a50366856.htm

The United States Government has filed an action in the U.S. District Court Eastern District of New York on April 17, 2012 relating to the collateral securing one of the Company’s loans that is classified as a Watch List loan as of June 30, 2012. On July 5, 2012, the Company provided a notice to the borrower that an event of default under the loan agreements had occurred as a result of the borrower’s failure to pay interest due and owing and replenish the debt reserve reserve account. The Company is in the process of evaluating the loan in connection with the proposed allegations. The Company has a perfected security interest in the collateral underlying the loan and believes the loan is currently fully collateralized and expects to recover our net investment in the loan, which approximates $13.0 million at June 30, 2012. The Company does not expect the final resolution of the aforementioned action to have a material impact on the Company’s consolidated financial statements.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Special Note Regarding Forward-Looking Statements

We make forward-looking statements in this report that are subject to risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives. When we use the words ‘‘believe,’’ ‘‘expect,’’ ‘‘anticipate,’’ ‘‘estimate,’’ ‘‘plan,’’ ‘‘continue,’’ ‘‘intend,’’ ‘‘should,’’ ‘‘may,’’ ‘‘would,’’ “will,” or similar expressions, we intend to identify forward-looking statements. Statements regarding the following subjects, among others, are forward-looking by their nature:

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our business and strategy;

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our ability to obtain and maintain financing arrangements and the terms of such arrangements;

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financing and advance rates for our targeted assets;

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general volatility of the markets in which we acquire assets;

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the implementation, timing and impact of, and changes to, various government programs;

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our expected assets;

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changes in the value of our assets;

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market trends in our industry, interest rates, the debt securities markets or the general economy;

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rates of default or decreased recovery rates on our assets;

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our continuing or future relationships with third parties;

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prepayments of the mortgage and other loans underlying our mortgage-backed or other asset-backed securities;

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the degree to which our hedging strategies may or may not protect us from interest rate volatility;

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changes in governmental regulations, tax law and rates, accounting guidance, and similar matters;

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our ability to maintain our qualification as a REIT for federal income tax purposes;

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ability to maintain our exemption from registration under the Investment Company Act of 1940, as amended;

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the availability of opportunities in real estate-related and other securities;

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the availability of qualified personnel;

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estimates relating to our ability to make distributions to our stockholders in the future;

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our understanding of our competition;

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interest rate mismatches between our assets and our borrowings used to finance purchases of such assets;

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changes in interest rates and mortgage prepayment rates;

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the effects of interest rate caps on our adjustable-rate mortgage-backed securities;

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our ability to integrate acquired assets into our existing portfolio; and

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our ability to realize our expectations of the advantages of acquiring assets.

The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. You should not place undue reliance on these forward-looking statements. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us. For a discussion of the risks and uncertainties which could cause actual results to differ from those contained in forward looking statements, see our most recent Annual Report on Form 10-K and any subsequent Quarterly Report on Form 10-Q. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made. New risks and uncertainties arise from time to time, and it is impossible for us to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Executive Summary

We are a commercial real estate company that acquires, manages, and finances, directly or through our subsidiaries, commercial mortgage loans and other commercial real estate debt, commercial real property, commercial mortgage-backed securities, or CMBS, other commercial real estate-related assets and Agency residential mortgage-backed securities. We expect that the commercial real estate loans we acquire will be fixed and floating rate first mortgage loans secured by commercial properties. We may also acquire subordinated commercial mortgage loans and mezzanine loans. We have also invested in long-term sale-leaseback and build-to-suit transactions for companies in the U.S. and we may engage in these transactions in Europe. The long term sale-leaseback and build to suit properties are triple-net leased to corporate tenants. The triple-net leases require that in sale-leaseback transactions, each tenant pays substantially all of the costs associated with operating and maintaining the property, including real estate taxes, assessments and other government charges, insurance, utilities, repairs and maintenance and capital expenditures. From time to time, we also acquire commercial real property as part of our resolution of commercial mortgage loans and other commercial real estate debt where a borrower defaults in their obligations and we take title to the collateral underlying the commercial mortgage loans and other commercial real estate debt through foreclosure or other means.

We acquire CMBS which are rated AAA through BBB as well as CMBS that are below investment grade or are non-rated. The other commercial real estate-related securities and other commercial real estate asset classes consist of debt and equity tranches of commercial real estate collateralized debt obligations, or CRE CDOs, loans to real estate companies including real estate investment trusts, or REITs, and real estate operating companies, or REOCs, commercial real estate securities and commercial real property. In addition, we acquire residential mortgage-backed securities, or RMBS, for which a U.S. Government agency such as Ginnie Mae, or a federally chartered corporation such as Fannie Mae and Freddie Mac, guarantees payments of principal and interest on the securities. We refer to these securities as Agency RMBS. We refer to Ginnie Mae, Fannie Mae, and Freddie Mac collectively as the Agencies.

We are externally managed by Fixed Income Discount Advisory Company, which we refer to as FIDAC. FIDAC is a wholly owned subsidiary of Annaly Capital Management, Inc., or Annaly.

We have elected to be taxed as a REIT for federal income tax purposes commencing with our taxable year ending on December 31, 2009. Our targeted asset classes and the principal investments we expect to make in each include:

●	Commercial Mortgage Loans, consisting of:

A-Notes and other first mortgage loans that are secured by commercial and multifamily properties

Construction loans

●	Subordinated Debt

B-Notes, C-Notes, and other subordinated notes

Mezzanine loans

Loan participations

Preferred equity

●	Commercial Real Property

Office buildings

Hotels

Retail

Industrial

Multifamily

Residential condominiums

Other commercial real property including land

·	Commercial Mortgage-Backed Securities, or CMBS, consisting of:

CMBS rated AAA through BBB

CMBS that are rated below investment grade or are non-rated

·	Other Commercial Real Estate Assets, consisting of:

Debt and equity tranches of CRE CDOs

Loans to real estate companies including REITs and REOCs

Commercial real estate securities

·	Agency RMBS:

Single-family residential mortgage pass-through certificates representing interests in “pools” of mortgage loans secured by residential real property where payments of both interest and principal are guaranteed by a U.S. Government agency or federally chartered corporation

Our principal business objective is to capitalize on the fundamental changes that have occurred and are occurring in the commercial real estate finance industry to provide attractive risk adjusted returns to our stockholders over the long term, primarily through dividends and secondarily through capital appreciation. In order to capitalize on the changing sets of opportunities that may be present in the various points of an economic cycle, we may expand or refocus our strategy by emphasizing assets in different parts of the capital structure and different real estate sectors. We expect to continue to deploy our capital through the origination and acquisition of commercial first mortgage loans, CMBS, mezzanine financings and other commercial real-estate debt instruments at attractive risk-adjusted yields as well as directly in commercial real property, and CMBS and Agency RMBS. We expect to allocate our capital within our targeted asset classes opportunistically based upon our Manager’s assessment of the risk-reward profiles of particular assets. Our strategy may be amended from time to time, if recommended by our Manager and approved by our board of directors. If we amend our asset strategy, we are not required to seek stockholder approval.

We expect that over the near term our investment portfolio will be weighted toward commercial real estate loans and other commercial real estate debt and commercial real property, subject to maintaining our REIT qualification and our 1940 Act exemption.

We use borrowings as part of our financing strategy. We have financed our triple-net lease portfolio with non-recourse financings, which generally limit the recoverability of the loan to the property. These financings may be specific to a particular property or secured by a portfolio of our properties. We anticipate that the loan to value ratio for these financing will be between 40% and 65% and would likely not exceed 80%.

Although we are not required to maintain any particular leverage ratio, the amount of leverage we incur is determined by our Manager, taking into account a variety of factors, which may include the anticipated liquidity and price volatility of the assets in our portfolio, the potential for losses and extension risk in our portfolio, the gap between the duration of our assets and liabilities, including hedges, the availability and cost of financing our assets, the creditworthiness of our financing counterparties, the health of the U.S. economy and commercial and residential mortgage markets, the outlook for the level, slope, and volatility of interest rate movement, the credit quality of our target assets and the collateral underlying our target assets. We may enhance the returns on our commercial mortgage loan assets, especially loan acquisitions, through securitizations. We may also sell the senior portion or

A-Note and retain the subordinate or junior position in a B-Note or other subordinate loan. If possible, we may securitize the senior portion, expected to be equivalent to investment grade rated CMBS, while retaining the subordinate securities in our portfolio. We use repurchase agreements to finance acquisitions of Agency RMBS with a number of counterparties. We expect to leverage our triple-net lease investments. In the future, we may also use other sources of financing to fund the acquisition of our targeted assets, including warehouse facilities and other secured and unsecured forms of borrowing. We may also seek to raise further equity capital or issue debt securities to fund our future asset acquisitions.

Subject to maintaining our qualification as a REIT, we may, from time to time, utilize derivative financial instruments to mitigate the effects of fluctuations in interest rates and its effects on our asset valuations. We also may engage in a variety of interest rate management techniques that seek to mitigate changes in interest rates or other potential influences on the values of our assets. We may attempt to reduce interest rate risk and to minimize exposure to interest rate fluctuations through the use of match funded financing structures, when appropriate. We expect these instruments will allow us to minimize, but not eliminate, the risk that we have to refinance our liabilities before the maturities of our assets and to reduce the impact of changing interest rates on our earnings.

Factors Impacting our Operating Results

In addition to the prevailing market conditions, our operations are affected by a number of factors and primarily depend on, among other things, the level of our net interest income, the market value of our assets and the supply of, and demand for, commercial mortgage loans, commercial real estate debt, CMBS and other financial assets in the marketplace. Our net interest income includes the actual payments we receive and is also impacted by the amortization of purchase premiums and accretion of purchase discounts. Our net interest income varies over time, primarily as a result of changes in interest rates, and with respect to Agency RMBS we own, prepayment rates and prepayment speeds as measured by the Constant Prepayment Rate, or CPR, on our CMBS and Agency RMBS assets. Interest rates and prepayment rates vary according to the type of asset, conditions in the financial markets, credit worthiness of our borrowers, competition and other factors, none of which can be predicted with any certainty. Our operating results may also be impacted by credit losses in excess of initial anticipations or unanticipated credit events experienced by borrowers whose mortgage loans are held directly by us or are included in our CMBS.

Change in Fair Value of our Assets. It is our business strategy to hold our targeted assets as long-term investments. As such, we expect that our CMBS and Agency RMBS will be carried at their fair value, as available-for-sale securities in accordance with ASC 320 Investments in Debt and Equity Securities, with changes in fair value recorded through accumulated other comprehensive income (loss) rather than through earnings. As a result, we do not expect that changes in the fair value of the assets will normally impact our operating results. At least on a quarterly basis, however, we will assess both our ability and intent to continue to hold such assets as long-term investments. As part of this process, we will monitor our targeted assets for other-than-temporary impairment, or OTTI, including OTTI attributable to credit losses. A change in our ability or intent to continue to hold any of our investment securities could result in our recognizing an impairment charge or realizing losses upon the sale of such securities.

