cause actual results to differ from those contained in the forward-looking statements, see Risk Factors in our most recent annual report on Form 10-K and all subsequent quarterly reports on Form 10-Q. We do not undertake and specifically disclaim any obligation to publicly release the result of any revisions, which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

Operator

Thank you. I would now turn the conference over to Mr. Kevin Riordan, President and Chief Executive Officer. Please proceed sir.

Kevin Riordan

Thank you, operator. Good morning and welcome to the earnings call for CreXus Investment Corp. for the final quarter and the calendar year ending 2012. I am Kevin Riordan, President and CEO of CreXus. In addition to our CFO, Dan Wickey, joining me on the call today are the senior members of CreXus management team.

Before we begin, I want to take a moment to state that I cannot provide any background or information on the proposed transaction with Annaly Capital Management beyond what has been disclosed in public filings. The CreXus Special Committee which is comprised of independent board members has accepted Annaly’s offer for the remaining outstanding stock of CreXus that Annaly does not own for $13 per share. The agreement provides Annaly’s tender offer will not begin until a period of 45 days, which will end March 16, 2013, during which the special committee with the assistance of it's independent advisors will actively solicit alternative proposals which maybe more favorable to CreXus and it's stockholders.

Turning to our operations. During the quarter, we closed approximately $50 million of portfolio investments. All have been subordinated debt investments. We also successfully recycled the senior part of a whole loan by selling a lower levered A note. We continue to be actively engage in those efforts. More details on portfolio activity during the quarter can be found on our quarterly supplement which I hope everyone has had a chance to review. It's up on our website at www.crexusinvestment.com.

During the quarter, we continue to maintain duration and focus on deploying capital in the subordinate debt space. We increased our subordinate debt position by $50 million and raised the portfolio coupon by 23 basis points during the quarter while the portfolio of loan to value ratio decreased by 3% from 71% to 68%. As QE3 in Q2 impact the return profile of fixed income assets, the CMBS originations were no exception as issuance surged during the second half of 2012.

Over the same period, credit spreads tightened across the board and investors developed a risk on appetite, for example (inaudible) and AAAs tightened from swaps plus 160, to swaps plus 85 basis points, and generic condo with BBBs which until fairly recently didn't even have a home moved from swaps plus 575 basis points to swaps plus 400 basis points.

We benefit as Wall Street originations facilitated acquisition activity across the board and CreXus provided subordinated debt financing as a component of the capital structure for these transactions. In this environment, we built a high credit quality portfolio with zero portfolio level leverage and what we believe are stable long-term cash flows.

Our portfolio is comprised of debt and preferred equity investments with the weighted average yield north of 10% and 1.5% and the weighted average maturity of close to five years. As well as the real estate portfolio earning in net equity yield north of 11%.

With that, Dan Wickey, our CFO will now take you through our results.

Dan Wickey

Good morning, CreXus reported GAAP earnings for the quarter ended December 31, 2012 of $17.9 million or $0.23 per average share available to common shareholders. We declared the dividend for the period of $0.32 per share producing an annualized dividend yield of 10.45% based on the December 31 closing price of $12.25 per share.

Our book value at December 31 was $11.85 per share. At December 31, 2012; the weighted average yield on our debt and preferred equity investment portfolio was 10.56% and the net equity yield on the real estate investment portfolio was 11.28%.

The increase in discount on the company's loan and preferred equity portfolio which is a component of interest income for the quarter ended December 31, 2012 was approximately $500,000. The total net discount remaining at December 31, 2012 is $7.4 million. At this time, I would like to turn the call back over to the moderator and we will be happy to answer any questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from Steve Delaney from JMP Securities.

Steve Delaney - JMP Securities

I realized there's limited things that you can say that haven't been publicly disclosed, but I recall reading some of the early press releases that there was a statement about the board’s intent with respect to the dividend that would normally be paid in the first quarter or beyond, could you if that was, if there was such a statement could you refresh us on with that position is with respect to the dividend?

Kevin Riordan

With respect to dividends, I'll just keep it consistent with our policy; we just look to taxable earnings on that and whatever they are. We will dividend that out.

