CreXus Investment Corp. (CXS), a mortgage real estate investment trust (REIT) focused on commercial real estate assets, has recently rejected an unconditional buyout offer from Starwood Property Trust, Inc. (STWD), also a mortgage REIT, and instead proceeded with its secondary offering. The acquisition bid was contingent on CreXus suspending its equity offering as Starwood felt that it would lead to significant book value dilution.
Earlier, Starwood made a takeover bid for CreXus by proposing to acquire all of its outstanding shares for $14.00 each. The offer price was at a substantial premium to the quoted price of CreXus and virtually above all the trading prices since its initial public offering in September 2009. According to the terms of the proposal, each CreXus share was intended to be exchanged for 0.61 of Starwood share.
The acquisition was expected to be accretive to Starwood’s earnings, with potential cost savings from synergies created by the combination. The transaction was also expected to augment Starwood’s portfolio and diversify its asset base, while providing economies of scale by creating the largest U.S. commercial-mortgage REIT.
However, CreXus rebuffed the proposal and went ahead with its equity offer by pricing 50 million common shares at $11.50 per share for estimated gross proceeds of approximately $575 million. The company also granted the underwriters an option to purchase an additional 7.5 million shares to cover any over-allotments.
CreXus intends to utilize the net proceeds of about $539 million from the offering to fund its recently announced acquisition of a portfolio of commercial real estate assets, which is anticipated to close during mid-April 2011.
Concurrent with the public offering, Annaly Capital Management, Inc. – the parent company of CreXus’ external manager, Fixed Income Discount Advisory Company, will acquire about 5 million shares in a private placement at $11.50 each. Consequently, the entire transaction is likely to result in earnings dilution of CreXus in the near future.
Furthermore, the commercial mortgage market in the U.S. has experienced a certain amount of volatility and liquidity concerns in the recent past. These factors have impacted investor perception of the risk associated with real estate related assets. Increased volatility and deterioration in the mortgage markets may also adversely affect the performance of CreXus in the coming quarters.
As such, we remain cautious on the stock and have a ‘Neutral’ recommendation on CreXus, which presently has a Zacks #3 Rank that indicates a short-term ‘Hold’ rating.
CREXUS INVESTMT (CXS): Free Stock Analysis Report
STARWOOD PROPRT (STWD): Free Stock Analysis Report
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