CreXus Investment Corp. - FORM 10-Q

Attached files

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EX-32.1 - EXHIBIT 32.1 - CreXus Investment Corp.	a6498736ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - CreXus Investment Corp.	a6498736ex31-2.htm
EX-32.2 - EXHIBIT 32.2 - CreXus Investment Corp.	a6498736ex32-2.htm
EX-31.1 - EXHIBIT 31.1 - CreXus Investment Corp.	a6498736ex31-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 2010

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM _______________ TO _________________

COMMISSION FILE NUMBER: 1-34451

CREXUS INVESTMENT CORP.

(Exact name of Registrant as specified in its Charter)

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

1211 AVENUE OF THE AMERICAS, SUITE 2902

NEW YORK, NEW YORK

(Address of principal executive offices)

10036

(Zip Code)

(646) 829-0160

(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all documents and reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:

Yes þ No o

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer o Non-accelerated filer þ Smaller reporting company o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date:

Class	Outstanding at November 5, 2010
Common Stock, $.01 par value	18,120,112

CREXUS INVESTMENT CORP.

FORM 10-Q

TABLE OF CONTENTS

Part I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Statements of Financial Condition at September 30, 2010 (unaudited) and December 31, 2009 (Derived from the audited statement of financial condition at December 31, 2009)	1

Consolidated Statements of Operations and Comprehensive Income (Loss) for the Quarter and Nine Months Ended September 30, 2010 (unaudited) and the Period Commencing September 22, 2009 through December 31, 2009 (Derived from the audited statement of operations and comprehensive income (loss) for the period commencing September 22, 2009 through December 31, 2009)	2

Consolidated Statement of Stockholders’ Equity for the Nine Months Ended September 30, 2010 (Unaudited)	3

Consolidated Statements of Cash Flows for the Quarter and Nine Months Ended September 30, 2010 (Unaudited) and the Period Commencing September 22, 2009 through December 31, 2009 (Derived from the audited statement of cashflow for the period commencing September 22, 2009 through December 31, 2009)	4

Notes to Consolidated Financial Statements (Unaudited)	5

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

Item 3. Quantitative and Qualitative Disclosures about Market Risk	42

Item 4T. Controls and Procedures	47


Part II. OTHER INFORMATION

Item 1. Legal Proceedings	48

Item 1A.Risk Factors	48

Item 6. Exhibits	49

SIGNATURES	50

CERTIFICATIONS	51

PART I. FINANCIAL INFORMATION

Item 1. CONSOLIDATED FINANCIAL STATEMENTS:

CREXUS INVESTMENT CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except per share data)

	September 30, 2010			December 31,
Assets:	(Unaudited)			2009 (1)
Cash and cash equivalents	$	53,475		$	212,133
Commercial mortgage-backed securities, at fair value		228,509			30,913
Commercial mortgage loans, mezzanine loans and preferred equity, net of allowance for loan losses ($115 and $2, respectively)		166,006			39,998
Accrued interest receivable		2,385			578
Other assets		829			685
Total assets	$	451,204		$	284,307

Liabilities:
Secured financing agreements	$	173,060		$	25,579
Accrued interest payable		273			26
Accounts payable and other liabilities		2,780			2,521
Dividends payable		3,080			-
Investment management fees payable to affiliate		356			354
Total liabilites		179,549			28,480


Stockholders' Equity:
Common stock, par value $0.01 per share, 1,000,000,000 authorized, 18,120,112 issued and outstanding		181			181
Additional paid-in-capital		257,006			257,029
Accumulated other comprehensive income (loss)		14,568			(373	)
Accumulated deficit		(100	)		(1,010	)
Total stockholders' equity		271,655			255,827
Total liabilities and stockholders' equity	$	451,204		$	284,307


(1) Derived from the audited consolidated statement of financial condition at December 31, 2009. See notes to consolidated financial statements.

CREXUS INVESTMENT CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(dollars in thousands, except share and per share data)
	For the Quarter ended September 30, 2010 (unaudited)		For the Nine Months ended September 30, 2010 (unaudited)			For the period commencing September 22, 2009 through December 31, 2009 (1)

Net interest income:
Interest income	$	5,708	$	13,443		$	325
Interest expense		1,569		3,710			26
Net interest income		4,139		9,733			299

Realized gains on sale of investments		-		623			-

Other expenses:
Management fee		356		994			354
Provision for loan losses		63		113			2
General and administrative expenses		505		1,813			951
Total other expenses		924		2,920			1,307

Net income (loss) before income tax		3,215		7,436			(1,008	)
Income tax		-		1			1
Net income (loss)	$	3,215	$	7,435		$	(1,009	)

Net income (loss) per share-basic and diluted	$	0.18	$	0.41		$	(0.06	)
Weighted average number of shares outstanding- basic and diluted		18,120,112		18,120,112			18,120,112

Comprehensive income:
Net income (loss)	$	3,215	$	7,435		$	(1,009	)
Other comprehensive income:
Unrealized gain (loss) on securities available-for-sale		9,364		15,564			(373	)
Reclassification adjustment for realized gains included in net income		-		(623	)		-
Total other comprehensive income (loss)		9,364		14,941			(373	)
Comprehensive income (loss)	$	12,579	$	22,376		$	(1,382	)

(1) Derived from the audited consolidated statement of operations and comprehensive income (loss) for the period commencing September 22, 2009 through December 31, 2009. See notes to consolidated financial statements.

CREXUS INVESTMENT CORP.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(dollars in thousands, except per share data)
(unaudited)
						Accumulated			Retained
	Common		Additional			Other			Earnings
	Stock Par		Paid-in			Comprehensive			(Accumulated
	Value		Capital			Income (Loss)			Deficit)			Total
Balance, December 31, 2009	$	181	$	257,029		$	(373	)	$	(1,010	)	$	255,827
Net income		-		-						7,435			7,435
Other comprehensive income (loss)		-		-			14,941			-			14,941
Additional expenses from
common stock offering		-		(23	)		-			-			(23	)
Common dividends declared, $0.36 per share		-		-			-			(6,525	)		(6,525	)
Balance September 30, 2010	$	181	$	257,006		$	14,568		$	(100	)	$	271,655

See notes to consolidated financial statements.

CREXUS INVESTMENT CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)

	For the quarter ended September 30, 2010 (unaudited)				For the nine months ended September 30, 2010 (unaudited)			For the period commencing September 22, 2009 through December 31, 2009 (1)

Cash Flows From Operating Activites:
Net income (loss)		$	3,215		$	7,435		$	(1,009	)
Adjustments to reconcile net income (loss) to net cash provided by operating acitvities:
Net amortization of investment premiums and discounts			(69	)		2			-
Realized gain on sale of investments			-			(623	)		-
Provision for loan losses			63			113			2
Restricted stock grants			-			-			135
Changes in operating assets:
Increase in accrued interest receivable			(339	)		(1,807	)		(578	)
Increase in other assets			(423	)		(144	)		(685	)
Changes in operating liabilities:
Increase in accounts payable and other liabilities			348			260			2,520
Increase in investment management fee payable to affiliate			35			2			355
(Decrease) increase in accrued interest payable			(187	)		247			26
Net cash provided by operating activities			2,643			5,485			766
Cash Flows From Investing Activities:
Mortgage-backed securities portfolio:
Purchases			-			(244,221	)		(31,286	)
Sales			-			61,194			-
Principal payments			342			896			-
Loans held for investment portfolio:
Purchases			(98,761	)		(126,061	)		(40,000	)
Sales			-			-			-
Principal payments			34			34			-
Net cash provided by (used in) investing activities			(98,385	)		(308,158	)		(71,286	)
Cash Flows From Financing Activities:
Additional (expenses) proceeds from common stock offerings			-			(23	)		189,146
Net proceeds from common stock offering with affiliates			-			-			67,917
Proceeds from secured financing			-			147,481			25,579
Payments on secured financing			(449	)		-			-
Dividends paid			(2,174	)		(3,443	)		-
Net cash (used in) provided by financing activities			(2,623	)		144,015			282,642
Net (decrease) increase in cash and cash equivalents			(98,365	)		(158,658	)		212,122
Cash and cash equivalents at beginning of period			151,840			212,133			11
Cash and cash equivalents at end of period		$	53,475		$	53,475		$	212,133
Supplemental disclosure of cash flow information:
Interest paid		$	1,756		$	3,463		$	-
Taxes paid		$	-		$	1		$	1
Non cash investing activities:
Net change in unrealized gain (loss) on available-for-sale securities		$	9,364		$	14,941		$	(373	)
Non cash financing activities:
Common dividends declared, not yet paid		$	3,080		$	3,080		$	-

(1) Derived from the audited consolidated statement of cashflows for the period commencing September 22, 2009 through December 31, 2009.
See notes to consolidated financial statements.