Credit Risk. We may be exposed to various levels of credit risk depending on the nature of our investments and the nature and level of the assets underlying the investments and credit enhancements, if any, supporting our assets. FIDAC and FIDAC’s Investment Committee approve and monitor credit risk and other risks associated with each investment. We review loan to value metrics upon either the origination or the acquisition of a new investment but generally not in the course of quarterly surveillance. We generally review the most recent financial information produced by the borrower, net operating income, or NOI, debt service coverage ratios, or DSCR, property debt yields (net cash flow or NOI divided by the amount of outstanding indebtedness), loan per unit and rent rolls relating to each of our assets, and may consider other factors we deem important. We review market pricing to determine the refinanceability of the asset. We review economic trends, both macro as well as those directly affecting the property, and the supply and demand of competing projects in the sub-market in which the subject property is located. We also evaluate the borrower’s ability to manage and operate the properties.

Based upon the review, loans are assigned an internal rating of Performing Loans, Watch List Loans or Workout Loans. Loans that are deemed Performing Loans meet all present contractual obligations. Watch List Loans are defined as performing loans but whose timing and/or recovery of investment may be under review. Workout Loans are defined as those either not performing or we do not expect to recover our cost basis.

Size of Portfolio. The size of our portfolio, as measured by the aggregate unpaid principal balance of our mortgage loans and aggregate principal balance of our mortgage related securities and the other assets we own is also a key revenue driver. Generally, as the size of our portfolio grows, the amount of interest income we receive increases. The larger portfolio, however, may drive increased expenses if we incur additional interest expense to finance the purchase of our assets.

Changes in Market Interest Rates. With respect to our business operations, increases in interest rates, in general, may over time cause:

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the interest expense associated with our borrowings to increase;

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the value of our mortgage loans, CMBS and Agency RMBS, to decline;

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coupons on our adjustable rate mortgage loans, CMBS and Agency RMBS to reset, although on a delayed basis, to higher interest rates;

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to the extent applicable under the terms of our investments, prepayments on our mortgage loan portfolio, CMBS and Agency RMBS to slow, thereby slowing the amortization of our purchase premiums and the accretion of our purchase discounts; and

●

to the extent we enter into interest rate swap agreements as part of our hedging strategy, the value of these agreements to increase.

Conversely, decreases in interest rates, in general, may over time cause:

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to the extent applicable under the terms of our investments, prepayments on our mortgage loan, CMBS and Agency RMBS portfolio to increase, thereby accelerating the amortization of our purchase premiums and the accretion of our purchase discounts;

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the interest expense associated with our borrowings to decrease;

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the value of our mortgage loan, CMBS and Agency RMBS portfolio to increase;

●

to the extent we enter into interest rate swap agreements as part of our hedging strategy, the value of these agreements to decrease; and

●

coupons on our adjustable-rate mortgage loans, CMBS and Agency RMBS to reset, although on a delayed basis, to lower interest rates

Since changes in interest rates may significantly affect our activities, our operating results depend, in large part, upon our ability to effectively manage interest rate risks and prepayment risks while maintaining our status as a REIT.

Investment Activities

At June 30, 2012, our investment portfolio consisted of $676.5 million of loans and $81.6 million of equity investments in real estate.

The following segmented table summarizes certain characteristics of our portfolio at June 30, 2012 and December 31, 2011:

	As of June 30, 2012			As of December 31, 2012
Debt Securities Portfolio	(dollars in thousands)
Debt investment portfolio at period-end	$	676,478		$	752,801
Fixed-rate investments as percentage of portfolio		65	%		38	%
Adjustable rate investments as percentage of portfolio		35	%		62	%
Fixed-rate investments
Commercial mortgage loans as percentage of fixed-rate assets		100	%		100	%
Adjustable rate investments
Commercial mortgage loans as percentage of adjustable-rate assets		100	%		100	%
Weighted average yield on interest earning assets at period-end		11.27	%		29.86	%
Weighted average cost of funds for debt portfolio at period-end		-			-
Real Estate Properties Portfolio including Net Lease Operations
Real estate investment at period-end		81,604			33,196
Financing on real estate		19,150			16,600
Annualized yield on real estate investment portfolio at period end (1)		7.78	%		7.67	%
Weighted average cost of funds on real estate investment financing(2)		3.49	%		3.50	%

(1) Quarter ended June 30, 2012 includes gain on sales and related taxes.
(2) Includes the effect of the swap for the quarter ended June 30, 2012.

The following table represents our debt portfolio at June 30, 2012:

Commercial Loans on Real Estate
June 30, 2012
(dollars in thousands)

Property Type					Final	Payment			Carrying
Commercial mortgage loans	Location	Coupon			Maturity Date	Terms	Face Amount		Amount
Hotel	Grand Cayman		6.75	%	Oct-14	Floater	$	43,400	$	42,314
Hotel	CA		1.99	%	Nov-14	Floater	$	35,099	$	23,732
Retail	IN		4.75	%	Nov-14	Floater	$	23,814	$	23,814
Retail	CO		5.58	%	May-17	Fixed	$	17,833	$	15,537
Condo	NY		-	%(1)	Dec-13	Fixed	$	12,973	$	12,973
Condo	NJ		12.08	%	Dec-14	Fixed	$	5,475	$	5,475
Commercial mortgage loans: weighted average coupon			4.63	%	Commercial mortgage loans total		$	138,594	$	123,845


Subordinate & Mezzanine debt (2)

Office	Various		11.50	%	Dec-14	Floater		100,000		100,000
Retail	Various		11.25	%	Apr-17	Fixed		87,520		87,520
Industrial	Various		11.00	%	Jun-17	Floater		50,000		50,000
Retail	Various		7.71	%	Sep-15	Fixed		46,150		42,918
Hotel	TX		10.53	%	Sep-16	Fixed		44,000		44,000
Retail	Various		12.24	%	Dec-19	Fixed		40,000		40,000
Retail	TX		11.25	%	Apr-15	Fixed		27,145		27,145
Office	IL		6.66	%	Jun-15	Fixed		25,000		22,978
Office	GA		12.17	%	Oct-13	Fixed		20,500		20,500
Office	CA		11.13	%	Oct-14	Fixed		20,000		20,000
Office	NY		11.15	%	Sep-13	Fixed		18,000		18,000
Hotel	NY		10.83	%	Sep-13	Floater		17,000		17,000
Office	IL		5.64	%	Jan-15	Fixed		16,576		15,742
Hotel	NY		12.61	%	Sep-13	Floater		13,000		13,000
Office	NY		10.00	%	Jul-21	Fixed		10,000		10,000
Hotel	CA		12.25	%	Apr-17	Fixed		8,000		8,000
Office	IL		12.25	%	Dec-15	Floater		6,500		6,500
Office	NY		10.00	%	Dec-14	Fixed		4,812		4,812
Retail	IN		16.79	%	Nov-14	Floater		4,518		4,518
Subordinate & mezzanine debt: weighted average coupon			10.70	%	Subordinate & mezzanine debt total		$	558,721	$	552,633
Total debt portfolio: weighted average coupon			9.50	%	Total debt portfolio		$	697,315	$	676,478

(1) Loan on non-accrual status as of June 30, 2012.
(2) Subject to prior liens.

Results of Operations

Net Income Summary

Our net income for the quarter and six months ended June 30, 2012 was $14.4 million and $30.5 million, or $0.19 and $0.40 per share, respectively. Our net income for the quarter and six months ended June 30, 2011 was $22.1 million and $26.7 million, or $0.29 and $0.55 per share, respectively. We attribute the decrease in net income for the quarter ending June 30, 2012 to the sale of our CMBS portfolio for a gain of $13.9 million during the quarter ended June 30, 2011. We primarily attribute the increase in net income for the six months ended June 30, 2012 to the purchase of additional interest earning assets.

The table below presents the Consolidated Statements of Comprehensive Income for the quarters and six months ended June 30, 2012 and 2011:

CREXUS INVESTMENT CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands, except share and per share data)

	For the Quarter Ended						For the Six Months Ended
	June 30, 2012			June 30, 2011			June 30, 2012			June 30, 2011
	(unaudited)			(unaudited)			(unaudited)			(unaudited)

Net interest income:
Interest income	$	17,678		$	13,055		$	40,904		$	20,498
Interest expense		(310	)		(742	)		(670	)		(2,274	)
Servicing fees		(114	)		(154	)		(229	)		(217	)
Net interest income		17,254			12,159			40,005			18,007

Other income:
Realized loss on sale of loan		(525	)		-			(525	)		-
Realized gains on sales of investments		-			13,925			-			13,925
Miscellaneous fee income		127			-			642			-
Rental income		811			-			1,523			-
Total other income		413			13,925			1,640			13,925

Other expenses:
Provision for loan losses, net		-			-			2,803			127
Management fee		3,426			3,345			6,897			4,024
General and administrative expenses		1,180			614			3,890			1,093
Amortization expense		106			-			229			-
Depreciation expense		270			-			545			-
Total other expenses		4,982			3,959			14,364			5,244

Net income before income tax		12,685			22,125			27,281			26,688
Income tax		32			-			33			1
Net income from continuing operations	$	12,653		$	22,125		$	27,248		$	26,687

Net (loss) income from discontinued operations (net of tax expense of $1,564, $0, $1,859 and $0, respectively)		(46	)		-			1,476			-

Gain on sale from discontinued operations		1,774			-			1,774			-

Net Income	$	14,381		$	22,125		$	30,498		$	26,687

Net income per share-basic and diluted, continuing operations	$	0.17		$	0.29		$	0.36		$	0.55
Net income per share-basic and diluted, discontinued operations		-			-			0.02			-
Net income per share-basic and diluted, gain on sale from discontinued operations		0.02			-			0.02			-

Net income per share-basic and diluted	$	0.19		$	0.29		$	0.40		$	0.55
Dividend declared per share of common stock	$	0.27		$	0.29		$	0.54		$	0.48
Weighted average number of shares outstanding-basic and diluted		76,624,462			76,466,266			76,622,287			48,365,968
Comprehensive income:
Net income	$	14,381		$	22,125		$	30,498		$	26,687
Other comprehensive income:
Unrealized gains on securities available-for-sale		-			5,557			-			6,198
Reclassification adjustment for realized gains included in net income		-			(13,925	)		-			(13,925	)
Total other comprehensive income		-			(8,368	)		-			(7,727	)
Comprehensive income	$	14,381		$	13,757		$	30,498		$	18,960

See notes to consolidated financial statements.

Interest Income and Average Earning Asset Yield

We had average earning assets of $638.6 million and $1.1 billion for the quarters ended June 30, 2012 and 2011, respectively, decreasing primarily as a result of the sale of Agency RMBS during the quarter ended December 31, 2011. Our interest income, net of service fees, was $17.6 million and $12.9 million for the quarters ended June 30, 2012 and 2011, respectively and the yield on our portfolio, excluding cash, was 11.00% and 4.64% for the quarters ended June 30, 2012 and 2011, respectively. Interest income increased $4.6 million primarily due to the purchase of interest earning assets and recycling of maturing assets in to higher coupon loans.

We had average earning assets of $663.9 million and $766.1 million for the six months ended June 30, 2012 and 2011, respectively, decreasing primarily as a result of the sale of Agency RMBS during the quarter ended December 31, 2011. Our interest income, net of service fees, was $40.7 million and $20.7 million for the six months ended June 30, 2012 and 2011, respectively and the yield on our portfolio, excluding cash, was 12.25% and 5.29% for the six months ended June 30, 2012 and 2011, respectively. Interest income, net of service fees, increased $20.4 million primarily due to the recognition of accretion income related to refinancings, settlements and maturities of those assets and an overall increase in the weighted average coupon of the portfolio.

