CreXus Says No to Starwood, Goes Ahead With Share Sale

Includes: CXS, NLY, STWD
by: Mike Maher

Investors in CreXs Investment Corp (NYSE:CXS) were hit with a one-two punch of news going into the afternoon yesterday, causing the REIT, which is 25% owned by Annaly Capital Management (NYSE:NLY), to trade on very heavy volume. Shares jumped up above $13 as news emerged that Starwood Property Trust (NYSE:STWD) had offered to buy CreXus for $14 a share, a 20% premium to where shares had been trading.

The offer, which would see Starwood offer 0.61 shares of its common stock for each share of CreXus, was contingent on CreXus canceling its planned offering of shares. The share offer, which had commenced a week earlier, was being done in order to purchase a commercial real estate mortgage loan portfolio. CreXus's board rejected the deal, saying the company would continue to proceed with its offering of stock. Shares closed Monday at $12.15, up 1.6%.

After the bell on Monday, CreXus priced its secondary offering of 50 million shares at $11.50 per share. The offering will raise net proceeds of approximately $539 million, and is being issued to purchase a portfolio of real estate assets from Barclays Capital. The Barclays assets are being purchased for $586 million, and the companies are targeting to close the deal in mid-April. The deal is massive for CreXus, which only had total assets of $448.4 million as of December 31, 2010, and has a market capitalization of just $220 million. The share offering is also being done at a significant discount to the $14.79 per share book value the company reported in its most recent quarterly report at the end of January.

All in all, I'm having trouble wrapping my head around the whole thing. I'm surprised Annaly hasn't issued a statement, given that Annaly not only owns 25% of CXS but also owns the management company that controls CXS. I'm not sure Starwood's offer was very genuine, given Starwood's website does not even have a press release out about a deal, and news did not emerge until around noon the day the share offering was set to price. While it is impressive that CreXus is able to raise as much money as it needed to buy the portfolio from Barclays, I can't see how selling shares at 22% below book value is a positive event. The board effectively said at noon it did not want to sell the company at $14 a share, and then sold shares worth more than double the value of the company at $11.50 six hours later.

Given the massive share offering was priced, it's likely safe to assume that Starwood will not be making a second bid for the company. As for shares in CXS, a strong yield, support from Annaly Management and a discount to book value do make the shares look interesting. However, the company is selling 50 million shares, when its average trading volume is about 64,000, so expect some volatility in the next few weeks as the market digests the offering.

Secondary offerings are usually good opportunities to get into these REITs (as I explain here about American Capital Agency's (NASDAQ:AGNC) recent offering), but given the higher yields elsewhere in the space, I'd rather put money into larger companies like AGNC or NLY. CreXus may be an opportunity, but given the strangeness of these events, investors should consider a wait and see approach, and would do better to stick to the bigger names in the space.

Disclosure: I am long AGNC.