CREXUS INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE QUARTER ENDED SEPTEMBER 30, 2010

(Unaudited)

1. Organization

CreXus Investment Corp. (“Company”) was organized in Maryland on January 23, 2008. The Company commenced operations on September 22, 2009 when it completed its initial public offering. The Company directly or through its subsidiaries owns a portfolio of commercial real estate loans and commercial mortgage backed securities (“CMBS”) and has elected to be taxed as a real estate investment trust (“REIT”), under the Internal Revenue Code of 1986, as amended. As a REIT, the Company will generally not be subject to U.S. federal or state corporate taxes on its income to the extent that qualifying distributions are made to stockholders and the REIT requirements, including certain asset, income, distribution and stock ownership tests, are met. The Company’s wholly-owned subsidiaries, CreXus S Holdings LLC, CreXus F Asset Holdings LLC and CreXus TALF Holdings LLC, are qualified REIT subsidiaries. Annaly Capital Management, Inc. (“Annaly”) owns approximately 25.0% of the Company’s common shares. The Company is managed by Fixed Income Discount Advisory Company (“FIDAC”), an investment advisor registered with the Securities and Exchange Commission (“SEC”). FIDAC is a wholly-owned subsidiary of Annaly.

2. Summary of the Significant Accounting Policies

(a) Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in conformity with the instructions to Form 10-Q and Article 10, Rule 10-01 of Regulation S-X for interim financial statements. Accordingly, they may not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”). The consolidated interim financial statements are unaudited; however, in the opinion of the Company's management, all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the financial position, results of operations, and cash flows have been included. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. The nature of the Company's business is such that the results of any interim period are not necessarily indicative of results for a full year. The consolidated interim financial statements include the accounts of the Company and its wholly-owned subsidiaries, CreXus S Holdings LLC, CreXus F Asset Holdings LLC and CreXus TALF Holdings LLC. All intercompany balances and transactions have been eliminated.

(b) Cash and Cash Equivalents

Cash and cash equivalents include cash on hand and in money market accounts with original maturities less than 90 days.

The Company directly or through its subsidiaries acquires CMBS representing interests in obligations backed by pools of commercial mortgage loans and carries those securities at fair value estimated using a pricing model. Management reviews the fair values generated by this model to determine that prices are reflective of the current market. Management performs a validation of the fair value calculated by this pricing model by comparing its results to independent prices provided by dealers in the securities and/or third party pricing services. If dealers or independent pricing services are unable to provide a price for an asset or if the Company deems the price provided by such dealers or independent pricing services to be unreliable, then the Company will determine the fair value of the asset in good faith. In the current market, it may be difficult or impossible to obtain third party pricing on certain of the investments the Company may purchase. In addition, validating third party pricing for the Company's possible investments may be more subjective as fewer participants may be willing to provide this service to the Company. Moreover, the current market is more illiquid than in recent history for some of the investments the Company may purchase. Illiquid investments typically experience greater price volatility as a ready market does not exist. As volatility increases or liquidity decreases, the Company may have greater difficulty financing its investments which may negatively impact its earnings and the execution of its investment strategy.

The Company classifies its investment securities as either available-for-sale investments or held-to-maturity investments. The Company holds its CMBS as available-for-sale and as such may sell any of its CMBS as part of its overall management of its portfolio. All assets classified as available-for-sale are reported at estimated fair value, with unrealized gains and losses included in other comprehensive income (loss).

If the fair value of an investment security is less than its amortized cost at the date of the consolidated statement of financial condition, the Company analyzes the investment security for other-than-temporary impairment (“OTTI”). Management evaluates the Company’s CMBS for OTTI at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been lower than carrying value, (2) the intent of the Company to sell the investment prior to recovery in fair value (3) whether the Company will more likely than not be required to sell the investment before the expected recovery in fair value, and (4) the expected future cash flows of the investment in relation to its amortized cost. Unrealized losses on assets that are considered other-than-temporary credit impairments are recognized in income and the cost basis of the asset is adjusted.

CMBS transactions are recorded on the trade date. Realized gains and losses from CMBS transactions are determined based on the specific identification method and recorded as a gain or a loss on sale of available for sale securities in the consolidated statement of operations. Accretion of discounts or amortization of premiums on available-for-sale securities and mortgage loans is computed using the effective interest method and is included as a component of interest income in the consolidated statement of operations.

(d) Mortgages, Loans and Preferred Equity Held for Investment

The Company's commercial mortgages, mezzanine loans and preferred equity interests are comprised of fixed-rate and adjustable-rate loans. Mortgages and loans are designated as held for investment, recorded on trade date, and are carried at their principal balance outstanding, plus any premiums or discounts which are amortized or accreted over the estimated life of the loan, less allowances for loan losses. The Company does not plan to sell these assets and may or may not use financing to maintain these positions.

(e) Allowance for Loan Losses

The Company has established an allowance for loan losses at a level that management believes is adequate based on an evaluation of known and inherent risks related to the Company's loan portfolio. The estimate is based on a variety of factors including, but not limited to, current economic conditions, industry loss experience, credit quality trends, loan portfolio composition, delinquency trends, national and local economic trends, national unemployment data, and whether specific geographic areas where the Company has significant loan concentrations are experiencing adverse economic conditions and events such as natural disasters that may affect the local economy or property values. While the Company has little history of its own to establish loan trends, delinquency trends of the originators and the current market conditions aided in determining the allowance for loan losses. The Company also performed due diligence procedures on a sample of loans that met its criteria during the purchase process. The Company has created an unallocated provision for probable loan losses estimated as a percentage of the remaining principal on the loans. Management's estimate is based on historical experience of similarly underwritten pools.

When it is probable that contractually due specific amounts are deemed uncollectible, the account is considered impaired. Where impairment is indicated, a valuation write-off is measured based upon the excess of the recorded investment over the net fair value of the collateral. Any deficiency between the carrying amount of an asset and the net sales price of repossessed collateral is charged to the allowance for loan losses. There were no losses specifically allocated to loans as of September 30, 2010.

(f) Provision for Probable Credit Losses

The expense for probable credit losses in connection with mortgage loans is the charge to earnings to increase the allowance for probable credit losses to the level that management estimates to be adequate considering delinquencies, loss experience and collateral quality. Other factors considered relate to geographic trends and product diversification, the size of the portfolio and current economic conditions. Based upon these factors, the Company will establish the provision for probable credit losses by category of asset. When it is probable that the Company will be unable to collect all amounts contractually due, the account is considered impaired.

Where impairment is indicated, a valuation write-down or write-off will be measured based upon the excess of the recorded investment amount over the net fair value of the collateral, as reduced by selling costs. Any deficiency between the carrying amount of an asset and the net sales price of repossessed collateral will be charged to the allowance for loan losses.

(g) Income Taxes

The Company has qualified and elected to be taxed as a REIT, and therefore it generally will not be subject to corporate, federal or state income tax to the extent that qualifying distributions are made to stockholders and the REIT requirements, including certain asset, income, distribution and stock ownership tests are met. If the Company fails to qualify as a REIT and does not qualify for certain statutory relief provisions, the Company would be subject to federal, state and local income taxes and may be precluded from qualifying as a REIT for the subsequent four taxable years following the year in which the REIT qualification was lost. Further the Company conducts a continuing analysis on a quarterly basis in an effort to identify any tax positions taken by the Company that are not “more-likely-than-not” to be upheld upon examination by the pertinent taxing authorities.

(h) Net Income per Share

The Company calculates basic net income per share by dividing net income (loss) for the period by the weighted-average shares of its common stock outstanding for that period. Diluted net income (loss) per share takes into account the effect of dilutive instruments, such as stock options, but uses the average share price for the period in determining the number of incremental shares that are to be added to the weighted average number of shares outstanding. The Company had no potentially dilutive securities outstanding during the periods presented.

(i) Stock-Based Compensation

The Company accounts for stock-based compensation using fair value based methods which require the Company to measure the fair value of the equity instrument using the stock prices and other measurement assumptions as of the earlier of either the date at which a performance commitment by the counterparty is reached or the date at which the counterparty's performance is complete. Compensation expense related to grants of stock and stock options will be recognized over the vesting period of such grants based on the estimated fair value on the grant date.

(j) Use of Estimates

The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities in reporting period. The most significant estimates used in preparation of the financial statements are related to determining the fair value of the investment portfolio. Actual results could differ from those estimates.