Interest Expense and the Cost of Funds

We had average borrowed funds of $27.4 million and $119.0 million and total interest expense of $310 thousand and $742 thousand for the quarters ended June 30, 2012 and 2011, respectively and our average cost of funds was 4.52% and 2.49% for the quarters ended June 30, 2012 and 2011, respectively. Our interest expense decreased $432 thousand for the quarter ended June 30, 2012 as compared to the quarter ended June 30, 2011 primarily due to repayment of the TALF debt.

We had average borrowed funds of $29.5 million and $145.6 million and total interest expense of $670 thousand and $2.3 million for the six months ended June 30, 2012 and 2011, respectively, and our average cost of funds was 4.54% and 3.12% for the six months ended June 30, 2012 and 2011, respectively. Our interest expense decreased $1.6 million for the six months ended June 30, 2012 as compared to the six months ended June 30, 2011 primarily due to the repayment of the TALF debt.

Net Interest Income

Our net interest income, which equals interest income less interest expense and service fees, totaled $17.3 million and $12.2 million for the quarters ended June 30, 2012 and 2011, respectively. Our net interest income increased $5.1 million primarily due to the purchase of additional assets at a discount and the recognition of accretion income associated with that discount for the quarter ended June 30, 2012 when compared to the quarter ended June 30, 2011. Our net interest spread, which equals the yield on our average assets for the period less the average cost of funds for the period, was 6.48% and 2.15% for the quarters ended June 30, 2012 and 2011, respectively. For the quarter ended June 30, 2012, the increase in net interest spread is primarily due to an increase in the recognition of discount accretion income when compared to the quarter ended June 30, 2011.

Our net interest income totaled $40.0 million and $18.0 million for the six months ended June 30, 2012 and 2011, respectively. Our net interest income increased $22.0 million primarily due to the purchase of additional assets at a discount and the accretion income associated with that discount for the quarter ended June 30, 2012 when compared to the quarter ended June 30, 2011. Our net interest spread was 7.71% and 2.17% for the six months ended June 30, 2012 and 2011, respectively. For the six months ended June 30, 2012, the increase in net interest spread is primarily due to an increase in the recognition of discount accretion income when compared to the quarter ended June 30, 2011.

The table below shows our average earning assets held, total interest income, weighted average yield on average interest earning assets for the period, average balance of interest bearing liabilities, interest expense, weighted average cost of funds for the period, net interest income, and net interest rate spread for the quarters ended June 30, 2012 and March 31, 2012, the year ended December 31, 2011 and for each of the quarters in 2011.

Net Interest Income
(Ratios have been annualized, dollars in thousands)
					Yield on
	Average				Average			Average									Net
	Earning		Interest		Interest			Interest				Average			Net		Interest
	Assets		Earned on		Earning			Bearing		Interest		Cost			Interest		Rate
	Held (1)		Assets (2)		Assets (1)(2)			Liabilities		Expense		of Funds			Income		Spread
For the quarter ended June 30, 2012	$	638,619	$	17,564		11.00	%	$	27,392	$	310		3.49	%	$	17,254		7.51	%
For the quarter ended March 31, 2012	$	689,210	$	23,105		13.41	%	$	31,656	$	360		4.55	%	$	22,745		8.86	%
For the year ended December 31, 2011	$	866,731	$	105,658		12.19	%	$	82,836	$	2,370		2.86	%	$	103,288		9.33	%
For the quarter ended December 31, 2011	$	860,842	$	41,426		19.25	%	$	2,113	$	75		14.19	%	$	41,351		5.06	%
For the quarter ended September 30, 2011	$	1,070,659	$	43,961		16.42	%	$	40,000	$	21		0.21	%	$	43,940		16.21	%
For the quarter ended June 30, 2011	$	1,112,767	$	12,898		4.64	%	$	118,965	$	742		2.49	%	$	12,156		2.15	%
For the quarter ended March 31, 2011	$	415,519	$	7,380		7.10	%	$	172,612	$	1,532		3.60	%	$	5,848		3.50	%

(1) Excludes cash and cash equivalents.

(2) Net of servicing fees.

Rental Income

Our rental income for the quarter and six months ended June 30, 2012 was $811 thousand and $1.5 million, respectively, which is directly attributable to our investments in real estate. We had no rental income for the quarter and six months ended June 30, 2011.

Management Fee and General and Administrative Expenses

We paid FIDAC management fees of $3.4 million and $3.3 million for the quarters ended June 30, 2012 and 2011, respectively. The increase is due primarily to an increase in stockholders’ equity which is the basis of the management fee calculation. We paid FIDAC management fees of $6.9 million and $4.0 million for the six months ended June 30, 2012 and 2011, respectively. The increase is due primarily to the increase in stockholders’equity for the comparable period.

General and administrative expenses, or G&A expenses, were $1.2 million and $614 thousand for the quarters ended June 30, 2012 and 2011, respectively. The increase is primarily attributable to an increase in costs associated with an increase in the overall number of commercial mortgage debt instruments and real estate properties in our portfolio for the quarter ended June 30, 2012 compared to the quarter ended June 30, 2011. G&A expenses were $3.9 million and $1.1 million for the six months ended June 30, 2012 and 2011, respectively. The increase is primarily attributable to costs associated with taking possession of collateral underlying loans via a deed in lieu of foreclosure during the six months ended June 30, 2012 and costs associated with the increase in the management fee percentage from 1.00% per annum to 1.50% per annum that occurred on March 23, 2011 pursuant to the terms of the management agreement.

Total expenses as a percentage of average total assets, excluding provision for loan losses, depreciation and amortization, were 1.88% and 1.42% for the quarters ended June 30, 2012 and 2011, respectively. The increase is attributable to an increase in license fees, legal and accounting fees.

Currently, FIDAC has waived its right to require us to pay our pro rata portion of rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses of FIDAC and its affiliates required for our operations.

The table below shows our total management fee and G&A expenses as compared to average total assets and average equity for the quarters ended June 30, 2012 and March 31, 2012, the year ended December 31, 2011 and for each of the quarters in 2011.

Management Fees and G&A Expenses and Operating Expense Ratios
(Ratios have been annualized, dollars in thousands)

	Total Management		Total Management			Total Management
	Fee and G&A		Fee and G&A			Fee and G&A
	Expenses		Expenses/Average			Expenses/Average
			Total Assets			Equity
For the quarter ended June 30, 2012	$	4,606		1.88	%		2.00	%
For the quarter ended March 31, 2012	$	6,181		2.50	%		2.67	%
For the year ended December 31, 2011	$	14,169		1.36	%		1.57	%
For the quarter ended December 31, 2011	$	4,829		1.99	%		2.10	%
For the quarter ended September 30, 2011	$	4,221		1.76	%		1.86	%
For the quarter ended June 30, 2011	$	3,959		1.42	%		1.80	%
For the quarter ended March 31, 2011	$	1,160		0.54	%		1.73	%

Net Income and Return on Average Equity

Our net income was $14.4 million for the quarter ended June 30, 2012 as compared to $22.1 million for the quarter ended June 30, 2011. The decrease is primarily due to the gain on sale of our CMBS portfolio during the quarter ended June 30, 2011. Our net income was $30.5 million for the six months ended June 30, 2012 as compared to $26.7 million for the six months ended June 30, 2011. The increase is primarily due to an increase in accretion income and an increase in interest earning assets. The table below shows our net interest income, fee income, rental income, total expenses, realized gains (losses), Income (loss) from discontinued operations and gain on sale from discontinued operations each as a percentage of average equity, and the return on average equity for the quarters ended June 30, 2012 and March 31, 2012, the year ended December 31, 2011 and the four quarters of 2011.

Components of Return on Average Equity
(Ratios have been annualized)

	Net															Income (Loss) from			Gain on Sale from
	Interest			Fee			Rental			Total			Realized			Discontinued			Discontinued			Return
	Income/			Income/			Income/			Expenses(1)/			Gains (Losses)/			Operations/			Operations/			on
	Average			Average			Average			Average			Average			Average			Average			Average
	Equity			Equity			Equity			Equity			Equity			Equity			Equity			Equity
For the quarter ended June 30, 2012		7.49	%		0.06	%		0.35	%		(2.18	%)		(0.23	%)		(0.02	%)		0.77	%		6.24	%
For the quarter ended March 31, 2012		9.84	%		0.22	%		0.31	%		(4.06	%)		0.00	%		0.66	%		0.00	%		6.97	%
For the year ended December 31, 2011		11.45	%		0.08	%		0.03	%		(1.57	%)		2.05	%		0.00	%		0.00	%		12.04	%
For the quarter ended December 31, 2011		17.94	%		0.22	%		0.10	%		(2.10	%)		1.98	%		0.00	%		0.00	%		18.14	%
For the quarter ended September 30, 2011		19.37	%		0.10	%		0.00	%		(1.86	%)		0.00	%		0.00	%		0.00	%		17.61	%
For the quarter ended June 30, 2011		5.51	%		0.00	%		0.00	%		(1.80	%)		6.32	%		0.00	%		0.00	%		10.03	%
For the quarter ended March 31, 2011		8.71	%		0.00	%		0.00	%		(1.91	%)		0.00	%		0.00	%		0.00	%		6.80	%

(1) Includes provision for loan loss, depreciation and amortization.

Discontinued Operations

We recorded a net loss of approximately $46 thousand and net income of $1.5 million from discontinued operations during the quarter and six months ended June 30, 2012, respectively, which represents the net operating results of the hotels acquired during the quarter ended March 31, 2012 via deed in lieu of foreclosure. Net income (loss) from discontinued operations is recorded net of tax expense of $1.6 million and $1.9 million for the quarter and six months ended June 30, 2012, respectively. Additionally, we recorded a pre-tax gain on sale from discontinued operations of $1.8 million during the quarter ended June 30, 2012.

Liquidity and Capital Resources

Liquidity measures our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain our assets and operations, make distributions to our stockholders and other general business needs. We will primarily use cash to purchase our targeted assets, repay principal and interest on our borrowings, make distributions to our stockholders and fund our operations. Our primary sources of cash will generally consist of the net proceeds from equity offerings, payments of principal and interest we receive on our portfolio of assets, proceeds from the sale of real estate held for sale and cash generated from our operating real estate held for sale.

We have financed our triple-net lease portfolio with non-recourse financings, which generally limit the recoverability of the loan by the creditor to the property. These financings are generally specific to a particular property or secured by a portfolio of our properties. We anticipate that the loan to value ratio for these financing will be between 40% and 65% and would likely not exceed 80%. We may utilize structural leverage through securitizations of commercial real estate loans or CMBS. We may also seek to finance the acquisition of Agency RMBS using repurchase agreements with counterparties, which are recourse to us. With regard to securitizations or selling the senior portion of the loan, the leverage will depend on the market conditions for structuring such transactions. We anticipate that leverage for Agency RMBS would be available to us, which would provide for a debt-to-equity ratio in the range of 2:1 to 4:1 and would likely not exceed 8:1. Based on current market conditions, we expect to operate within the leverage levels described above in the near and long-term. We can provide no assurance that we will be able to obtain financing on favorable terms, or at all.

Securitizations

We may seek to enhance the returns on our commercial mortgage loan investments, especially loan acquisitions, through securitization. If available, we may securitize the senior portion, expected to be equivalent to AAA-rated CMBS, while retaining the subordinate securities in our portfolio.