Steve Delaney - JMP Securities

Okay. I'll have to go back and read the release but I thought there was something a little more specific in terms of what the board said but I understand that you can't comment on that. I'll go back and see what I maybe mothball the old memory. Then just one very general thing, as you are looking at this market, I know you guys, you closed $50 million in new mez loans, you are looking at a lot of opportunities, could you just give us a sense generally looking at the market potentially you may have even more capital deployed, sort of how are you looking at the pipeline and the opportunity as it exists today maybe versus a year ago, is it growing, is it about the same, and also how was pricing holding up on specifically on the Mez loans where it appears that you have been concentrating, thanks.

Kevin Riordan

With respect to the pipeline and that's obviously Steve you could see our results for the year I mean the pipeline has been fairly active and fairly even in terms of what we've been looking at, and in particular the type of space that even going into I think the fourth quarter is very representative of the types of situations that we look for in terms of the subordinate debt space.

With respect to pricing I mean Q3 is an impact out there. There's no question about that and one can't deny that. But we've been sort of careful about that we are trying to hold the return profile for the investors, and if anything that's why we have a little bit higher cash position.

Steve Delaney - JMP Securities

Okay and so far you've chosen you haven't had the need I guess just in terms of balancing investments versus capital available, you haven't had the need to look to any permanent CMBS or CLO type of financing, but is that something the team is evaluating for the future.

Bob Restrick

As we've talked about in the past, we are always looking at those different kind of exit financing strategies whether its warehouse lines of the investment banks or whether its in the (inaudible) or whether we are doing securitization, and there just seems to be more and more of those kinds of opportunities in front of us and we are always evaluating them and with sort of the pick up in activity there's no shortage of those kind of exits available to us. But as you said yourself and as we've said we are always managing balancing between cash and investments. So we have lots of opportunities in front of us in terms of what we can do once we go forward.

Kevin Riordan

Steve, historically you can see we've been successful recycling A-Notes, specific A-Notes to individual buyers and in fact we recycled an A-Note that even got repaid back on and the senior investor got paid back also.

Steve Delaney - JMP Securities

Right, I noticed that. That's a good way to kind of create your own higher yielding subordinate piece with that structure. Thanks for the comments and all the best with the transaction you have in front of you.

Operator

Thank you and the next question comes from Stephen Laws with Deutsche Bank.

Stephen Laws - Deutsche Bank

To talk, I guess, follow up on Steve’s question about the investment pipeline a little bit. You know, page 14 of the supplemental deck breaks up the maturity profile of your portfolio. It looks like given the year-over-year change, majority of investments have really been more of five year duration, obviously some 10 as well. Can you maybe talk about that? Is that what you guys preferred to ride? Is that really more what the borrowers demanding? Is there any reason why they are looking at those five year terms over different type of loans?

Kevin Riordan

We would love to push our duration of the portfolio. When we look to do that, actually it sometime gives us a competitive advantage if we can do 10 year fixed rates subordinate loan. But a lot of our business as you remember in my remarks talk about acquisition, financing for new transactions and a lot of those transactions are, if you will sort of a value add proposition to the acquired of the properties. So he looks to keep his financing on a shorter end. So that’s the other side to our barbell if you will of average license of portfolio.

Stephen Laws - Deutsche Bank

One last follow up, really right to that remaining discount on the portfolio, I believe it was roughly 7.5 million year end. Is there any way, can you provide us with really when maturity schedule and when that discount might be realized. Is it tied to specific loan maturity or is it a mix of stuff coming up here soon?

Dan Wickey

This is Dan Wickey, it is tied to the maturities of the loans, I would say going forward for the near future that the current rate is a good proxy for the near future.

Stephen Laws - Deutsche Bank

Okay, so the fourth quarter rate is somewhat to be proxy to roughly years going forward?

Dan Wickey

Yeah, as the loans drop out obviously the rate will drop out very soon.

Operator

Thank you. And there are no questions at this present time, I would like to turn the call back over to management for any closing remarks.

Kevin Riordan

Thank you very much and we look forward to talking with you all again in the future.

Operator

Thank you. Ladies and gentlemen, if you would like to access the replay for this call, you do so by dialing 877-344-7529 or 412-317-0088, with ID number of 10024281. This concludes the teleconference for today. Thank you for participating and have a nice day. All parties may now disconnect.

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