(k) Recent Accounting Pronouncements

General Principles

Generally Accepted Accounting Principles (ASC 105)

In June 2009, the Financial Accounting Standards Board (“FASB”) issued The Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (Codification) which revises the framework for selecting the accounting principles to be used in the preparation of financial statements that are presented in conformity with GAAP. The objective of the Codification is to establish the FASB Accounting Standards Codification (“ASC”) as the source of authoritative accounting principles recognized by the FASB. Codification was effective September 30, 2009. In adopting the Codification, all non-grandfathered, non-SEC accounting literature not included in the Codification is superseded and deemed non-authoritative. Codification requires any references within the Company’s consolidated financial statements be modified from FASB issues to ASC. However, in accordance with the FASB Accounting Standards Codification Notice to Constituents (v 2.0), the Company will not reference specific sections of the ASC but will use broad topic references.

The Company’s recent accounting pronouncements section has been formatted to reflect the same organizational structure as the ASC. Broad topic references will be updated with pending content as it is released.

Assets

Receivables (ASC 310)

In July 2010, the FASB released Accounting Standard Updates (“ASU”) 2010-20, which addresses disclosures about the credit quality of financing receivables and the allowance for credit losses. The purpose of this update is to provide greater transparency regarding the allowance for credit losses and the credit quality of financing receivables as well as to assist in the assessment of credit risk exposures and evaluation of the adequacy of allowances for credit losses. Additional disclosures must be provided on a disaggregated basis. The update defines two levels of disaggregation – portfolio segment and class of financing receivable. Additionally, the update requires disclosure of credit quality indicators, past due information and modifications of financing receivables. The update is not applicable to mortgage banking activities (loans originated or purchased for resale to investors); derivative instruments such as repurchase agreements; debt securities; a transferors interest in securitization transactions accounted for as sales under ASC 860; and purchased beneficial interests in securitized financial assets. This update is effective for the Company for interim or annual periods ending on or after December 15, 2010. At this time, the Company is evaluating the effect of this update on future financial reporting.

Investments in Debt and Equity Securities (ASC 320)

New guidance was provided to make impairment guidance more operational and to improve the presentation and disclosure of OTTI on debt and equity securities, as well as beneficial interests in securitized financial assets, in financial statements. This was as a result of the SEC mark-to-market study mandated under the Emergency Economic Stabilization Act of 2008 (“EESA”). The SEC’s recommendation was to “evaluate the need for modifications (or the elimination) of current OTTI guidance to provide for a more uniform system of impairment testing standards for financial instruments.” The new guidance revises the OTTI evaluation methodology. Previously the analytical focus was on whether the entity had the “intent and ability to retain its investment in the debt security for a period of time sufficient to allow for any anticipated recovery in fair value.” Now the focus is on whether the entity (1) has the intent to sell the investment securities, (2) is more likely than not to be required to sell the investment securities before recovery, or (3) does not expect to recover the entire amortized cost basis of the investment securities. Further, the security is analyzed for credit loss (the difference between the present value of cash flows expected to be collected and the amortized cost basis). If the entity does not intend to sell the debt security, nor will be required to sell the debt security prior to its anticipated recovery, the credit loss, if any, will be recognized in the statement of earnings, while the balance of impairment related to other factors will be recognized in Other Comprehensive Income/(Loss) (“OCI”). If the entity intends to sell the security, will be required to sell the security before its anticipated recovery, or does not expect to recover the entire amortized cost basis of the security the full OTTI will be recognized in the statement of earnings.

OTTI has occurred if there has been an adverse change in future estimated cash flows and its impact reflected in current earnings. The determination cannot be overcome by management judgment of the probability of collecting all cash flows previously projected. The objective of OTTI analysis is to determine whether it is probable that the holder will realize some portion of the unrealized loss on an impaired security. Factors to consider when making an OTTI decision include information about past events, current conditions, reasonable and supportable forecasts, remaining payment terms, financial condition of the issuer, expected defaults, value of underlying collateral, industry analysis, sector credit rating, credit enhancement, and financial condition of guarantor. The Company’s CMBS and Agency residential mortgage-backed securities (“Agency RMBS”) investments fall under this guidance and, as such, the Company will assess each security for OTTIs based on estimated future cash flows. For the quarter ended September 30, 2010, the Company did not have any unrealized losses in investment securities that were deemed other-than-temporary.

Broad Transactions

Consolidation (ASC 810)

On January 1, 2009, FASB amended the guidance concerning, noncontrolling interests in consolidated financial statements, which changes the presentation of financial statements. This guidance requires the Company to classify noncontrolling interests (previously referred to as “minority interest”) as part of consolidated net income and to include the accumulated amount of noncontrolling interests as part of stockholders’ equity. Similarly, in the presentation of stockholders’ equity, the Company must distinguish between equity amounts attributable to controlling interest and amounts attributable to the noncontrolling interests – previously classified as minority interest outside of stockholders’ equity. In addition to these financial reporting changes, this guidance provides for significant changes in accounting related to noncontrolling interests; specifically, increases and decreases in its controlling financial interests in consolidated subsidiaries will be reported in equity similar to treasury stock transactions. If a change in ownership of a consolidated subsidiary results in loss of control and deconsolidation, any retained ownership interests are re-measured with the gain or loss reported in net earnings. For the quarter ended September 30, 2010, the Company does not have any non-controlling interests.

Effective January 1, 2010, the consolidation standards have been amended by ASU 2009-17. This amendment updates the existing standard and eliminate the exemption from consolidation of a Qualified Special Purpose Entity. The update requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity (“VIE”). The analysis identifies the primary beneficiary of a VIE as the enterprise that has both: a) the power to direct the activities that most significantly impact the entity’s economic performance and b) the obligation to absorb losses and/or the right to receive benefits from the entity which could potentially be significant to the VIE. The update requires enhanced disclosures to provide users of financial statements with more transparent information about an enterprise’s involvement in a VIE. Further, ongoing assessments of whether an enterprise is the primary beneficiary of a VIE are required. For the quarter ended September 30, 2010, the Company was not the primary beneficiary of any VIEs.

Effective January 1, 2010, FASB amended the consolidation standard with ASU 2010-10 which indefinitely defers the effective date of ASU 2009-17 for a reporting enterprises interest in entities for which it is industry practice to issue financial statements in accordance with investment company standards (ASC 946). This deferral is expected to most significantly affect reporting entities in the investment management industry. This amendment has no effect on the Company’s financial statements.

Derivatives and Hedging (ASC 815)

Effective January 1, 2009, the FASB issued guidance attempting to improve the transparency of financial reporting by mandating the provision of additional information about how derivative and hedging activities affect an entity’s financial position, financial performance and cash flows. This guidance changed the disclosure requirements for derivative instruments and hedging activities by requiring enhanced disclosure about (1) how and why an entity uses derivative instruments, (2) how derivative instruments and related hedged items are accounted for, and (3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. To adhere to this guidance, qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts, gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements must be made. This disclosure framework is intended to better convey the purpose of derivative use in terms of the risks that an entity is intending to manage. The Company is currently not engaged in any derivative or hedging activity and does not intend to elect hedge accounting at this time; however, it will comply with all disclosure requirements set forth by the FASB concerning derivatives and hedging when applicable.

The FASB issued ASU 2010-8 in February, 2010. ASU 2010-8 provided technical corrections to ASC 815. This update provides a four step analysis to determine whether call or put options that can accelerate the settlement of debt instruments should be considered clearly and closely related to the debt host contract. If it is determined that such option is closely related to the host contract, bifurcation of the host contract from the derivative instrument is not necessary. If an existing hybrid instrument requires bifurcation under this update, a one-time election can be made to utilize the Fair Value Option for the entire contract. This update is effective for the Company January 1, 2010 and has no material effect on the financial statements.

ASU 2010-11 was issued in March 2010 and defined a scope exception for embedded derivative features which involve only the transfer of credit risk that is only in the form of subordination of one financial instrument to another. Such instruments would not be subject to bifurcation under ASC 815. This guidance is effective for the first quarter beginning after June 15, 2010, however early adoption for the first fiscal quarter is allowed. The Company elected to adopt effective the first quarter of 2010. Adoption has had no material effect on the financial statements.

Fair Value Measurements and Disclosures (ASC 820)

In response to the deterioration of the credit markets, FASB issued guidance clarifying how Fair Value Measurements should be applied when valuing securities in markets that are not active. The guidance provides an illustrative example, utilizing management’s internal cash flow and discount rate assumptions when relevant observable data do not exist. It further clarifies how observable market information and market quotes should be considered when measuring fair value in an inactive market. It reaffirms the notion of fair value as an exit price as of the measurement date and that fair value analysis is a transactional process and should not be broadly applied to a group of assets. The guidance was effective upon issuance including prior periods for which financial statements had not been issued.