Other Sources of Financing

We have used and may continue to use repurchase agreements to finance acquisitions of Agency RMBS with a number of counterparties. Under our repurchase agreements, we may be required to pledge additional assets to our repurchase agreement counterparties (i.e., lenders) in the event the estimated fair value of the existing pledged collateral under such agreements declines and such lenders demand additional collateral (a margin call), which may take the form of additional securities or cash. Similarly, if the estimated fair value of interest earning assets increases due to changes in market interest rates or market factors, lenders may release collateral back to us. Specifically, margin calls result from a decline in the value of our Agency RMBS securing our repurchase agreements, prepayments on the mortgages securing such Agency RMBS and changes in the estimated fair value of such Agency RMBS generally due to principal reduction of such Agency RMBS from scheduled amortization and resulting from changes in market interest rates and other market factors. Our repurchase agreements generally provide that the valuations for the Agency RMBS securing our repurchase agreements are to be obtained from a generally recognized source agreed to by the parties. However, in certain circumstances and under certain of our repurchase agreements our lenders have the sole discretion to determine the value of the Agency RMBS securing our repurchase agreements. In instances where we have agreed to permit our lenders make a determination of the value of the Agency RMBS securing our repurchase agreements, such lenders are required to act in good faith in making such valuation determinations and in certain of these instances are also required to act reasonably in this determination. Our repurchase agreements generally provide that in the event of a margin call we must provide additional securities or cash on the same business day that a margin call is made, if the lender provides us notice prior to the margin notice deadline on such day. As of June 30, 2012, we did not own any Agency RMBS and consequently have no Agency RMBS pledged or subject to any margin calls under our repurchase agreements. However, should we acquire any Agency RMBS, margin calls on our repurchase agreements could result, causing an adverse change in our liquidity position.

In the future, we may also use other sources of financing to fund the acquisition of our targeted assets, including warehouse facilities and other secured and unsecured forms of borrowing. We also sell the senior portion or A-Note and retain the subordinate or junior position in a B-Note or other subordinate loan. We may also seek to raise further equity capital or issue debt securities in order to fund our future asset acquisitions.

For our short-term (one year or less) and long-term liquidity, which include investing and compliance with collateralization requirements under our repurchase agreements (if the pledged collateral decreases in value or in the

event of margin calls created by prepayments of the pledged collateral), we also rely on the cash flow from investments, primarily monthly principal and interest payments to be received on our CMBS and mortgage loans, cash flow from the sale of securities as well as any primary securities offerings authorized by our board of directors.

Based on our current portfolio, leverage ratio and available borrowing arrangements, we believe our assets will be sufficient to enable us to meet anticipated short-term (one year or less) liquidity requirements such as to fund our investment activities, pay fees under our management agreement, fund our distributions to stockholders and pay general corporate expenses. However, a decline in the value of our collateral or an increase in prepayment rates substantially above our expectations could cause a temporary liquidity shortfall due to the timing of the necessary margin calls on the financing arrangements and the actual receipt of the cash related to principal pay-downs. If our cash resources are at any time insufficient to satisfy our liquidity requirements, we may have to sell debt or additional equity securities in a common stock offering. If required, the sale of assets at prices lower than their carrying value would result in losses and reduced income.

Our ability to meet our long-term (greater than one year) liquidity and capital resource requirements will be subject to obtaining additional debt financing and equity capital. Subject to our maintaining our qualification as a REIT, we expect to use a number of sources to finance our investments, including repurchase agreements, warehouse facilities, securitization, commercial paper and term financing CDOs. Such financing will depend on market conditions for capital raises and for the investment of any proceeds. If we are unable to renew, replace or expand our sources of financing on substantially similar terms, it may have an adverse effect on our business and results of operations. Upon liquidation, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our common stock.

We held cash and cash equivalents of approximately $189.1 million and $202.8 million at June 30, 2012 and December 2011, respectively. The net decrease is primarily due to the acquisition of loans and payment of dividends.

Our operating activities provided net cash of approximately $1.0 million, and $11.4 million for the quarters ended June 30, 2012 and 2011, respectively, primarily due to net interest income. Our operating activities provided net cash of approximately $6.7 million, and $14.8 million for the six months ended June 30, 2012 and 2011, respectively, primarily due to net interest income.

Our investing activities resulted in the use of net cash of $33.8 million and net cash $509.1 million for the quarters ended June 30, 2012 and 2011, respectively, primarily from the purchase of loans. Our investing activities provided net cash of $39.4 million and resulted in the use of cash of $508.6 million for the six months ended June 30, 2012 and 2011, respectively. The cash proceeds are primarily from principal payments on loans and loan payoffs for the six months ended June 30, 2012. The use of cash is primarily due to the purchase of loans related to the secondary offering settling in April 2011 for the six months ended June 30, 2012.

Our financing activities for the quarter and six months ended June 30, 2012 resulted in the net use of cash of $35.6 million and $59.7 million, including $20.7 million and $47.5 million paid in dividends to our common shareholders, respectively. Our financing activities for the quarter and six months ended June 30, 2011 resulted in the net proceeds of $504.2 million and $499.9 million, respectively, which includes $634.3 million relating to our secondary offering that settled in April 2011.

At June 30, 2012, we had outstanding financing agreements of $19.2 million and no repurchase agreements. At June 30, 2011, we had no outstanding financing arrangements and repurchase agreements approximating $46.6 million for our Agency RMBS, respectively, which had remaining maturities of approximately 5 years and one month, respectively.

We are not required to maintain any specific debt-to-equity ratio as we believe the appropriate leverage for the particular assets we are financing depends on the credit quality and risk of those assets. At June 30, 2012 our total non-recourse debt was approximately $19.2 million which represented a debt-to-equity ratio of approximately 0.02:1 as compared to December 31, 2011 our total debt was approximately $16.6 million which represented a debt-to-equity ratio of approximately 0.02:1.

Stockholders' Equity

Our charter provides that we may issue up to 1,100,000,000 shares of stock, consisting of up to 1,000,000,000 shares of common stock having a par value of $0.01 per share and up to 100,000,000 shares of preferred stock having a par value of $0.01 per share.

There was no preferred stock issued or outstanding as of June 30, 2012 or December 31, 2011.

Related Party Transactions

Management Agreement

We have entered into a management agreement with FIDAC, pursuant to which FIDAC is entitled to receive a management fee and, in certain circumstances, a termination fee and reimbursement of certain expenses as described in the management agreement. Such fees and expenses do not have fixed payments. The management fee is payable quarterly in arrears, and currently is 1.50% per annum, of our stockholders’ equity (as defined in the management agreement). FIDAC uses the proceeds from its management fee in part to pay compensation to its officers and employees who, notwithstanding that certain of them also are our officers, receive no cash compensation directly from us.

Upon termination without cause, we will pay FIDAC a termination fee. We may also terminate the management agreement with 30-days’ prior notice from our board of directors, without payment of a termination fee, for cause or upon a change of control of Annaly or FIDAC, each as defined in the management agreement. FIDAC may terminate the management agreement if we or any of our subsidiaries become required to register as an investment company under the 1940 Act, with such termination deemed to occur immediately before such event, in which case we would not be required to pay a termination fee. FIDAC may also decline to renew the management agreement by providing us with 180-days’ written notice, in which case we would not be required to pay a termination fee.

We are obligated to reimburse FIDAC for its costs incurred under the management agreement. In addition, the management agreement permits FIDAC to require us to pay for our pro rata portion of rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses of FIDAC incurred in our operation. These expenses are allocated between FIDAC and us based on the ratio of our proportion of gross assets compared to all remaining gross assets managed by FIDAC as calculated at each quarter end. We and FIDAC will modify this allocation methodology, subject to our board of directors’ approval if the allocation becomes inequitable (i.e., if we become very highly leveraged compared to FIDAC’s other funds and accounts). FIDAC has waived its right to request reimbursement from us of these expenses until such time as it determines to rescind that waiver.

Purchases of Common Stock by Affiliates

As of June 30, 2012, Annaly owned approximately 12.4% of our outstanding shares of common stock.

Clearing and Underwriting Fees

We use RCap to clear trades for us and RCap receives customary market-based fees and charges in connection with the provision of such services

Contractual Obligations and Commitments

As of June 30, 2012 we financed a portion of our real estate assets with non-recourse motrtgage loans. The table below provides a summary of our contractual obligations at June 30, 2012 and December 31, 2011.

	June 30, 2012
	Within One Year		One to Three Years		Three to Five Years		Greater Than Five Years		Total
Contractual Obligations	(dollars in thousands)
Loan	$	-	$	216	$	18,934	$	-	$	19,150
Interest expense on loan		670		1,338		1,047		-		3,055
Total	$	670	$	1,554	$	19,981	$	-	$	22,205

	December 31, 2011
	Within One Year		One to Three Years		Three to Five Years		Greater Than Five Years		Total
Contractual Obligations	(dollars in thousands)
Loan	$	-	$	-	$	16,600	$	-	$	16,600
Interest expense on loan		533		1,162		1,143		-		2,838
Total	$	533	$	1,162	$	17,743	$	-	$	19,438

We have agreed to pay the underwriters of our initial public offering $0.15 per share for each share sold in the initial public offering if during any full four calendar quarter period during the 24 full calendar quarters after our initial public offering our Core Earnings (as described below) for any such four-quarter period exceeds an 8% performance hurdle rate (as described below). The performance hurdle rate will be met if during any full four calendar quarter period during the 24 full calendar quarters after the consummation of our initial public offering our Core Earnings for any such four-quarter period exceeds the product of (x) the weighted average of the issue price per share of all public offerings of our common stock, multiplied by the weighted average number of shares outstanding (including any restricted stock units, any restricted shares of common stock and any other shares of common stock underlying awards granted under our equity incentive plans) in such four-quarter period and (y) 8%. Core Earnings is a non-GAAP measure and is defined as GAAP net income (loss) excluding non-cash equity compensation expense, depreciation and amortization (to the extent that we foreclose on any properties underlying our target assets), any unrealized gains, losses or other non-cash items recorded for the period, regardless of whether such items are included in other comprehensive income (loss), or in net income. The amount will be adjusted to exclude one-time events pursuant to changes in GAAP and certain other non-cash charges after discussions between FIDAC and our independent directors and after approval by a majority of our independent directors.

Off-Balance Sheet Arrangements

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Further, we have not guaranteed any obligations of unconsolidated entities nor do we have any commitment or intent to provide funding to any such entities.

Dividends

To qualify as a REIT, we must pay annual dividends to our stockholders of at least 90% of our taxable income. We intend to pay regular quarterly dividends to our stockholders. Before we pay any dividend, whether for U.S. federal income tax purposes or otherwise, which would only be paid out of available cash to the extent permitted under our repurchase facilities, we must first meet both our operating requirements and scheduled debt service on our other debt payable.

During the quarter ended June 30, 2012, we declared dividends to common shareholders totaling $20.7 million or $0.27 per share, which were paid on July 27, 2012.

Capital Expenditures

At June 30, 2012, we had no material commitments for capital expenditures.

Inflation

Virtually all of our assets and liabilities will be interest rate sensitive in nature. As a result, interest rates and other factors will influence our performance far more so than does inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. Our consolidated financial statements are prepared in accordance with GAAP and our distributions will be determined by our board of directors consistent with our obligation to distribute to our stockholders at least 90% of our REIT taxable income on an annual basis in order to maintain our REIT qualification; in each case, our activities and balance sheet are measured with reference to historical cost and/or fair market value without considering inflation.

