Crexus Turning Focus to B-Notes, B-Pieces

Crexus Investment, a mortgage REIT formed last year by Annaly Capital, plans to step up its investment in subordinate commercial real estate debt.

Since raising $257 million via an IPO in September, the New York company has mostly acquired super-senior commercial MBS, tapping low-cost financing from the Federal Reserve's Term Asset-Backed Securities Loan Facility.

Now that the Fed program has expired, Crexus is turning its sights to higher-yielding debt. It will look to invest in the junior portions of newly originated commercial mortgages and in the B-pieces of new-issue CMBS transactions.

Crexus is looking to achieve yields "in the low double digits" on the investments, said investment chief Robert Karner. The REIT still has roughly $150 million of untapped capital from the IPO.

Karner noted that Crexus has always been interested in subordinate debt. "But now it is more of a focus," he said. "We took some time to evaluate this space."

The REIT is in talks with a handful of senior institutional lenders to form alliances under which it would have the option to take down the B-notes of their originations and acquire the B-pieces of their securitizations.

Last year, Crexus formed a strategic relationship with Principal Real Estate Investors, which agreed to originate, underwrite, close and service loans for the REIT. The servicing capability is critical if Crexus is to invest in B-pieces.

With the new emphasis, Crexus joins the ranks of fledgling B-piece buyers, which are moving in to replace some traditional players beaten down by losses suffered during the market collapse. The players looking at the arena include debt-fund operators such as BlackRock Realty Advisors, whose $461 million Carbon Capital 3 fund has agreed to buy the B-piece of J.P. Morgan's upcoming multi-borrower deal (see article on Page 3), Apollo Commercial Real Estate and Starwood Capital. Also in the mix are REITs that traditionally specialized in residential mortgage debt, but now are considering commercial real estate. They include New York Mortgage Trust and Redwood Trust of Mill Valley, Calif.

As of March 31, Crexus had a $282.8 million investment portfolio. Triple-A CMBS made up slightly more than three-quarters of the assets. The rest consisted of commercial mortgages. The weighted average yield was 6.7% - 11.8% on the loans and 5.1% on the CMBS. The weighted average cost of funds was 3.6%. Crexus calculates that the annualized return on its $109 million of invested equity is 11.7%. The company posted $1.8 million of net income in the first quarter.

Real estate veteran Kevin Riordan, who long ran TIAA-CREF's structured-securities program, is chief executive. Jeffrey Conti is head of commercial underwriting. Robert Restrick joined the firm last month to work on investments.

New York-based Annaly owns 25% of Crexus and provides investment guidance to the firm.

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