In October 2008, the EESA was signed into law. Section 133 of the EESA mandated that the SEC conduct a study on mark-to-market accounting standards. The SEC provided its study to the U.S. Congress on December 30, 2008. Part of the recommendations within the study indicated that “fair value requirements should be improved through development of application and best practices guidance for determining fair value in illiquid or inactive markets”. As a result of this study and the recommendations therein, on April 9, 2009, the FASB issued additional guidance for determining fair value when the volume and level of activity for the asset or liability have significantly decreased when compared with normal market activity for the asset or liability (or similar assets or liabilities). The guidance gives specific factors to evaluate if there has been a decrease in normal market activity and if so, provides a methodology to analyze transactions or quoted prices and make necessary adjustments to fair value. The objective is to determine the point within a range of fair value estimates that is most representative of fair value under current market conditions.

In August 2009, FASB provided further guidance (ASU 2009-05 Measuring Liabilities at Fair Value) regarding the fair value measurement of liabilities. The guidance states that a quoted price for the identical liability when traded as an asset in an active market is a Level 1 fair value measurement. If the value must be adjusted for factors specific to the liability, then the adjustment to the quoted price of the asset shall render the fair value measurement of the liability a lower level measurement. This update was effective for reporting periods following issuance. This guidance has no material effect on the fair valuation of the Company’s liabilities.

In September 2009, FASB issued guidance (ASU 2009-12) on measuring the fair value of certain alternative investments. This guidance offers investors a practical expedient for measuring the fair value of investments in certain entities that calculate net asset value (“NAV”) per share. If an investment falls within the scope of the ASU, the reporting entity is permitted, but not required to use the investment’s NAV to estimate its fair value. This guidance has no material effect on the fair valuation of our assets, as we do not hold any assets qualifying under this guidance.

In January 2010, FASB issued guidance (ASU 2010-06) which increases disclosure regarding the fair value of assets. The key provisions of this guidance include the requirement to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 including a description of the reason for the transfers. Previously this was only required of transfers between Level 2 and Level 3 assets. Further, reporting entities are required to provide fair value measurement disclosures for each class of assets and liabilities; a class is potentially a subset of the assets or liabilities within a line item in the statement of financial position. Additionally, disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements are required for either Level 2 or Level 3 assets. This portion of the guidance is effective for us for all interim and annual reporting periods after December 15, 2009. The guidance also requires that the disclosure on any Level 3 assets presents separately information about purchases, sales, issuances and settlements. In other words, Level 3 assets are presented on a gross basis rather than as one net number. However, this last portion of the guidance is not effective until December 15, 2010. Adoption of this guidance will result in increased disclosure in the notes to the Company’s financial statements.

Financial Instruments (ASC 825)

On April 9, 2009, the FASB issued guidance which requires disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements.

Subsequent Events (ASC 855)

ASC 855 provides general standards governing accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. ASC 855 also provides guidance on the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that an entity should make about events or transactions occurring after the balance sheet date.

In February 2010, FASB issued ASU 2010-09 as an amendment to ASC 855. This update eliminates the requirement to provide a specific date through which subsequent events were evaluated. The purpose of this update was to alleviate potential conflicts between ASC 855 and SEC reporting requirements. The update was effective upon issuance. The Company evaluated subsequent events through date of issuance of this Quarterly Report on Form 10-Q.

Transfers and Servicing (ASC 860)

On June 12, 2009, the FASB issued ASU 2009-16 as an amendment to the accounting standards governing the transfer and servicing of financial assets. This amendment updates the existing standard and eliminates the concept of a Qualified Special Purpose Entity (“QSPE”); clarifies the surrendering of control to effect sale treatment; and modifies the financial components approach – limiting the circumstances in which a financial asset or portion thereof should be derecognized when the transferor maintains continuing involvement. It defines the term “Participating Interest”. Under this standard update, the transferor must recognize and initially measure at fair value all assets obtained and liabilities incurred as a result of a transfer, including any retained beneficial interest. Additionally, the amendment requires enhanced disclosures regarding the transferors risk associated with continuing involvement in any transferred assets. The amendment was effective January 1, 2010. At the quarter ended September 30, 2010, the Company determined this amendment has no material effect on the Company’s financial statements.

3. Cash and Cash Equivalents

The Company had $53.5 million and $212.1 million in money market funds held at an independent national banking institution and earned $23,000 and $46,000 for the quarter ended September 30, 2010 and the end of the period commencing September 22, 2009 through December 31, 2009, respectively. The average cash balance was $114.9 million and $245.4 million with annualized yields on average cash balances of 0.08% for both the quarter ended September 30, 2010 and the period commencing September 22, 2009 through December 31, 2009.

4. Commercial Mortgage-Backed Securities

The following table represents the Company's available-for-sale CMBS portfolio as of September 30, 2010 and December 31, 2009, at fair value.

	September 30, 2010		December 31, 2009
	(dollars in thousands)
Amortized cost	$	213,941	$	31,286
Unrealized gains		14,568		-
Unrealized losses		-		(373	)

Fair value	$	228,509	$	30,913

The following table presents the gross unrealized losses and estimated fair value of the Company's CMBS by length of time that such securities have been in a continuous unrealized loss position. At September 30, 2010 the Company held no securities at an unrealized loss.

						Unrealized Loss Position For:
	Less than 12 Months					12 Months or More				Total
	Estimated		Unrealized			Estimated		Unrealized			Estimated		Unrealized
	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
	(dollars in thousands)
CMBS	$	-	$	-		$	-	$	-		$	-	$	-
Total September 30, 2010	$	-	$	-		$	-	$	-		$	-	$	-

CMBS	$	30,913	$	(373	)	$	-	$	-		$	30,913	$	(373	)
Total December 31, 2009	$	30,913	$	(373	)	$	-	$	-		$	30,913	$	(373	)

The decline in value of these securities was due to market conditions and not the credit performance of the assets. The investments are not considered other-than-temporarily impaired because the Company currently does not intend to sell the investments and has the ability and intent to hold the investments to maturity or for a period of time sufficient for a forecasted market price recovery up to or beyond the cost of the investments.

Actual maturities of CMBS are generally shorter than stated contractual maturities. Actual maturities of the Company's commercial mortgage-backed securities are affected by the contractual lives of the underlying mortgages, periodic payments of principal and prepayments of principal.

The following table summarizes the Company's available-for-sale CMBS at September 30, 2010 and December 31, 2009 according to their weighted-average life classifications:

	September 30, 2010
	(dollars in thousands)
Weighted Average Life	Fair Value		Amortized Cost		Weighted Average Coupon

Less than one year	$	-	$	-		-	%
Greater than one year
less than five years		52,762		49,816		5.21
Greater than five years		175,747		164,125		5.45

Total	$	228,509	$	213,941		5.40	%

	December 31, 2009
	(dollars in thousands)
Weighted Average Life	Fair Value		Amortized Cost		Weighted Average Coupon

Less than one year	$	-	$	-		-	%
Greater than one year
less than five years		-		-		-
Greater than five years		30,913		31,286		5.81

Total	$	30,913	$	31,286		5.81	%

The overall statistics for the Company’s CMBS investments calculated on a weighted average basis assuming no early prepayments or defaults as of September 30, 2010 and December 31, 2009, are as follows:

	September 30, 2010		December 31, 2009

Credit Ratings (1)		AAA		AAA
Coupon		5.40%		5.81%
Yield		5.13%		6.50%

Weighted Average Life		5.0 years		6.3 years

(1) Ratings per Fitch, Moody’s or S&P.

The rating, vintage, property type, and location of the collateral securing the Company’s CMBS investments calculated on a weighted average basis as of September 30, 2010 and December 31, 2009 are as follows:

September 30, 2010
	Property					Geographic Break Down 5% or Greater
	Type		Percentage			State	Percentage			Vintage	Percentage
		Office		34.3	%	NY		14.5	%	2006		76.9	%
		Retail		30.3	%	CA		11.7	%	2005		16.9	%
		Multifamily		8.5	%	TX		6.8	%	2004		6.2	%
		Industrial		4.9	%	FL		6.5	%			100.0	%
		Hospitality		5.3	%	MA		5.4	%
		Other		16.7	%	Other		55.1	%
		Total		100.0	%	Total		100.0	%

December 31, 2009
	Property				Geographic Break Down 5% or Greater
	Type		Percentage			State	Percentage			Vintage	Percentage
		Office		35.1	%	District of Columbia		14.2	%	2006		100.0	%
		Retail		20.1	%	California		7.3	%
		Multifamily		10.4	%	New York		6.3	%
		Industrial		14.2	%	Wisconsin		5.7	%
		Other		20.2	%	Other		66.5	%

		Total		100.0	%	Total		100.0	%

For the nine months ended September 30, 2010, the Company sold CMBS with a carrying value of $60.6 million for proceeds of $61.2 million realizing a gain of $0.6 million. The Company did not sell any CMBS during the quarter ended September 30, 2010.

