Crexus Investment Corp. (CXS) is a REIT that acquires, manages, and finances commercial mortgage debt. It also acquires some Agency RMBS. It is externally managed by the Fixed Income Discount Advisory Company (FIDAC), a subsidiary of Annaly Capital Management Inc. (NLY). Unlike many of the other mortgage REIT companies, it raised its dividend in Q3 ($0.32/share) versus Q2 ($0.27/share) in 2012. This is a big indicator that the commercial mortgage business is doing better than the Agency RMBS market under the current market conditions. Agency RMBS companies have been lowering their dividends.
CXS is a micro/small cap company with a market cap of only $851.36 million; and it apparently uses little or no leverage. Therefore it is truly a small company by mortgage REIT standards. This may make it more susceptible to market conditions. However, it may also make it a much safer bet if the US economy does badly for a short time. Its lack of leverage will be a benefit.
As of June 30, 2012 CXS' investment portfolio consisted of $676.5 million in loans and $81.6 million in equity investments in real estate. Of the loans 65% were fixed-rate commercial mortgage loans and 35% were adjustable rate commercial mortgage loans. The weighted average yield of these loans was 11.27% as of June 30, 2012. Further CXS repaid its TALF debt last year, so its interest expenses have gone down. This attests to CXS' increased fiscal robustness. The real estate investments include warehouses and hotels.
GAAP earnings for Q2 2012 were $14.4 million or $0.19 per share. CXS paid a dividend of $0.27 per share in Q2 2012. CXS' book value per share at the end of Q2 was $11.96 per share. I note this is a premium to the stock price of $11.11 per share as of the close on Tuesday October 23, 2012. This provides at least one reason for the stock price to go up. CXS has short interest (as a % of the Float) of only 2.80%. This is a good indication of health in a small/micro cap stock in a troubled economic environment.
For example, small/micro cap New York Mortgage Trust Inc. (NYMT), which invests in RMBS and CMBS has a short interest of 10.30%. American Capital Mortgage Investment Corp. (MTGE), which invests in agency RMBS, non-agency RMBS, and loans, has a short interest of 33.70%. Dynex Capital Inc. (DX), which invests in both RMBS and CMBS has a short interest of 5.80%. CXS compares well to peers in this area. Further CXS has a Beta of only 0.48, which is fantastic for a micro/small cap stock. The only thing that really worried me was CXS' high proportion of subordinate and mezzanine loans (about 80%) in its commercial loans portfolio. However, the yields on subordinate/mezzanine loans versus senior loans are about 300 basis points higher (+3%). Hence I can see the logic in this approach, especially with an improving real estate market.
In practice CXS will often make a two component commercial loan. Then it will keep the subordinate loan and sell the senior loan. It can make some profits on the senior loan, and it will continue to glean bigger yields on the subordinate loan. The subordinate commercial loans generally yield about 300 basis points more than the senior loans.
CXS declared a dividend of $0.32 per share (11.52% annualized) for Q3 2012 on September 19, 2012. Logic dictates that the company is doing better financially in Q3 than it did in Q2 2012. As of June 30, 2012 CXS' commercial mortgage loan portfolio had no loans that were 30 days or more delinquent. As a consequence it had no Allowance for Loan Losses. It has only one loan that it has classified as Watch List.
All told CXS looks like a buy. It seems to be solidly managed, although it could conceivably lose that management. It has a vague connection to Annaly Capital -- a 12% owner, which doesn't hurt its credibility. It trades at an attractive PE of 7.60. It trades at a discount to its book value of $11.96 (as of June 30, 2012) at a share price of $11.11 as of the close Tuesday October 23, 2012. This stock seems great now, but I am not sure it will do as well if the US goes over the fiscal cliff (or even comes close). Some economists have estimated a -4% decline in US GDP if the US is allowed to go over the fiscal cliff, and that is ignoring all the other signs of slowing for other reasons.
For instance, the economic troubles in the EU, which the October Flash PMI miss of 45.8 versus an expected 46.4 made look ever worse, are expected to depress the US GDP by themselves. We are already seeing a significant decline in technology earnings in part due to this factor. Multi-national companies such as E.I. du Pont & de Nemours and Company (DD) have disappointed on Q3 earnings too. If this situation gets significantly worse, it will adversely affect commercial real estate. This may adversely affect CXS. For now with the Fed backing real estate significantly, CXS still looks like a good investment.
The two year chart of CXS provides some technical direction to this trade.
The slow stochastic sub chart shows CXS is approaching overbought levels. The main chart shows that CXS is in an uptrend. The 50-day SMA has recently passed through the 200-day SMA heading upward. This is a technical buy signal. If the announced dividend raise for Q3 2012 to $0.32 per share from $0.27 per share in Q2 2012 correctly indicates that Q3 earnings were substantially better than Q2's, the technical indications may prove correct. However, with the many negative uncertainties facing today's markets (such as the fiscal cliff), averaging in around the fiscal cliff is a good strategy.
Note: Some of the fundamental fiscal data above is from Yahoo Finance.
Good Luck Trading.