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This 12% Dividend Yield is Still a Buy

Crexus Investment Corp. (CXS) operates as a specialty finance company in the United States. It acquires, manages, and finances commercial mortgage loans and commercial real estate debts, commercial mortgage-backed securities, and other commercial real estate-related assets.  The principal business objective is to provide attractive risk-adjusted returns to investors over the long-term, primarily through dividends and secondarily through capital appreciation.

CXS is trading at $11.21 and has a market cap of $865 million.  CXS raised their quarterly dividend from $0.30 to $0.35 in the 4th quarter, an increase of
16.7%.  CXS has a dividend yield of 12.49% that should remain solid in the near future.  CXS has increased its dividend for 8 straight quarters – from $0.07 in Q1 2010 to the current $0.35 in Q4 2011, a 400% increase within 2 years.

CXS reported fourth quarter core EPS of $0.49, $0.05 higher than the estimate. A larger than expected discount accretion accounted for the difference versus the estimate. GAAP EPS were $0.55 including $0.06 of gains from selling the Agency MBS portfolio.

Estimates: We are maintaining our 2012 and 2013 core EPS estimates and establishing a 2014 estimate at $1.35. Near-term visibility into earnings remains low given the volatility around discount accretion, but visibility should increase as the portfolio transition continues.

Investment activity: Crexus completed $143 million of investments during the fourth quarter including its first 2 triple net lease investments for a total
of $33 million. The company continues to make progress in transitioning the portfolio into longer duration higher yielding assets. We will look for management commentary on the call about the 2012 outlook for capital deployment given the sale of Agency portfolio and the current $200 million cash balance.

Revenues: Core net revenues totaled $41.4 million, 10% higher than the estimate.  For the fourth quarter discount accretion on the loan portfolio was $28.8 million versus $21.0 million expected and $30.9 million in the third quarter which accounted for most of the beat relative to estimates.

Valuation: Crexus is trading at a 6% discount to current book value and yielding 12.49%.

Reiterate Outperform: The transformation of the portfolio into higher yielding assets combined with the start of the triple net leasing investments increases our conviction that Crexus should trade at a premium to book value.  The current price to book is 0.94, buy CXS when it is below 1.0 and sell when it moves above 1.5.

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