5. Loans Held for Investment

The following table represents the Company's commercial mortgage loans classified as held for investment at September 30, 2010 and December 31, 2009, which are carried at their principal balance outstanding less an allowance for loan losses:

	For the quarter ended		For the period September 22, 2009
	September 30, 2010		through December 31, 2009

Coupon		8.94%		12.24%
Yield		10.04%		12.24%
Weighted Average Life		6.0 years		10.0 years

	September 30, 2010			December 31, 2009
	(dollars in thousands)
Mortgage loans, remaining principal	$	175,373		$	40,000
Net premium and discount		(9,252	)		-
Less: allowance for loan losses		(115	)		(2	)

Mortgage loans held for investment	$	166,006		$	39,998

The following table summarizes the changes in the allowance for loan losses for the mortgage loan portfolio during the quarter ended September 30, 2010 and the period ended December 31, 2009.

	September 30, 2010		December 31, 2009
	(dollars in thousands)

Balance, beginning of period	$	52	$	-
Provision for loan loss		63		2
Charge-offs		-		-

Balance, end of period	$	115	$	2

The following tables present certain characteristics of the Company’s commercial mortgage loan portfolio as of September 30, 2010 and December 31, 2009.

For the period ended September 30, 2010
Geographic Distribution Top 5 States	Remaing Balance (dollars in thousands)		% of Loans		Property Count
Illinois	$	63,308		36.1%		4
Texas		32,119		18.3%		4
California		30,240		17.2%		5
Colorado		19,009		10.8%		2
South Carolina		3,000		1.7%		6

For the period ended December 31, 2009
Geographic Distribution	Remaing Balance				Property
Top 5 States	(dollars in thousands)		% of Loans		Count
California	$	8,600		13.1%		4
Texas		7,296		12.1%		3
South Carolina		2,815		7.5%		6
Arizona		2,464		7.0%		2
Pennslyvania		1,670		5.8%		3

On a quarterly basis, the Company evaluates the adequacy of its allowance for loan losses. Based on this analysis, the Company recorded a general provision for loan losses of $63,000 and $113,000 for the quarter and nine months ended September 30, 2010, respectively. At September 30, 2010, there were no loans 90 days or more past due and all loans were accruing interest.

6. Fair Value Measurements

GAAP defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets and liabilities in active markets.

Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3 – inputs to the valuation methodology are unobservable and significant to fair value.

The following discussion describes the methodologies to be utilized by the Company to fair value its financial instruments by instrument class.

Short-term Instruments

The carrying value of cash and cash equivalents, accrued interest receivable, dividends payable, accounts payable, and accrued interest payable generally approximates estimated fair value due to the short term nature of these financial instruments.

CMBS and RMBS

The Company determines the fair value of its investment securities utilizing a pricing model that incorporates such factors as coupon, prepayment speeds, weighted average life, collateral composition, borrower characteristics, expected interest rates, life caps, periodic caps, reset dates, collateral seasoning, expected losses, expected default severity, credit enhancement, and other pertinent factors. Management will review the fair values generated by the model to determine whether prices are reflective of the current market. Management will perform a validation of the fair values calculated by the pricing model by comparing its results to independent prices provided by dealers in the securities and/or third party pricing services.

During times of market dislocation, as has been experienced for some time, the observability of prices and inputs can be reduced for certain instruments. If dealers or independent pricing services are unable to provide a price for an asset or if the Company deems the price provided by such dealers or independent pricing services to be unreliable, then the Company will determine the fair value of the asset in good faith. In addition, validating third party pricing for the Company’s possible investments may be more subjective as fewer participants may be willing to provide this service to the Company. Illiquid investments typically experience greater price volatility as a ready market does not exist. As fair value is not an entity specific measure and is a market based approach which considers the value of an asset or liability from the perspective of a market participant, observability of prices and inputs can vary significantly from period to period. A condition such as this can cause instruments to be reclassified from Level 1 to Level 2 or Level 2 to Level 3 when the Company is unable to obtain third party pricing verification.

If at the valuation date the fair value of an investment security is less than its amortized cost at the date of the consolidated statement of financial condition, the Company will analyze the investment security for OTTI. Management will evaluate the Company’s CMBS and RMBS for OTTI at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration will be given to (1) the length of time and the extent to which the fair value has been lower than carrying value, (2) the intent of the Company to sell the investment prior to recovery in fair value, (3) whether the Company will more likely than not be required to sell the investment before the expected recovery, (4) and the expected future cash flows of the investment in relation to its amortized cost. If a credit portion of OTTI exists, the cost basis of the security is written down to the then-current fair value, and the unrealized loss is transferred from accumulated other comprehensive income (loss) as an immediate reduction of current earnings.

Repurchase Agreements

The Company records repurchase agreements at their contractual amounts including accrued interest payable. Repurchase agreements are collateralized financing transactions the Company could use to acquire investment securities. Due to the short term nature of these financial instruments the Company will estimate the fair value of these repurchase agreements to be the contractual obligation plus accrued interest payable at maturity.

Securitized Debt

The Company records securitized debt for certificates or notes sold in securitization or re-securitization transactions treated as “financings”. The Company will carry securitized debt at the principal balance outstanding on non-retained notes associated with its securitized loans held for investment plus premiums or discounts recorded with the sale of the notes to third parties. The premiums or discounts associated with the sale of the notes or certificates will be amortized over the life of the instrument. The Company fair values the securitized debt by estimating the future cash flows associated with underlying assets collateralizing the secured debt outstanding. The Company will model each underlying asset by considering, among other items, the structure of the underlying security, coupon, servicer, actual and expected defaults, actual and expected default severities, reset indices, and prepayment speeds in conjunction with market research for similar collateral performance and management’s expectations of general economic conditions in the sector and greater economy.

Any changes to the valuation methodology will be reviewed by management to ensure the changes are appropriate. As markets and products develop and the pricing for certain products becomes more transparent the Company will continue to refine its valuation methodologies. The methods used may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods will be appropriate and consistent with other market participants, the use of different methodologies, or assumptions, to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The Company will use inputs that are current as of the measurement date, which may include periods of market dislocation, during which price transparency may be reduced.

As of September 30, 2010, the Company has classified its CMBS as Level 2.

The Company's financial assets and liabilities carried at fair value on a recurring basis are valued at September 30, 2010 and December 31, 2009 as follows:

	September 30, 2010
	Level 1		Level 2		Level 3
	(dollars in thousands)
Assets:
Cash and cash equivalents	$	53,475	$	-	$	-
Commercial mortgage-backed securities		-		228,509		-

	December 31, 2009
	Level 1		Level 2		Level 3
	(dollars in thousands)
Assets:
Cash and cash equivalents	$	212,133	$	-	$	-
Commercial mortgage-backed securities		-		30,913		-

Mortgage loan assets totaled $166.0 million at September 30, 2010. These loans are held for investment and are recorded at amortized cost less an allowance for loan losses. Secured financing liabilities totaled $173.1 million at September 30, 2010. Due to the stable interest rate environment, the fair value of the assets and liabilities totaled $173.1 million at September 30, 2010. Due to the stable interest rate environment, the fair value of the assets and liabilities remain as recorded.

As fair value is not an entity-specific measure and is a market-based approach which considers the value of an asset or liability from the perspective of a market participant, observability of prices and inputs can vary significantly from period to period. During times of market dislocation, as has been experienced during the recent months, the observability of prices and inputs can be reduced for certain instruments. A condition such as this can cause instruments to be reclassified from Level 1 to Level 2 to Level 3 when the Company is unable to obtain third party pricing verification.

7. Secured Financing Agreements

Commercial Mortgage-Backed Securities

The Company had outstanding $173.1 million and $25.6 million of CMBS structured financing agreements with weighted average borrowing rate of 3.60% and 3.62% and weighted average remaining maturities of 4.3 years and 5.0 years as of September 30, 2010 and December 31, 2009, respectively. The average daily balance of the Company’s secured financing facilities for the quarter ended September 30, 2010 and the period commencing September 22, 2009 and ending December 31, 2009 were $173.2 million and $25.6 million, respectively. Investment securities pledged as collateral under these secured financing agreements had an estimated fair value of $213.9 million and $30.9 million at September 30, 2010 and December 31, 2009, respectively. The interest rates of these structured financing agreements are fixed to the 5- year or 3- year swap curve plus 100 basis points depending on duration.

At September 30, 2010 and December 31, 2009, the secured financing agreements all had the following remaining maturities:

	Secured Financing Carrying Value
	September 30, 2010		December 31, 2009
	(dollars in thousands)
2010	$	-	$	-
2011		-		-
2012		-		-
2013		11,218		-
2014 and thereafter		161,842		25,579
Total	$	173,060	$	25,579

At September 30, 2010 the Company had at risk 63.7% of the equity of the Company with the Federal Reserve Bank of New York (“FRBNY”).

