Annaly-Backed CreXus Investment IPO Due This Week

CreXus Investment Corp. (CXS), a new REIT backed by Annaly Capital Management, plans to invest in commercial real estate debt. Is this an opportune time to be starting a REIT? Only time will tell.

Business Overview (from prospectus)

We are a specialty finance company that will acquire, manage, and finance, directly or through our subsidiaries, commercial mortgage loans and other commercial real estate debt, commercial mortgage-backed securities, or CMBS, and other commercial real estate-related assets. We expect that the commercial real estate loans we acquire will be high quality fixed and floating rate first mortgage loans secured by commercial properties. We may also acquire subordinated commercial mortgage loans and mezzanine loans. We intend to acquire CMBS which are rated AAA through BBB as well as CMBS that are below investment grade or are non-rated. The other commercial real estate-related securities and other commercial real estate asset classes will consist of debt and equity tranches of commercial real estate collateralized debt obligations, or CRE CDOs, loans to real estate companies including real estate investment trusts, or REITs, and real estate operating companies, or REOCs, commercial real estate securities and commercial real property. In addition, to maintain our exemption from registration under the Investment Company Act of 1940, as amended, or the 1940 Act, we expect to acquire residential mortgage-backed securities, or RMBS, for which a U.S. Government agency such as the Government National Mortgage Association, or Ginnie Mae, or a federally chartered corporation such as the Federal National Mortgage Association, or Fannie Mae, or the Federal Home Loan Mortgage Corporation, or Freddie Mac, guarantees payments of principal and interest on the securities. We refer to these securities as Agency RMBS. We refer to Ginnie Mae, Fannie Mae, and Freddie Mac collectively as the Agencies.

Offering: 33.3 million shares at $15 per share. According to the company, proceeds will be used

to acquire CMBS, commercial real estate loans, commercial real estate-related securities and various other commercial real estate asset classes and Agency RMBS. As the diligence and acquisition lead times for commercial real estate loans are longer than for CMBS and Agency RMBS, we expect at the outset that a majority of our portfolio will consist of CMBS, Agency RMBS and cash and cash equivalents, subject to maintaining our REIT qualification and our 1940 Act exemption. However, we expect our portfolio to become weighted toward commercial real estate loans over the next 12 months. Based on prevailing market conditions, our current expectation is that, over the next 12 months, our portfolio will consist of between 60% to 80% commercial mortgage loans, 20% to 40% CMBS, up to 5% other commercial real estate-related assets and up to 5% Agency RMBS.

Lead Underwriters: Deutsche Bank, BofA Merrill Lynch, JMP Securities

Financial Highlights:

As of the date of this prospectus, we have not commenced any significant operations because we are in our organization stage. Since our organization on January 23, 2008, we have had $49,000 in a non-interest bearing bank account. We will not commence any significant operations until we have completed this offering. We are not aware of any material trends or uncertainties, other than economic conditions affecting mortgage loans, mortgage-backed securities and real estate, generally, that may reasonably be expected to have a material impact, favorable or unfavorable, on revenues or income from the acquisition of real estate-related assets, other than those referred to in this prospectus.

Competitors:

A number of entities will compete with us to purchase the types of assets we plan to acquire. Our net income will depend, in large part, on our ability to acquire assets at favorable spreads. In acquiring real estate-related assets, we will compete with other REITs, public and private funds, including PPIFs, commercial and investment banks, commercial finance companies and other entities. In addition, there are numerous mortgage REITs with similar asset acquisition objectives, including a number that have been recently formed, and others may be organized in the future. These other REITs will increase competition for the available supply of real estate-related assets suitable for purchase. Many of our anticipated competitors are substantially larger than we are, have considerably greater financial, technical, marketing and other resources and may have other advantages over us. Several other REITs have recently raised, or are expected to raise, significant amounts of capital, and may have objectives that overlap with ours, which may create competition for asset acquisition opportunities. Some competitors may have a lower cost of funds and access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us.

Update: While the Crexus IPO on Wednesday met estimates by pricing at $15, the size of the IPO was shrunk to 13.3 million shares earlier in the day. Crexus announced it will increase the percentage of shares it plans to sell to Annaly in private placement from 9.8% to between 25 and 35 percent.

The shares slipped by 2.5% to close at $14.63 on Thursday.

Additional Resources:

• Online road show
• Reuters: 'Crexus REIT sees $500 mln IPO'
• A superb post by Andrew Horowitz breaks down REITs' exposure to commercial real estate

Comments

[Opul4321:]

CreXus is the only IPO scheduled for this week, but there are more REITs (of the 9 total) on the calendar for next week....
www.renaissancecapital...

Sep 15 05:48 PM

[mbkelly75:]

Annaly's management is as sharp as anyone in the world and are at least one of the reasons that I consider NLY a best-of-breed investment. It will be interesting to see what they do with CXS.

Sep 17 04:29 PM

[highlarche:]

To early to buy at 20. I think we still have a big lag lower. 15 or less if your smart.

Sep 19 11:16 AM