Other Matters

We calculate that at least 75% of our assets were qualified REIT assets, as defined in the Code, as of June 30, 2012 and December 31, 2011. We also calculate that our revenue qualifies for the 75% source of income test and for the 95% source of income test rules for the quarter ended June 30, 2012 and the year ended December 31, 2011 and for each quarter therein. Consequently, we met the REIT income and asset tests. We also met all REIT requirements regarding the ownership of our common stock and the distribution of our net income. Therefore, as of June 30, 2012 and December 31, 2011, we believe that we qualified as a REIT under the Code.

We, at all times, intend to conduct our business so as not to become regulated as an investment company under the Investment Company Act of 1940, or the 1940 Act. If we were to become regulated as an investment company, then our ability to use leverage would be substantially reduced.

Certain of our subsidiaries, including CreXus S Holdings LLC and certain subsidiaries that we may form in the future, rely on the exemption from registration provided by Section 3(c)(5)(C) of the 1940 Act. Section 3(c)(5)(C) as interpreted by the staff of the Securities and Exchange Commission (or the SEC), requires us to invest at least 55% of our assets in “mortgages and other liens on and interest in real estate” (or Qualifying Real Estate Assets) and at least 80% of our assets in Qualifying Real Estate Assets plus real estate related assets. The assets that we acquire, therefore, are limited by the provisions of the Investment Company Act and the rules and regulations promulgated under the 1940 Act.

On August 31, 2011, the SEC issued a concept release titled “Companies Engaged in the Business of Acquiring Mortgages and Mortgage-Related Instruments” (SEC Release No. IC-29778). Under the concept release, the SEC is reviewing interpretive issues related to the Section 3(c)(5)(C) exemption. If the SEC determines that any of the securities we currently treat as Qualifying Real Estate Assets are not Qualifying Real Estate Assets or otherwise believes we do not satisfy the exemption under Section 3(c)(5)(C), we could be required to restructure our activities or sell certain of our assets. We may be required at times to adopt less efficient methods of financing certain of our mortgage assets and we may be precluded from acquiring certain types of higher yielding mortgage assets. The net effect of these factors will be to lower our net interest income. If we fail to qualify for exemption from registration as an investment company, our ability to use leverage would be substantially reduced, and we would not be able to conduct our business as described. The potential outcomes of the SEC’s actions are unclear as is the SEC’s timetable for its review and actions.

We determined that as of June 30, 2012 and December 31, 2011, we were in compliance with the exemption from registration provided by Section 3(c)(5)(C) of the Investment Company Act as interpreted by the staff of the SEC.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The primary components of our market risk are related to credit risk, interest rate risk, prepayment and market value risk. While we do not seek to avoid risk completely, we believe the risk can be quantified from historical experience and seek to actively manage that risk, to earn sufficient compensation to justify taking those risks and to maintain capital levels consistent with the risks we undertake.

Credit Risk

We are subject to credit risk, which is the risk of loss due to a borrower’s failure to repay principal or interest on a loan, a security or otherwise fail to meet a contractual obligation, in connection with our assets and will face more credit risk on assets we own which are rated below “AAA”. The credit risk related to these assets pertains to the ability and willingness of the borrowers to pay, which is assessed before credit is granted or renewed and periodically reviewed throughout the loan or security term. We believe that residual loan credit quality is primarily determined by the borrowers’ credit profiles and loan characteristics.

FIDAC uses a comprehensive credit review process. FIDAC’s analysis of loans includes borrower profiles, as well as valuation and appraisal data. FIDAC’s resources include a proprietary portfolio management system, as well as third party software systems. FIDAC selects loans for review predicated on risk-based criteria such as loan-to-value, a property’s operating history and loan size. FIDAC rejects loans that fail to conform to our standards. FIDAC accepts only those loans which meet our underwriting criteria. Once we own a loan, FIDAC’s surveillance process includes ongoing analysis and oversight by our third-party servicer and us. Additionally, CMBS, other commercial real estate-related securities and Agency RMBS which we acquire for our portfolio will be reviewed by FIDAC to ensure that the assets we acquire satisfy our risk based criteria. FIDAC’s review of CMBS, other commercial real estate-related securities and Agency RMBS includes utilizing its proprietary portfolio management system. FIDAC’s review of CMBS, other commercial real estate-related securities and Agency RMBS is based on quantitative and qualitative analysis of the risk-adjusted returns such securities present.

Loans are assigned an internal rating of “Performing Loans,” “Watch List Loans” or “Workout Loans.” Performing Loans meet all present contractual obligations. Watch List Loans are defined as performing loans for which the timing of cost recovery is under review. Workout Loans are defined as loans that are either not performing or the Company does not expect to recover its cost basis. The criteria used to asses these internal ratings are net operating income (NOI), debt service coverage (DSCR), property debt yields (net cash flow or NOI divided by the amount of outstanding indebtedness), loan per unit and rent rolls relating to each of its assets, and may consider other factors it deems important. We review market pricing to determine the ability to refinance the asset. We review economic trends, both macro as well as those directly affecting the property, and the supply and demand of competing projects in the sub-market in which the subject property is located. We also evaluate the borrower’s ability to manage and operate the properties.

Interest Rate Risk

Interest rates are highly sensitive to many factors, including fiscal and monetary policies and domestic and international economic and political considerations, as well as other factors. We are subject to interest rate risk in connection with our assets and any related financing obligations. In general, we may finance the acquisition of our targeted assets through financings in the form of borrowings under programs established by the U.S. government, warehouse facilities, bank credit facilities (including term loans and revolving facilities), resecuritizations, securitizations and repurchase agreements. We may mitigate interest rate risk through utilization of hedging instruments, primarily interest rate swap agreements. Interest rate swap agreements are intended to serve as a hedge against future interest rate increases on our borrowings. Another component of interest rate risk is the effect changes in interest rates will have on the market value of the assets we acquire. We face the risk that the market value of our assets will increase or decrease at different rates than that of our liabilities, including our hedging instruments. We may acquire floating rate mortgage assets. These are assets in which the mortgages are typically subject to periodic and lifetime interest rate caps and floors, which limit the amount by which the asset’s interest yield may change during any given period. Our borrowing costs pursuant to our financing agreements, however, will not be subject to similar restrictions. Therefore, in a period of increasing interest rates, interest rate costs on our borrowings could increase without limitation by caps, while the interest-rate yields on our floating rate mortgage assets would effectively be limited. In addition, floating rate mortgage assets may be subject to periodic payment caps that result in some portion of the interest being deferred and added to the principal outstanding. This could result in our receipt of less cash income on such assets than we would need to pay the interest cost on our related borrowings. These factors could lower our net interest income or cause a net loss during periods of rising interest rates, which would negatively affect our financial condition, cash flows and results of operations.

Our analysis of interest rate risk is based on FIDAC’s experience, estimates, models and assumptions. These analyses rely on models which utilize estimates of fair value and interest rate sensitivity. Actual economic conditions or implementation of asset allocation decisions by our management may produce results that differ significantly from the estimates and assumptions used in our models and the projected results shown in this Form 10-Q.

Interest Rate Effect on Net Interest Income

Our operating results depend, in part, on differences between the income from our investments and our borrowing costs. Most of our repurchase agreements would provide financing based on a floating rate of interest calculated on a fixed spread over LIBOR. The fixed spread varies depending on the type of underlying asset which collateralizes the financing. Accordingly, if a portion of our portfolio consisted of floating interest rate assets that would be match-funded utilizing our expected sources of short-term financing, while our fixed interest rate assets will not be match-funded. During periods of rising interest rates, the borrowing costs associated with our investments could tend to increase while the income earned on our fixed interest rate investments may remain substantially unchanged. This will result in a narrowing of the net interest spread between the related assets and borrowings and may even result in losses. Further, during this portion of the interest rate and credit cycles, defaults could increase and result in credit losses to us, which could adversely affect our liquidity and operating results. Such delinquencies or defaults could also have an adverse effect on the spread between interest-earning assets and interest-bearing liabilities. Hedging techniques are partly based on assumed levels of prepayments of fixed-rate and hybrid adjustable-rate debt investments. If prepayments are slower or faster than assumed, the life of the debt investments will be longer or shorter, which would reduce the effectiveness of any hedging strategies we may use and may cause losses on such transactions. Hedging strategies involving the use of derivative securities are highly complex and may produce volatile returns.

Interest Rate Effects on Fair Value

Another component of interest rate risk is the effect changes in interest rates have on the fair value of the assets we acquire. We face the risk that the fair value of our assets will increase or decrease at different rates than that of our liabilities, including our hedging instruments. We primarily assess our interest rate risk by estimating the duration of our assets and the duration of our liabilities. Duration essentially measures the market price volatility of financial instruments as interest rates change. We generally calculate duration using various financial models and empirical data. Different models and methodologies can produce different durations for the same securities.

It is important to note that the impact of changing interest rates on fair value can change significantly when interest rates change beyond 100 basis points from current levels. Therefore, the volatility in the fair value of our assets could increase significantly when interest rates change beyond 100 basis points. In addition, other factors impact the fair value of our interest rate-sensitive investments and hedging instruments, such as the shape of the yield curve, market expectations as to future interest rate changes and other market conditions. Accordingly, in the event of changes in actual interest rates, the change in the fair value of our assets would likely differ from that shown below and such difference might be material and adverse to our stockholders.

Interest Rate Cap Risk

We may invest in adjustable-rate mortgage loans and CMBS. These are mortgages or CMBS in which the underlying mortgages are typically subject to periodic and lifetime interest rate caps and floors, which limit the amount by which the security's interest yield may change during any given period. However, our borrowing costs pursuant to our financing agreements will not be subject to similar restrictions. Therefore, in a period of increasing interest rates, interest rate costs on our borrowings could increase without limitation by caps, while the interest-rate yields on our adjustable-rate mortgage loans and CMBS would effectively be limited. This problem will be magnified to the extent we acquire adjustable-rate CMBS that are not based on mortgages which are fully indexed. In addition, the mortgages or the underlying mortgages in a CMBS may be subject to periodic payment caps that result in some portion of the interest being deferred and added to the principal outstanding. This could result in our receipt of less cash income on our adjustable-rate mortgages or CMBS than we need in order to pay the interest cost on our related borrowings. These factors could lower our net interest income or cause a net loss during periods of rising interest rates, which would harm our financial condition, cash flows and results of operations.

Interest Rate Mismatch Risk

We may fund a portion of our acquisitions of hybrid adjustable-rate mortgages, CMBS and Agency RMBS with borrowings that, after the effect of hedging, have interest rates based on indices and repricing terms similar to, but of somewhat shorter maturities than, the interest rate indices and repricing terms of the mortgages , CMBS and Agency RMBS. Thus, we anticipate that in most cases the interest rate indices and repricing terms of our mortgage assets and our funding sources will not be identical, thereby creating an interest rate mismatch between assets and liabilities. Therefore, our cost of funds would likely rise or fall more quickly than would our earnings rate on assets. During periods of changing interest rates, such interest rate mismatches could negatively impact our financial condition, cash flows and results of operations. To mitigate interest rate mismatches, we may utilize the hedging strategies discussed above. Our analysis of risks is based on FIDAC's experience, estimates, models and assumptions. These analyses rely on models which utilize estimates of fair value and interest rate sensitivity. Actual economic conditions or implementation of investment decisions by our management may produce results that differ significantly from the estimates and assumptions used in our models and the projected results shown in this Form 10-Q.