The following table presents the debt and collateral carrying value of the Company’s secured financing by maturity.

	Structured Financing		CMBS
	Carrying Value		Carrying Value
	(dollars in thousands)
March 26, 2010, TALF loans, fixed rate 3.63%, mature March 2015	$	76,118	$	94,823
February 25, 2010, TALF loans, fixed rate 3.69%, mature February 2015	$	29,868	$	36,619
February 25, 2010, TALF loans, fixed rate 2.74%, mature February 2013	$	11,218	$	13,197
January 28, 2010, TALF loans, fixed rate 3.73%, mature January 2015	$	30,282	$	37,011
December 22, 2009, TALF loans, fixed rate 3.62%, mature December 2014	$	25,574	$	32,291

Total	$	173,060	$	213,941

8. Common Stock

During the quarter ended September 30, 2010, the Company declared dividends to common shareholders totaling $3.1 million or $0.17 per share, which were paid on October 28, 2010.

On September 16, 2009, the Company announced the sale of 13,333,334 shares of common stock at $15.00 per share for estimated proceeds, less the underwriters’ discount and offering expenses, of $189.4 million. Concurrently with the sale of these shares Annaly purchased 4,527,778 shares at the same price per share as the public offering, for proceeds of approximately $67.9 million. These sales were completed on September 22, 2009. In all, the Company raised net proceeds of approximately $257.3 million in these offerings.

On September 30, 2009, the Company issued 9,000 shares of restricted common stock in accordance with it’s equity incentive plan to its independent directors, which vested immediately.

9. Equity Incentive Plan

The Company has adopted an equity incentive plan to provide incentives to our independent directors, employees of FIDAC and its affiliates, including Annaly, and other service providers to stimulate their efforts toward our continued success, long-term growth and profitability and to attract, reward and retain personnel. The equity incentive plan is administered by the compensation committee of the board of directors. Unless terminated earlier, the equity incentive plan will terminate in 2019, but will continue to govern unexpired awards. The equity incentive plan provides for grants of restricted common stock and other equity-based awards up to an aggregate amount, at the time of the award, of (i) 2.5% of the issued and outstanding shares of the Company’s common stock on a fully diluted basis and including shares sold to Annaly concurrently with the Company’s initial public offering at the time of the award less (ii) 250,000 shares, subject to an aggregate ceiling of 25,000,000 shares available for issuance under the plan. The Company has issued 9,000 shares of restricted stock under the equity incentive plan to its independent directors, which vested immediately.

10. Income Taxes

As a REIT, the Company will generally not be subject to U.S. federal or state corporate taxes on its income to the extent that qualifying distributions are made to stockholders and the REIT requirements, including certain asset, income, distribution and stock ownership tests are met. During the quarter ended September 30, 2010, the Company recorded no tax expenses and the nine months ended September 30, 2010, the Company recorded $1,000 income tax expense related to minimum state tax requirements and no income tax expense related to federal tax liabilities on undistributed income.

In general, common stock cash dividends declared by the Company will be considered ordinary income to stockholders for income tax purposes. From time to time, a portion of the Company’s dividends may be characterized as capital gains or return of capital.

11. Credit Risk and Interest Rate Risk

The Company's primary risks are credit risk and interest rate risk. The Company is subject to credit risk in connection with its investments in commercial mortgage loans and credit sensitive commercial mortgage-backed securities. When the Company assumes credit risk, it attempts to minimize interest rate risk through asset selection, hedging and matching the income earned on mortgage assets with the cost of related liabilities. The Company attempts to manage credit risk through pre-acquisition due diligence processes including, but not limited to, analysis of the sponsor/borrower, the structure of the investment, property information including tenant composition, the property’s historical operating performance and evaluation of the market in which the property is located. These factors are considered to be important indicators of credit risk. The Company is subject to interest rate risk, primarily in connection with its investments in CMBS, commercial mortgage loans and borrowings under repurchase agreements.

12. Management Agreement and Related Party Transactions

The Company has entered into a management agreement with FIDAC which provides for an initial term through December 31, 2013 with an automatic one-year extension option and subject to certain termination rights. The Company paid FIDAC a quarterly management fee equal to 0.50% per annum for the first twelve months following the commencement of operations, pays 1.00% per annum for the period after the first twelve months through the eighteenth month following the commencement of operations, and will pay 1.50% per annum after the first eighteen months following the commencement of operations, calculated quarterly, of the Company’s stockholders’ equity (as defined in the management agreement) of the Company. Management fees accrued and subsequently paid to FIDAC were $356,000 and $994,000 for the quarter and nine months ended September 30, 2010.

Upon termination without cause, the Company will pay FIDAC a termination fee. The Company may also terminate the management agreement with 30-days’ prior notice from the Company’s 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 the Company or any of its subsidiaries become required to register as an investment company under the Investment Company Act of 1940, as amended, or the 1940 Act, with such termination deemed to occur immediately before such event, in which case the Company would not be required to pay a termination fee. FIDAC may also decline to renew the management agreement by providing the Company with 180-days written notice, in which case the Company would not be required to pay a termination fee.

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

Annaly purchased 4,527,778 shares of stock at the same price per share paid by other investors in the Company’s public offering and owns approximately 25% of the Company’s outstanding shares as an equity investment.

On May 21, 2008, the Company issued 1,000,000 shares of its common stock to certain FIDAC’s officers and employees for an aggregate purchase price of $50,000. On September 15, 2009, the Company repurchased 750,000 shares of common stock from existing holders on a pro rata basis at the initial per share purchase price. Each of these officers and employees has agreed to a three year lock-up with the Company, subject to termination upon the termination of the management agreement, with respect to those shares of our common stock.

The Company uses RCap Securities Inc., (“RCap”), a SEC registered broker-dealer and a wholly-owned subsidiary of Annaly, to clear CMBS trades for the Company and RCap is entitled to customary market-based fees and charges arising from such services.

13. Commitments and Contingencies

From time to time, the Company may become involved in various claims and legal actions arising in the ordinary course of business. Management is not aware of any reported or unreported contingencies at September 30, 2010.

The Company agreed to pay the underwriters of its initial public offering $0.15 per share for each share sold in the Company’s initial public offering if during any full four calendar quarter period during the 24 full calendar quarters after the consummation of the initial public offering the Company’s 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 the Company’s initial public offering its 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 its 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 the Company’s 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 or 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 the Company’s independent directors and after approval by a majority of the Company’s independent directors.

14. Subsequent Events

As of the issue date of this Form 10-Q, the Company has no subsequent events to report.

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:

·	our business and strategy;

·	our projected financial and operating results;

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

·	general volatility of the markets in which we acquire assets;

·	the implementation, timing and impact of, and changes to, various government programs, including the Term Asset-Backed Securities Loan Facility and the Public-Private Investment Program;

·	our expected assets;

·	changes in the value of our assets;

·	interest rate mismatches between our assets and our borrowings used to fund such purchases;

·	changes in interest rates and mortgage prepayment rates;

·	effects of interest rate caps on our adjustable-rate assets;

·	rates of default or decreased recovery rates on our assets;

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

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

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

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

·	availability of qualified personnel;

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

·	our understanding of our competition;

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

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

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

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 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 specialty finance company that acquires, manages, and finances, directly or through our subsidiaries, commercial mortgage loans and other commercial real estate debt, commercial mortgage-backed securities, or CMBS, and other commercial real estate-related assets. 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 intend to 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 will 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, commercial real property and preferred equity investments. In addition, to maintain our exemption from registration under the Investment Company Act of 1940, as amended, or the 1940 Act, we expect to acquire residential mortgage-backed securities, or RMBS, for which a U.S. Government agency such as the Government National Mortgage Association, or Ginnie Mae, or a federally chartered corporation such as the Federal National Mortgage Association, or Fannie Mae, or the Federal Home Loan Mortgage Corporation, or 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.

We elected and qualified 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 Real Estate Loans, including:

o	First mortgage loans that are secured by commercial properties

o	Subordinated mortgage loans or “B-notes”

o	Mezzanine loans

o	Construction loans

·	Commercial Mortgage-Backed Securities, or CMBS, including:

o	CMBS rated AAA through BBB

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

·	Other Commercial Real Estate Assets, including:

o	Debt and equity tranches of CRE CDOs

o	Loans to real estate companies including REITs and REOCs

o	Commercial real estate securities

o	Commercial property

o	Preferred equity investments

·	Agency RMBS:

o	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

We completed our initial public offering on September 22, 2009. In that offering, and in a concurrent private offering, we raised net proceeds of approximately $257.3 million.

Our objective is to provide attractive risk-adjusted returns to our investors over the long-term, primarily through dividends and secondarily through capital appreciation. We intend to achieve this objective by investing in a broad range of commercial real estate-related assets to construct a portfolio that is designed to achieve attractive risk-adjusted returns and that is structured to comply with the various federal income tax requirements for REIT status and to maintain our exemption from the 1940 Act.

