Crexus Investment Management Discusses Q2 2012 Results - Earnings Call Transcript

Crexus Investment (CXS)

Q2 2012 Earnings Call

August 02, 2012 11:00 am ET

Executives

Kevin Riordan - Chairman, Chief Executive Officer and President

Daniel Wickey - Chief Financial Officer, Principal Accounting Officer and Secretary

Robert M. Karner - Global Head of Debt Investments

Rose-Marie Lyght - Executive Vice President and Co-Head of Portfolio Management

Robert Restrick - Chief Operating Officer and Executive Vice President

Analysts

Jason Arnold - RBC Capital Markets, LLC, Research Division

Jade J. Rahmani - Keefe, Bruyette, & Woods, Inc., Research Division

Douglas Harter - Crédit Suisse AG, Research Division

Steven C. Delaney - JMP Securities LLC, Research Division

Gabriel J. Poggi - FBR Capital Markets & Co., Research Division

Presentation

Operator

Good morning, and welcome to the Second Quarter Earnings Call for the CreXus Investment Corp. At this time, I would like to inform you that this conference is being recorded. [Operator Instructions]

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.

I will 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 second quarter 2012. I'm 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. I want to begin the call with a few comments on the quarter and the markets in general, and Dan will run through our results. After which, our team will be happy to discuss anything in our release or quarterly supplement.

This quarter, we continue to make new investments and optimize our portfolio. We closed approximately $150 million of subordinate debt investments near the end of the quarter. We sold 2 hotels for approximately $10.5 million for a total gain of approximately $1.8 million. We also continue to implement our strategy to originate whole loans and sell the senior component of the loan while retaining the higher yielding junior piece. Specifically, we sold a $50 million senior position and retained a $30 million subordinate note with a coupon of 11.6%.

As can be seen in our quarterly supplement, our investing activity has enabled us to push out the maturity profile while increasing their return over the last 6 months. This takes some time, but you can see that we have increased the coupon by over 300 basis points while maturities are extended by more than a year.

So now looking at the portfolio at quarter end, we have an unlevered debt book of approximately $700 million yielding north of 11%, with a weighted average LTV of 70%. We also have real estate investments of approximately $70 million yielding 10% utilizing a modest amount of nonrecourse leverage. In light of the options available to investors, we think CreXus provides a very compelling investment opportunity.

Since quarter end, we have closed $125 million of new investments. We closed 2 subordinate debt investments totaling $60 million that will earn north of 11%, with a weighted maturity of 6.5 years. We also closed 2 senior mortgages totaling $65 million with a coupon of approximately 6.5%. We are obviously pleased with the risk return profile of the sub debt positions.

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