Our profitability and the value of our portfolio (including interest rate swaps) may be adversely affected during any period as a result of changing interest rates. The following table quantifies the potential changes in net interest income, and portfolio value should interest rates go up or down 25, 50, and 75 basis points, assuming the yield curves of the rate shocks will be parallel to each other and the current yield curve. All changes in income and value are measured as percentage changes from the projected net interest income and portfolio value at the base interest rate scenario. The base interest rate scenario assumes interest rates at June 30, 2012 and various estimates regarding prepayment and all activities are made at each level of rate shock. Actual results could differ significantly from these estimates.

	Projected Percentage Change in			Projected Percentage Change in
Change in Interest Rate	Net Interest Income			Portfolio Fair Value
-75 Basis Points		(0.12	%)(1)		1.78	%
-50 Basis Points		(0.12	%)(1)		1.19	%
-25 Basis Points		(0.12	%)		0.59	%
Base Interest Rate		-			-
+25 Basis Points		0.12	%		(0.61	%)
+50 Basis Points		0.41	%		(1.21	%)
+75 Basis Points		1.11	%		(1.81	%)

(1) Reflects considerations of floors on variable rate loans.

Prepayment Risk

As we receive prepayments of principal on our assets, premiums paid on such assets will be amortized against interest income. In general, an increase in prepayment rates will accelerate the amortization of purchase premiums, thereby reducing the interest income earned on the assets. Conversely, discounts on such investments are accreted into interest income. In general, an increase in prepayment rates will accelerate the accretion of purchase discounts, thereby increasing the interest income earned on our assets. For commercial real estate loans, the risk of prepayment is mitigated by call protection, which includes defeasance, yield maintenance premiums and prepayment charges.

Extension Risk

FIDAC computes the projected weighted-average life of our assets based on assumptions regarding the rate at which the borrowers will prepay the underlying mortgages. In general, when a fixed-rate or hybrid adjustable-rate asset is acquired with borrowings, we may, but are not required to, enter into an interest rate swap agreement or other hedging instrument that effectively fixes our borrowing costs for a period close to the anticipated average life of the fixed-rate portion of the related assets. This strategy is designed to protect us from rising interest rates because the borrowing costs are fixed for the duration of the fixed-rate portion of the related mortgage-backed security.

If prepayment rates decrease in a rising interest rate environment, however, the life of the fixed-rate portion of the related assets could extend beyond the term of the swap agreement or other hedging instrument. This could have a negative impact on our results from operations, as borrowing costs would no longer be fixed after the end of the hedging instrument while the income earned on the hybrid adjustable-rate assets would remain fixed. This situation may also cause the market value of our hybrid adjustable-rate assets to decline, with little or no offsetting gain from the related hedging transactions. In extreme situations, we may be forced to sell assets to maintain adequate liquidity, which could cause us to incur losses.

Market Risk

Market Value Risk

Our available-for-sale securities are reflected at their estimated fair value with unrealized gains and losses excluded from earnings and reported in other comprehensive income (loss). The estimated fair value of these securities fluctuates primarily due to changes in interest rates and other factors. Generally, in a rising interest rate environment, the estimated fair value of these securities would be expected to decrease; conversely, in a decreasing interest rate environment, the estimated fair value of these securities would be expected to increase. As market volatility increases or liquidity decreases, the fair value of our assets may be adversely impacted.

Real Estate Risk

Commercial property values are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors); local real estate conditions (such as an oversupply of housing); changes or continued weakness in specific industry segments; construction quality, age and design; demographic factors; and retroactive changes to building or similar codes. In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay our loans, which could also cause us to suffer losses.

Risk Management

To the extent consistent with maintaining our REIT status, we will seek to manage risk exposure to protect our portfolio of commercial mortgage loans, CMBS, commercial real estate related securities, Agency RMBS and related debt against the credit and interest rate risks. We generally seek to manage our risk by:

●

analyzing the borrower profiles, as well as valuation and appraisal data, of the loans we acquire. FIDAC’s resources include a proprietary portfolio management system, as well as third party software systems;

●

using FIDAC’s proprietary portfolio management system to review our CMBS, Agency RMBS and other commercial real estate-related securities;

●

monitoring and adjusting, if necessary, the reset index and interest rate related to our targeted assets and our financings;

●

attempting to structure our financings agreements to have a range of different maturities, terms, amortizations and interest rate adjustment periods;

●

using derivatives, financial futures, swaps, options, caps, floors and forward sales to adjust the interest rate sensitivity of our targeted assets and our borrowings;

●

using securitization financing to lower average cost of funds relative to short-term financing vehicles further allowing us to receive the benefit of attractive terms for an extended period of time in contrast to short term financing and maturity dates of the assets included in the securitization; and

●

actively managing, on an aggregate basis, the interest rate indices, interest rate adjustment periods, and gross reset margins of our targeted assets and the interest rate indices and adjustment periods of our financings.

Our efforts to manage our assets and liabilities are concerned with the timing and magnitude of the repricing of assets and liabilities. We attempt to control risks associated with interest rate movements. Methods for evaluating interest rate risk include an analysis of our interest rate sensitivity "gap", which is the difference between interest-earning assets and interest-bearing liabilities maturing or repricing within a given time period. A gap is considered positive when the amount of interest-rate sensitive assets exceeds the amount of interest-rate sensitive liabilities. A gap is considered negative when the amount of interest-rate sensitive liabilities exceeds interest-rate sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income, while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income, while a positive gap would tend to affect net interest income adversely. Because different types of assets and liabilities with the same or similar maturities may react differently to changes in overall market rates or conditions, changes in interest rates may affect net interest income positively or negatively even if an institution were perfectly matched in each maturity category.

The following table sets forth the estimated maturity or repricing of our interest-earning assets and interest-bearing liabilities at June 30, 2012. The amounts of assets and liabilities shown within a particular period were determined in accordance with the contractual terms of the assets and liabilities, except adjustable-rate loans, are included in the period in which their interest rates are first scheduled to adjust and not in the period in which they mature and include the effect of the interest rate swaps. The interest rate sensitivity of our assets and liabilities in the following table could vary substantially based on actual prepayment experience.

	Within 3			3-12			1 Year to			Greater than
	Months			Months			3 Years			3 Years			Total

Rate sensitive assets, principal balance	$	243,331		$	-		$	150,482		$	303,504		$	697,317
Cash equivalents		189,128			-			-			-			189,128
Total rate sensitive assets		389,059			-			150,482			303,504			886,445

Rate sensitive liabilities		2,550			-			-			16,600			19,150

Interest rate sensitivity gap	$	429,909		$	-		$	150,482		$	284,354		$	867,295

Cumulative rate sensitivity gap	$	429,909		$	429,909		$	580,391		$	867,295

Cumulative interest rate sensitivity
gap as a percentage of total rate
sensitive assets		43.50	%		43.50	%		65.47	%		97.84	%

Our analysis of risks is based on our manager's experience, estimates, models and assumptions. These analyses rely on models which utilize estimates of fair value and interest rate sensitivity. Actual economic conditions or implementation of investment decisions by our manager may produce results that differ significantly from the estimates and assumptions used in our models and the projected results shown in the above tables and in this Form 10-Q. These analyses contain certain forward-looking statements and are subject to the safe harbor statement set forth under the heading, "Special Note Regarding Forward-Looking Statements."

Item 4. CONTROLS AND PROCEDURES

Our management, including our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, reviewed and evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Securities Exchange Act”)) as of the end of the period covered by this quarterly report. Based on that review and evaluation, the CEO and CFO have concluded that our current disclosure controls and procedures, as designed and implemented, (1) were effective in ensuring that information regarding the Company and its subsidiaries is made known to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure and (2) were effective in providing reasonable assurance that information the Company must disclose in its periodic reports under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods prescribed by the SEC’s rules and forms.

There have been no changes in our “internal control over financial reporting” (as defined in Rule 13a-15(f) under the Securities Exchange Act) that occurred during the period covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

From time to time, we may be involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our consolidated financial statements.

Item 1A. RISK FACTORS

There have been no material changes to the risk factors discussed in Part I, “Item 1A. Risk Factors” in our most recent Annual Report on Form 10-K. The materialization of any risks and uncertainties identified in our forward looking statements contained in this report together with those previously disclosed in the Form 10-K or those that are presently unforeseen could result in significant adverse effects on our financial condition, results of operations and cash flows. See Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Special Note Regarding Forward-Looking Statements” in this quarterly report on Form 10-Q or our most recent Annual Report on Form 10-K.

Item 6. EXHIBITS

Exhibits:

The exhibits required by this item are set forth on the Exhibit Index attached hereto

EXHIBIT INDEX

Exhibit Number	Description
3.1	Articles of Amendment and Restatement of CreXus Investment Corp. (filed as Exhibit 3.1 to the Company’s Registration Statement on Amendment No. 5 to Form S-11 (File No. 333-160254) filed on September 14, 2009 and incorporated herein by reference).
3.2	Amended and Restated Bylaws of CreXus Investment Corp. (filed as exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q (filed on November 6, 2009) and incorporated herein by reference).
4.1	Specimen Common Stock Certificate of CreXus Investment Corp. (filed as Exhibit 4.1 to the Company’s Registration Statement on Amendment No. 3 to Form S-11 (File No. 333-160254) filed on August 31, 2009 and incorporated herein by reference).
31.1	Certification of Kevin Riordan, Chief Executive Officer and President of the Registrant, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Daniel Wickey, Chief Financial Officer of the Registrant, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Kevin Riordan, Chief Executive Officer and President of the Registrant, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Daniel Wickey, Chief Financial Officer of the Registrant, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit 101.INS XBRL	Instance Document*
Exhibit 101.SCH XBRL	Taxonomy Extension Schema Document*
Exhibit 101.CAL XBRL	Taxonomy Extension Calculation Linkbase Document*
Exhibit 101.DEF XBRL	Additional Taxonomy Extension Definition Linkbase Document Created*
Exhibit 101.LAB XBRL	Taxonomy Extension Label Linkbase Document*
Exhibit 101.PRE XBRL	Taxonomy Extension Presentation Linkbase Document*

* Submitted electronically herewith. Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Financial Condition at June 30, 2012 (Unaudited) and December 31, 2011 (Derived from the audited consolidated statement of financial condition at December 31, 2011); (ii) Consolidated Statements of Comprehensive Income (Unaudited) for the quarters and six months ended June 30, 2012 and 2011; (iii) Consolidated Statements of Stockholders' Equity (Unaudited) for the six months ended June 30, 2012 and 2011; (iv) Consolidated Statements of Cash Flows (Unaudited) for the quarters and six months ended June 30, 2012 and 2011; and (v) Notes to Consolidated Financial Statements (Unaudited) for the quarter ended June 30, 2012. Users of this data are advised pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities and Exchange Act of 1934, and otherwise is not subject to liability under these sections.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	CREXUS INVESTMENT CORP.