Since we commenced operations in September 2009, we have focused our investment activities on acquiring CMBS and on purchasing commercial mortgage loans. We expect that over the near term our investment portfolio will be weighted toward CMBS and commercial real estate loans, subject to maintaining our REIT qualification and acquiring Agency RMBS to maintain our 1940 Act exemption.

Our investment strategy is intended to take advantage of opportunities in the current interest rate and credit environment. We will adjust our strategy to changing market conditions by shifting our asset allocations across these various asset classes as interest rate and credit cycles change over time. We believe that our strategy, combined with FIDAC’s experience, will enable us to pay dividends and achieve capital appreciation throughout changing market cycles. We expect to take a long-term view of assets and liabilities, and our reported earnings and mark-to-market valuations at the end of a financial reporting period will not significantly impact our objective of providing attractive risk-adjusted returns to our stockholders over the long-term.

We do not presently intend to use recourse borrowings to finance our acquisitions of commercial real estate loans and CMBS. We have financed our current CMBS portfolio with non-recourse financings under the Term Asset-Backed Securities Loan Facility, or the TALF. Based on market conditions, we intend to utilize structural leverage through securitizations of commercial real estate loans or CMBS. With regard to leverage available under the TALF, the maximum level of allowable leverage under currently announced CMBS programs would be 6.67:1. With regard to securitizations, the leverage will depend on the market conditions for structuring such transactions. We will seek to finance the acquisition of Agency RMBS using repurchase agreements with counterparties, which are recourse. We anticipate that leverage for Agency RMBS would be available to us, which we expect would allow for debt-to-equity ratio in the range of 2:1 to 4:1 but would likely not exceed 6:1. Based on current market conditions, we expect to operate within the leverage levels described above in the near and long term. We are not required to maintain any specific debt-to-equity ratio, as we believe the level of leverage will vary based on the particular asset class, the characteristics of the portfolio and market conditions. We can provide no assurance that we will be able to obtain financing as described herein.

If we finance all or a portion of our portfolio, subject to maintaining our qualification as a REIT, we may utilize derivative financial instruments, including, among others, interest rate swaps, interest rate caps, and interest rate floors to hedge all or a portion of the interest rate risk. Specifically, we may seek to hedge our exposure to potential interest rate mismatches between the interest we earn on our assets and our borrowing costs caused by fluctuations in short-term interest rates. In utilizing leverage and interest rate hedges, our objectives will be to improve risk-adjusted returns and, where possible, to lock in, on a long-term basis, a spread between the yield on our assets and the cost of our financing.

Current Environment

We commenced operations in September 2009 in the midst of challenging market conditions. Beginning in the summer of 2007, significant adverse changes in financial market conditions resulted in a deleveraging of the entire global financial system. As part of this process, residential and commercial mortgage markets in the United States have experienced a variety of difficulties including loan defaults, credit losses and reduced liquidity.

In response to these unprecedented events, the U.S. Government has taken a number of actions to improve stability in the financial markets and encourage lending. These programs include the Troubled Assets Relief Program, or TARP, the TALF and the Public-Private Investment Program, or PPIP and large scale asset purchases by the Federal Reserve among others. It is not possible for us to predict how these programs will impact our business.

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (or the Dodd-Frank Act). The Dodd-Frank Act provides for new regulations on financial institutions and creates new supervisory and advisory bodies, including the new Consumer Financial Protection Bureau. The Dodd-Frank Act tasks many agencies with issuing a variety of new regulations, including rules related to mortgage origination and servicing, securitization and derivatives. As the Dodd-Frank Act has only recently been enacted and because a significant number of regulations have yet to be proposed or adopted in final form, it is not possible for us to predict how the Dodd-Frank Act will impact our business.

Market conditions are evolving on a number of fronts. Regulatory and technical dynamics continue to develop, and monetary policy initiatives, including the prospect of further large scale asset purchases by the Federal Reserve, continue to support asset prices and lower yields across a wide range of market sectors, including ours.

Factors Impacting our Operating Results

In addition to the prevailing market conditions, we expect that the results of our operations will be affected by a number of factors and will 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, prepayment rates on our mortgage loans and prepayment speeds, as measured by the Constant Prepayment Rate, or CPR, on our CMBS and 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 the majority of our Mortgage-Backed Securities, or MBS, 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), a component of stockholders’ equity, 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. A change in our ability or intent to continue to hold any of our investment securities or a change in our expectation of recovering the entire amortized cost basis 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 underlying assets and the nature and level of credit enhancements, if any, supporting our assets. FIDAC and FIDAC’s Investment Committee will approve and monitor credit risk and other risks associated with each investment. We will seek to manage this risk through our pre-acquisition due diligence processes including, but not limited to, analysis of the sponsor/borrower, the structure of the investment, property information including tenant composition, the property’s historical operating performance and evaluation of the market in which the property is located.

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, drives increased expenses as 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:

·	the interest expense associated with our borrowings to increase;

·	the value of our mortgage loans and MBS to decline;

·	coupons on our adjustable-rate mortgage loans and MBS to reset, although on a delayed basis, to higher interest rates;

·	to the extent applicable under the terms of our investments, prepayments on our mortgage loan portfolio and MBS 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:

·	the interest expense associated with our borrowings to decrease;

·	the value of our mortgage loan and MBS portfolio to increase;

·	coupons on our adjustable-rate mortgage loans and MBS to reset, although on a delayed basis, to lower interest rates

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

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

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.

Critical Accounting Policies

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. These accounting principles may require us to make some complex and subjective decisions and assessments. Our most critical accounting policies will involve decisions and assessments that could affect our reported assets and liabilities, as well as our reported revenues and expenses. We believe that all of the decisions and assessments upon which our consolidated financial statements are based will be reasonable at the time made and based upon information available to us at that time. The following are or will be our most critical accounting policies:

Loans and Securities Held for Investment

We purchase MBS, commercial real estate loans, and commercial real estate-related securities, a portion of which may be held for investment. Loans or securities held for investment are intended to be held to maturity and, accordingly, will be reported at amortized cost less an allowance for loan losses.

Securities Held as Available-for-Sale

A portion of our CMBS and commercial real estate-related securities may be held as available-for-sale. In accordance with Accounting Standards Codification (“ASC”) 320, Investments – Debt and Equity Securities, all assets classified as available-for-sale are reported at fair value, and unrealized gains and losses included in other comprehensive income. We analyze assets for impairment and any credit impairment is reflected in the consolidated statements of operations.

Valuation of Financial Instruments

ASC 820, Fair Value Measurements and Disclosure, establishes a framework for measuring fair value, and expands related disclosures. This guidance establishes a hierarchy of valuation techniques based on the observability of inputs utilized in measuring financial instruments at fair values. It also establishes market based or observable inputs as the preferred source of values, followed by valuation models using management assumptions in the absence of market inputs. The three levels of the hierarchy are described below:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Prices are determined using other significant observable inputs. Observable inputs are inputs that other market participants would use in pricing a security. These may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk and others.

Level 3 – Prices are determined using significant unobservable inputs. In situations where quoted prices or observable inputs are unavailable (for example, when there is little or no market activity for an investment at the end of the period), unobservable inputs may be used.

Unobservable inputs reflect our own assumptions about the factors that market participants would use in pricing an asset or liability, and would be based on the best information available. We anticipate that a portion of our future asset purchases may be classified as Level 3 in the valuation hierarchy.

FASB has provided guidance for the valuation of assets when the market is not active and when the volume and level of activity have significantly decreased, along with guidance on identifying transactions that are not orderly. This guidance allows the use of management’s internal cash flow and discount rate assumptions when relevant observable data does not exist and clarifies how observable market information and market quotes should be considered when measuring fair value in an inactive market. Additionally, FASB provided guidance on determining fair value when the volume and level of activity for the asset or liability have significantly decreased when compared with normal market activity for the asset or liability (or similar assets or liabilities). This guidance provides factors to evaluate if there has been a decrease in normal market activity and if so, provides a methodology to analyze transactions or quoted prices and make necessary adjustments to fair value.The objective is to determine the point within a range of fair value estimates that is most representative of fair value under current market conditions.

We rely on independent pricing of our assets at each quarter’s end to verify what we believe to be reasonable estimates of fair market value. FIDAC will evaluate the pricing of our assets by conducting its own analysis at least on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. Any changes to the valuation methodology will be reviewed by management to ensure the changes are appropriate. As markets and products develop and the pricing for certain products becomes more transparent, we will continue to refine our valuation methodologies. The methods used by us may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while we anticipate that our valuation methods will be appropriate and consistent with other market participants, the use of different methodologies, or assumptions, to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. We will use inputs that are current as of the measurement date, which may include periods of market dislocation, during which price transparency may be reduced.