	By:	/s/ Kevin Riordan
		Kevin Riordan
		Chief Executive Officer and President (Principal Executive Officer)
		August 8, 2012

	By:	/s/ Daniel Wickey
		Daniel Wickey
		Chief Financial Officer
		August 8, 2012

	By:	/s/ Jack DeCicco
		Jack DeCicco, CPA
		Chief Accounting Officer
		August 8, 2012

MARYLAND	26-2652391
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

Class	Outstanding at August 8, 2012
Common Stock, $.01 par value	76,630,528

Part I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Statements of Financial Condition at June 30, 2012 (Unaudited) and December 31, 2011 (Derived from the audited financial statements at December 31, 2011)			1

Consolidated Statements of Comprehensive Income for the Quarters and Six Months Ended June 30, 2012 and 2011 (Unaudited)			2

Consolidated Statement of Stockholders’ Equity for the Six Months Ended June 30, 2012 and 2011 (Unaudited)			3

Consolidated Statements of Cash Flows for the Quarters and Six Months Ended June 30, 2012 and 2011 (Unaudited)			4

Notes to Consolidated Financial Statements (Unaudited)			5

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			28

Item 3. Quantitative and Qualitative Disclosures about Market Risk			44

Item 4. Controls and Procedures			49


Part II. OTHER INFORMATION

Item 1. Legal Proceedings			50

Item 1A. Risk Factors			50

Item 6. Exhibits			51

SIGNATURES			52

	June 30, 2012		December 31, 2011
	(unaudited)			(1)
Assets:
Cash and cash equivalents	$	189,128	$	202,814
Principal receivable from servicer		11,429		-
Commercial real estate loans net of allowance for loan losses ($0 and $369, respectively)
Senior		123,845		374,348
Subordinate		38,720		71,517
Mezzanine		513,913		306,936
Real estate held for sale		44,071		-
Investment in real estate, net		34,196		33,196
Intangible assets, net		5,306		-
Rents receivable		154		32
Accrued interest receivable		4,140		2,608
Other assets		2,527		1,420
Total assets	$	967,429	$	992,871

Liabilities:
Mortgages payable	$	19,150	$	16,600
Participation sold (non-recourse)		-		14,755
Accrued interest payable		-		6
Accounts payable and other liabilities		5,809		4,048
Dividends payable		20,692		26,817
Intangible liabilities, net		1,969		-
Investment management fees payable to affiliate		3,426		3,488
Total liabilities		51,046		65,714

Stockholders' Equity:
Common stock, par value $0.01 per share, 1,000,000,000
authorized, 76,630,528 and 76,620,112 shares issued and outstanding, respectively		766		766
Additional paid-in-capital		890,862		890,757
Accumulated earnings		24,755		35,634
Total stockholders' equity		916,383		927,157
Total liabilities and stockholders' equity	$	967,429	$	992,871

(1) Derived from the audited financial statements at December 31, 2011.
See notes to consolidated financial statements.

					Accumulated
	Common		Additional		Other
	Stock Par		Paid-in		Comprehensive			Accumulated
	Value		Capital		Income			Earnings			Total
Balance, December 31, 2010	$	181	$	257,014	$	10,475		$	365		$	268,035
Net income		-		-		-			26,687			26,687
Other comprehensive income		-		-		(7,727	)		-			(7,727	)
Net proceeds from common stock
offering, with affiliates		50		57,450		-			-			57,500
Net proceeds from common stock												-
follow-on offerings		535		576,277		-			-			576,812
Common dividends declared, $0.48 per share		-		-		-			(23,323	)		(23,323	)
Balance, June 30, 2011	$	766	$	890,741	$	2,748		$	3,729		$	897,984

Balance, December 31, 2011	$	766	$	890,757	$	-		$	35,634		$	927,157
Net income		-		-		-			30,498			30,498
Restricted stock grants		-		105		-			-			105
Common dividends declared, $0.54 per share		-		-		-			(41,377	)		(41,377	)
Balance, June 30, 2012	$	766	$	890,862	$	-		$	24,755		$	916,383

	For the Quarters Ended						For the Six Months Ended
	June 30, 2012			June 30, 2011			June 30, 2012			June 30, 2011
	(unaudited)			(unaudited)			(unaudited)			(unaudited)

Net interest income:
Interest income	$	17,678		$	13,055		$	40,904		$	20,498
Interest expense		(310	)		(742	)		(670	)		(2,274	)
Servicing fees		(114	)		(154	)		(229	)		(217	)
Net interest income		17,254			12,159			40,005			18,007

Other income:
Realized loss on sale of loan		(525	)		-			(525	)		-
Realized gains on sales of investments		-			13,925			-			13,925
Miscellaneous fee income		127			-			642			-
Rental income		811			-			1,523			-
Total other income		413			13,925			1,640			13,925

Other expenses:
Provision for loan losses, net		-			-			2,803			127
Management fee		3,426			3,345			6,897			4,024
General and administrative expenses		1,180			614			3,890			1,093
Amortization expense		106			-			229			-
Depreciation expense		270			-			545			-
Total other expenses		4,982			3,959			14,364			5,244

Income before income tax		12,685			22,125			27,281			26,688
Income tax		32			-			33			1
Net income from continuing operations	$	12,653		$	22,125		$	27,248		$	26,687

Net (loss) income from discontinued operations (net of tax expense of $1,564, $0, $1,859 and $0, respectively)		(46	)		-			1,476			-
Gain on sale from discontinued operations		1,774			-			1,774			-

Net Income	$	14,381		$	22,125		$	30,498		$	26,687

Net income per share-basic and diluted, continuing operations	$	0.17		$	0.29		$	0.36		$	0.55
Net income per share-basic and diluted, discontinued operations		-			-			0.02			-
Net income per share-basic and diluted, gain on sale from discontinued operations		0.02			-			0.02			-
Net income per share-basic and diluted	$	0.19		$	0.29		$	0.40		$	0.55
Dividend declared per share of common stock	$	0.27		$	0.25		$	0.54		$	0.48
Weighted average number of shares outstanding-basic and diluted		76,624,462			76,466,266			76,622,287			48,365,968
Comprehensive income:
Net income	$	14,381		$	22,125		$	30,498		$	26,687
Other comprehensive income:
Unrealized gains on securities available-for-sale		-			5,557			-			6,198
Reclassification adjustment for realized gains included in net income		-			(13,925	)		-			(13,925	)
Total other comprehensive income		-			(8,368	)		-			(7,727	)
Comprehensive income	$	14,381		$	13,757		$	30,498		$	18,960

	For the Quarter ended						For the Six Months ended
	June 30, 2012 (unaudited)			June 30, 2011 (unaudited)			June 30, 2012 (unaudited)			June 30, 2011 (unaudited)

Cash Flows From Operating Activities:
Net income	$	14,381		$	22,125		$	30,498		$	26,687
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Net amortization of investment premiums and discounts		(2,626	)		(1,094	)		(13,692	)		(1,217	)
Realized gain on sale of investments		(1,774	)		(13,925	)		(1,774	)		(13,925	)
Realized loss on sale of loan		525			-			525			-
Provision for loan losses, net		-			-			2,803			127
Unrealized loss on interest rate swap		40			-			81			-
Restricted stock grants		105			-			105			-
Amortization expense		106			-			229			-
Depreciation expense		270			-			545			-
Changes in operating assets:
Decrease (increase) in accrued interest receivable		(631	)		(190	)		(1,532	)		(726	)
Decrease (increase) in principal receivable from servicer		(11,429	)		-			(11,429	)		-
Decrease (increase) in other assets		1,012			4,300			(1,148	)		1,259
Decrease (increase) in straight-line rent		(66	)		-			(121	)		-
Changes in operating liabilities:
Increase (decrease) in accounts payable and other liabilities		1,184			(2,191	)		1,632			201
Increase (decrease) in investment management fee payable to affiliate		(45	)		2,665			(63	)		2,695
Increase (decrease) in accrued interest payable		(48	)		(293	)		(6	)		(272	)
Net cash provided by (used in) operating activities		1,004			11,397			6,653			14,829
Cash Flows From Investing Activities:
Mortgage-backed securities portfolio:
Purchases		-			(209,923	)		-			(209,923	)
Sales		-			214,771			-			214,771
Principal payments		-			15,026			-			15,309
Loans and preferred equity held for investment portfolio:
Purchases net of discount/loan originations		(150,000	)		(545,304	)		(266,077	)		(545,304	)
Sales		49,475			-			49,475			-
Principal payments		56,236			16,359			250,513			16,558
Real estate portfolio:
Purchases of real estate		-			-			(5,050	)		-
Sales		10,508			-			10,508			-
Net cash provided by (used in) investing activities		(33,781	)		(509,071	)		39,369			(508,589	)
Cash Flows From Financing Activities:
Net proceeds (expense) from common stock offerings		-			576,812			-			576,812
Net proceeds from common stock offering with affiliates		-			57,500			-			57,500
Proceeds from repurchase agreements		-			46,550			-			46,550
Proceeds from collateralized mortgage borrowings		-			-			2,550			-
Payments on structured financing		(14,898	)		-			(14,898	)		-
Payments on secured financing		-			(172,469	)		-			(172,837	)
Proceeds from secured financing		-			-			144			-
Dividends paid		(20,687	)		(4,168	)		(47,504	)		(8,154	)
Net cash (used in) provided by financing activities		(35,585	)		504,225			(59,708	)		499,871
Net increase (decrease) in cash and cash equivalents		(68,362	)		6,551			(13,686	)		6,111
Cash and cash equivalents at beginning of period		257,490			30,579			202,814			31,019
Cash and cash equivalents at end of period	$	189,128		$	37,130		$	189,128		$	37,130
Supplemental disclosure of cash flow information:
Interest paid	$	393		$	1,034		$	698		$	1,756
Taxes paid	$	1,596		$	1		$	1,597		$	1
Non cash investing activities:
Reclassification of loans to real estate upon deed in lieu of foreclosure		-		$	-		$	52,800			-
Rate and term financing	$	30,000		$	-		$	45,000			-
Net change in unrealized losses on available-for-sale securities	$	-			(8,368	)	$	-		$	(7,727	)
Non cash financing activities:
Common dividends declared, not yet paid	$	20,692		$	19,155		$	20,692		$	19,155

	June 30, 2012							December 31, 2011

					Percentage							Percentage
	Outstanding		Carrying		of Loan			Outstanding		Carrying		of Loan
	Principal		Value		Portfolio			Principal		Value		Portfolio
	(dollars in thousands)
First mortgages	$	138,595	$	123,845		19.9	%	$	439,795	$	374,348		52.5	%
Subordinate notes		41,576		38,720		6.0	%		79,279		71,517		9.5	%
Mezzanine loans		517,146		513,913		74.1	%		317,915		306,936		38.0	%
Total	$	697,317	$	676,478		100.0	%	$	836,989	$	752,801		100.0	%

	June 30, 2012												June 30, 2011
	First			Subordinate			Mezzanine						First			Subordinated			Mezzanine
	Mortgages			Notes			Loans			Total			Mortgages			Notes			Loans			Total
	(dollars in thousands)
Beginning principal balance, net of allowance for loan losses	$	439,712		$	79,208		$	317,697		$	836,617		$	38,152		$	42,007		$	95,109		$	175,268
Purchases, principal balance		-			8,501			260,600			269,101			473,406			65,738			151,611		$	690,755
Remaining discount		(14,746	)		(2,856	)		(3,234	)		(20,836	)		(124,631	)		(14,631	)		(12,474	)	$	(151,736	)
Principal payments		(185,112	)		(15,032	)		(50,369	)		(250,513	)		(2,418	)		(242	)		(13,898	)	$	(16,558	)
Principal write-off		(31,493	)		(6,405	)		(10,999	)		(48,897	)		-			-			-			-
Sales and transfers to real estate held for sale		(84,595	)		(24,768	)		-			(109,363	)		-			-			-			-
		123,766			38,648			513,695			676,109			384,509			92,872			220,348			697,729
(Allowance) recovery for loan losses		79			72			218			369			(40	)		(28	)		(44	)		(112	)
Commercial mortgage loans held for investment	$	123,845		$	38,720		$	513,913		$	676,478		$	384,469		$	92,844		$	220,304		$	697,617

	Accretable Yield
	June 30, 2012						June 30, 2011
	Accretable Yield			Carrying Value of the Loans			Accretable Yield			Carrying Value of the Loans
	(dollars in thousands)
Beginning balance	$	13,259		$	257,065		$	-		$	-
Additions		-			-			50,581			296,949
Accretion		(8,114	)		8,114			(199	)		199
Collections		-			(169,000	)		-			(721	)
Disposition/transfers		(1,126	)		(53,865	)		-			-
Decrease in cashflow estimates		(2,933	)		-			-			-
Reclassifications from nonaccretable
difference		-			-			-			-
Ending balance	$	1,086		$	42,314		$	50,382		$	296,427

June 30, 2012
Geographic Distribution						Property
Top 5 States	Remaining Balance		% of Loans (1)			Count
	(dollars in thousands)
Texas	$	108,338		15.5	%		103
California		92,918		13.3	%		72
Illinois		86,078		12.3	%		96
New York		77,296		11.1	%		8
Georgia		56,341		8.1	%		50


December 31, 2011
Geographic Distribution						Property
Top 5 States	Remaining Balance		% of Loans (1)			Count
	(dollars in thousands)
New York	$	215,337		25.7	%		25
California		195,401		23.3	%		83
Texas		79,717		9.5	%		59
Georgia		68,060		8.1	%		6
Illinois		54,512		6.5	%		75

(1) Percentages based on remaining principal balance of the debt portfolio of $697 and $836 million for June 30, 2012 and December 31, 2011, respectively.

June 30, 2012

Property Type	Number of Assets		Outstanding Principal		% of Total
	(dollars in thousands)
Retail		7		246,981		35	%
Office		9		221,388		32	%
Hotel		6		160,499		23	%
Industrial		1		50,000		7	%
Condominium		2		18,449		3	%
Total		25	$	697,317		100	%

December 31, 2011

Property Type	Number of Assets		Outstanding Principal		% of Total
	(dollars in thousands)
Hotel		9	$	343,606		41	%
Office		14		174,621		21	%
Retail		6		160,662		19	%
Multi-family		2		132,000		16	%
Condominium		2		26,100		3	%
Total		33	$	836,989		100	%

June 30, 2012
			Percentage			Internal Ratings
	Outstanding		of Loan			Performing		Watch List		Workout
Investment type	Principal		Portfolio			Loans		Loans		Loans
	(dollars in thousands)
First mortgages	$	138,595		19.9	%	$	125,622	$	12,973	$	-
Subordinate notes		41,576		6.0	%		41,576		-		-
Mezzanine loans		517,146		74.1	%		517,146		-		-
	$	697,317		100.0	%	$	684,344	$	12,973	$	-

December 31, 2011
			Percentage			Internal Ratings
	Outstanding		of Loan			Performing		Watch List		Workout
Investment type	Principal		Portfolio			Loans		Loans		Loans
	(dollars in thousands)
First mortgages	$	439,795		52.5	%	$	398,815	$	-	$	40,980
Subordinate notes		79,279		9.5	%		56,608		-		22,671
Mezzanine loans		317,915		38.0	%		317,915		-		-
	$	836,989		100.0	%	$	773,338	$	-	$	63,651

	As of
	June 30, 2012			December 31, 2011
	(dollars in thousands)

Land	$	7,490		$	7,289
Buildings and improvements		27,306			25,961
Subtotal		34,796			33,250
Less: Accumulated depreciation		(600	)		(54	)
Investments in real estate, net	$	34,196		$	33,196



Date of acquisition	Type	Location	Purchase Price
			(dollars in thousands)
November 2011	Warehouse/distribution center	Phoenix, AZ	$	33,250
February 2012	Warehouse	Las Vegas, NV		5,050
			$	38,300

Category		Term
Building		35-40 years
Site improvements		2-7 years

	Business Combinations Actual				Pro Forma Consolidated
	For the quarter ended		For the six months ended		For the quarter ended				For the six months ended
	June 30, 2012		June 30, 2012		June 30, 2012		June 30, 2011		June 30, 2012		June 30, 2011
	(dollars in thousands, except per share data)
Revenues	$	811	$	1,523	$	17,667	$	26,688	$	41,717	$	33,140
Net income	$	189	$	316	$	14,381	$	22,353	$	30,521	$	27,072
Net income per common share - basic/diluted	$	0.00	$	0.00	$	0.19	$	0.29	$	0.40	$	0.56

Date	Type	Location	Carrying Value of Loan at Time of REO
			(dollars in thousands)
February 2012	Hotels	Various	$	55,973
Total			$	55,973

	Quarter ended June 30, 2012			Six months ended June 30, 2012
Revenue:	(dollars in thousands)
Operating income	$	6,695		$	13,374
Total Revenue		6,695			13,374

Expenses:
Property operating expenses	$	5,177			10,039
Total Expenses	$	5,177		$	10,039

Pretax earnings	$	1,518		$	3,335

Income tax		1,564			1,859

Total (loss) income from discontinued operations	$	(46	)	$	1,476

	June 30, 2012
	Level 1		Level 2		Level 3
	(dollars in thousands)
Liabilities:
Interest Rate Swap	$	-	$	81	$	-

			June 30, 2012				December 31, 2011
			Carrying Value		Fair Value		Carrying Value		Fair Value
	Level in Fair Value Hierarchy		(dollars in thousands)
Financial assets:
Cash and cash equivalents(1)		1	$	189,128	$	189,128	$	202,814	$	202,814
Commercial real estate loans:
Senior		3		123,845		128,742		374,348		379,877
Subordinate		3		38,720		42,546		71,517		76,115
Mezzanine		3		513,913		525,485		306,936		316,157

Financial liabilities:
Mortgage payable		2		19,150		19,150		16,600		16,600
Interest rate swap liability		2		81		81		-		-

(1) Carrying value approximates fair value due to the short-term maturities of these items.

				Outstanding Balance
Maturity	Type	Fixed interest rate/spread over 1 Month LIBOR (1)		June 30, 2012		December 31, 2011
				(dollars in thousands)
2016	Fixed		3.50	$	16,600	$	16,600
2017 (2)	Variable		2.24		2,550		-
				$	19,150	$	16,600

(1) Applicable for variable rate loans
(2) The Company has entered into an interest rate swap to hedge against increases in interest rates. Refer to footnote 14 for more detail.

	Quarter ended June 30, 2012		Quarter ended June 30, 2011		Six months ended June 30, 2012		Six months ended June 30, 2011
	(dollars in thousands)				(dollars in thousands)
Numerator:
Net income	$	14,381	$	22,125	$	30,498	$	26,687
Effect of dilutive securities:		-		-		-		-
Dilutive net income available to stockholders	$	14,381	$	22,125	$	30,498	$	26,687

Denominator:
Average shares available to common stockholders		76,624,462		76,466,266		76,622,287		48,365,968
Weighted Average Dilutive Shares		-		-		-		-
Net income per average share attributable to common stockholders - Basic/Diluted	$	0.19	$	0.29	$	0.40	$	0.55

	For the Quarter Ended June 30, 2012

	Corporate/ Unallocated			Debt Investments			Real Estate Investments			Inter-segment Transactions			Consolidated Total
							(dollars in thousands)

Interest income	$	-		$	18,630		$	-		$	(952	)	$	17,678
Interest expense		-			(103	)		(207	)		-			(310	)
Servicing fees		-			(108	)		(6	)		-			(114	)
Net interest income		-			18,419			(213	)		(952	)		17,254

Realized loss on sale of loan		-			(525	)		-			-			(525	)
Miscellaneous fee income		-			127			-			-			127
Rental income		-			-			811			-			811
Total other income		-			(398	)		811			-			413

Other expenses:
Management fee		3,426			-			-			-			3,426
General and administrative expenses		1,157			(254	)		277			-			1,180
Amortization Expense		-			-			106			-			106
Depreciation expense		-			-			270			-			270
Total other expenses		4,583			(254	)		653			-			4,982


Net (loss) income before income tax		(4,583	)		18,275			(55	)		(952	)		12,685

Income tax		(1	)		-			(31	)		-			(32	)

(Loss) income from continuing operations		(4,584	)		18,275			(86	)		(952	)		12,653

Net (loss) income from discontinued operations (net of tax expense of $1,564)		-			-			(998	)		952			(46	)
Gain on sale from discontinued operations		-			-			1,774			-			1,774

Net (loss) income	$	(4,584	)	$	18,275		$	690		$	-		$	14,381

Total assets	$	574		$	926,963		$	97,700		$	(57,808	)	$	967,429

	For the Six Months Ended June 30, 2012

	Corporate/ Unallocated			Debt Investments			Real Estate Investments			Inter-segment Transactions			Consolidated Total
							(dollars in thousands)

Interest income	$	-		$	42,494		$	-		$	(1,590	)	$	40,904
Interest expense		-			(277	)		(393	)		-			(670	)
Servicing fees		-			(223	)		(6	)	$	-			(229	)
Net interest income		-			41,994			(399	)		(1,590	)		40,005

Realized loss on sale of loan		-			(525	)		-			-			(525	)
Miscellaneous fee income		-			642			-			-			642
Rental income		-			-			1,523			-			1,523
Total other income		-			117			1,523			-			1,640

Other expenses:
Provision loan losses, net		-			(369	)		3,172			-			2,803
Management fee		6,897			-			-			-			6,897
General and administrative expenses		2,387			1,118			385			-			3,890
Amortization Expense		-			-			229			-			229
Depreciation expense		-			-			545			-			545
Total other expenses		9,284			749			4,331			-			14,364


Net (loss) income before income tax		(9,284	)		41,362			(3,207	)		(1,590	)		27,281

Income tax		(2	)		-			(31	)		-			(33	)

(Loss) income from continuing operations		(9,286	)		41,362			(3,238	)		(1,590	)		27,248

Net (loss) income from discontinued operations (net of tax expense of $1,859)		-			-			(114	)		1,590			1,476
Gain on sale from discontinued operations		-			-			1,774			-			1,774

Net (loss) income	$	(9,286	)	$	41,362		$	(1,578	)	$	-		$	30,498

Total assets	$	574		$	926,963		$	97,700		$	(57,808	)	$	967,429

	For the Six Months Ended June 30, 2011
	Corporate/ Unallocated			Debt Investments			Real Estate Investments		Inter-segment Transactions		Consolidated Total
							(dollars in thousands)

Interest income	$	-		$	20,498		$	-	$	-	$	20,498
Interest expense		-			(2,274	)		-		-		(2,274	)
Servicing fees		-			(217	)		-		-		(217	)
Net interest income		-			18,007			-		-		18,007

Realized gains on sales of investments		-			13,925			-		-		13,925
Rental income		-			-			-		-		-
Miscellaneous fee income		-			-			-		-		-
Total other income		-			13,925			-		-		13,925

Other expenses:
Provision loan losses, net		-			127			-		-		127
General and administrative		1,006			87			-		-		1,093
Management fee		4,024			-			-		-		4,024
Total other expenses		5,030			214			-		-		5,244

Net (loss) income before income tax		(5,030	)		31,718			-		-		26,688

Income tax		(1	)		-			-		-		(1	)

Net (loss) income	$	(5,031	)	$	31,718		$	-	$	-	$	26,687

Total assets	$	266		$	969,625		$	-	$	-	$	969,891