Loan Impairment

Loans held for investment will be valued quarterly to determine if an impairment exists. Impairment occurs when it is deemed probable that we will not be able to collect all amounts due according to the contractual terms of the loan. If upon completion of the valuation, the fair value of the underlying collateral securing the impaired loan is less than the net carrying value of the loan, an allowance will be created with a corresponding charge to the provision for losses. An allowance for each loan would be maintained at a level believed adequate by management to absorb probable losses. We may elect to sell a loan held for investment due to adverse changes in credit fundamentals. Once the determination has been made by us that we will no longer hold the loan for investment, we will account for the loan at the lower of amortized cost or estimated fair value. The reclassification of the loan and recognition of impairments could adversely affect our reported earnings.

Impairment of Securities

Securities are valued quarterly to determine if an OTTI exists. Impairment occurs when the fair value of the investment is less than its amortized cost basis. The securities will be evaluated based on the intent to sell the security or if it is more likely than not that we will be required to sell the debt security before its anticipated recovery. If the intention is not to sell (and we are not required to sell), the credit loss, if any, will be recognized in the statement of earnings and the balance of impairment related to other factors recognized in Other Comprehensive Income, or OCI. Credit loss is determined by comparing the difference between the present value of cash flows expected to be collected and the amortized cost basis. If the intention is to sell the security (or we are required to sell) before its anticipated recovery, the full OTTI will be recognized in the statement of earnings. The recognition of impairments could adversely affect our reported earnings.

Classifications of Investment Securities

Our MBS are expected to initially consist primarily of commercial real estate debt instruments, CMBS and Agency RMBS that we will classify as either available-for-sale or held-to-maturity. As such, we expect that our MBS classified as available-for-sale will be carried at their fair value in accordance with ASC 320, with changes in fair value recorded through accumulated other comprehensive income/(loss), a component of stockholders’ equity, rather than through earnings. MBS assets held for investment will be stated at their amortized cost, net of deferred fees and costs with income recognized using the effective interest method. When the estimated fair value of an available-for-sale security is less than amortized cost, we will consider whether there is an OTTI in the value of the security. Unrealized losses on securities considered to be other-than-temporary will be recognized in earnings. The determination of whether a security is other-than-temporarily impaired will involve judgments and assumptions based on subjective and objective factors. Consideration will be given to (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of recovery in fair value of the security and (iii) our intent to sell our investment in the security, or whether it is more likely than not we will be required to sell the security before its anticipated recovery in fair value. Investments with unrealized losses will not be considered other-than-temporarily impaired if we have the ability and intent to hold the investments for a period of time, to maturity if necessary, sufficient for a forecasted market price recovery up to or beyond the amortized cost of the investments.

Investment Consolidation

When acquiring assets, we evaluate the underlying entity that issued the securities we intend to acquire, or to which we will make a loan to determine the appropriate accounting. We refer, initially, to guidance in ASC 860-Transfers and Servicing and ASC 810-Consolidation, in performing our analysis. ASC 810 addresses consolidation of certain entities in which voting rights are not effective in identifying an investor with a controlling financial interest. An entity is subject to consolidation under this guidance if it is determined that the entity is a Variable Interest Entity, or VIE. In a VIE, the investors either do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support, are unable to direct the entity’s activities, or are not exposed to the entity’s losses or entitled to its residual returns proportional to their ownership. Variable interest entities within the scope of this guidance are required to be consolidated by their primary beneficiary. The primary beneficiary of a VIE is determined to be the party that absorbs a majority of the entity’s expected losses, its expected returns, or both. This guidance has been materially updated effective January 1, 2010. The update which eliminates the exemption for a Qualifying Special Purpose Entity or QSPE requires ongoing analysis of the primary beneficiary in a VIE. This update will have no material effect on our financial statements based on our current asset holdings as we have no interest in any QSPE’s or VIE’s at this time.

Securitizations

We may periodically enter into transactions in which we sell financial assets, such as commercial mortgage loans, CMBS and other assets. Upon a transfer of financial assets, we will sometimes retain or acquire senior or subordinated interests in the related assets. Gains and losses on such transactions will be recognized using the guidance in ASC 860-Transfers and Servicing, which is based on a financial components approach that focuses on control. Under this approach, after a transfer of financial assets that meets the criteria for treatment as a sale--legal isolation, ability of transferee to pledge or exchange the transferred assets without constraint, and transferred control--an entity recognizes the financial and servicing assets it acquired or retained and the liabilities it has incurred, derecognizes financial assets it has sold, and derecognizes liabilities when extinguished. We will determine the gain or loss on sale of mortgage loans by allocating the carrying value of the underlying mortgage between securities or loans sold and the interests retained based on their fair values. The gain or loss on sale is the difference between the cash proceeds from the sale and the amount allocated to the securities or loans sold. From time to time, we may securitize mortgage loans we hold if such financing is available. These transactions will be recorded in accordance with ASC 860 and will be accounted for as either a “sale” and the loans will be removed from our balance sheet or as a “financing” and will be classified as “securitized loans” on our balance sheet, depending upon the structure of the securitization transaction.

Valuations of Available-for-Sale Securities

Our available-for-sale securities have fair values as determined by FIDAC with reference to price estimates provided by independent pricing services and dealers in the securities. FIDAC will evaluate available-for-sale securities estimates by conducting its own analysis at least on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. The pricing is subject to various assumptions which could result in different presentations of value.

When the fair value of an available-for-sale security is less than its amortized cost for an extended period, we will consider whether there is an OTTI in the value of the security. If, based on our analysis, a credit portion of OTTI exists, the cost basis of the security is written down to the then-current fair value, and the unrealized loss is transferred from accumulated other comprehensive loss as an immediate reduction of current earnings as if the loss had been realized in the period of OTTI. The determination of OTTI is a subjective process, and different judgments and assumptions could affect the timing of loss realization.

We will consider the following factors when determining an OTTI for a security or investment:

·	The length of time and the extent to which the market value has been less than the amortized cost;

·	Whether the security has been downgraded by a rating agency; and

·	Whether we have the intent to sell the security or will be required to sell the security before any anticipated recovery in market value to amortized cost.

The determination of OTTI is made at least quarterly. If we determine an impairment to be other than temporary we will need to realize a loss that would have an impact on future income.

Interest Income Recognition

Interest income on available-for-sale securities and loans held for investment will be recognized over the life of the investment using the effective interest method. Interest income on mortgage-backed securities is recognized using the effective interest method. Interest income on loans held for investment is recognized based on the contractual terms of the loan instruments. Income recognition will be suspended for loans when, in the opinion of management, a full recovery of income and principal becomes doubtful. Income recognition will be resumed when the loan becomes contractually current and performance is demonstrated to be resumed. Any loan fees or acquisition costs on originated loans or securities will be capitalized and recognized as a component of interest income over the life of the investment using the effective interest method.

Management will estimate, at the time of purchase, the future expected cash flows and determine the effective interest rate based on these estimated cash flows and our purchase price. As needed, these estimated cash flows will be updated and a revised yield computed based on the current amortized cost of the investment. In estimating these cash flows, there will be a number of assumptions that will be subject to uncertainties and contingencies. These include the rate and timing of principal payments (including prepayments, repurchases, defaults and liquidations), the pass-through or coupon rate and interest rate fluctuations. In addition, interest payment shortfalls due to delinquencies on the underlying mortgage loans, and the timing of the magnitude of credit losses on the mortgage loans underlying the securities have to be judgmentally estimated. These uncertainties and contingencies are difficult to predict and are subject to future events that may impact management’s estimates and our interest income.

Security transactions will be recorded on the trade date. Realized gains and losses from security transactions will be determined based upon the specific identification method and recorded as gain (loss) on sale of available for sale securities and loans held for investment in the consolidated statement of operations.

We account for accretion of discounts or amortization of premiums on available-for-sale securities and real estate loans using the effective interest method. Such amounts will be included as a component of interest income in the consolidated statement of operations.

Accounting For Derivative Financial Instruments

Our policies permit us to enter into derivative contracts, including interest rate swaps and interest rate caps, as a means of mitigating our interest rate risk. We intend to use interest rate derivative instruments to mitigate interest rate risk rather than to enhance returns.

We will account for derivative financial instruments in accordance with ASC 815, Derivatives and Hedging. ASC 815 requires us to recognize all derivatives as either assets or liabilities in the consolidated statement of financial condition and to measure those instruments at fair value. Additionally, fair value adjustments will affect either other comprehensive income in stockholders’ equity until the hedged item is recognized in earnings or net income depending on whether the derivative instrument qualifies as a hedge for accounting purposes and, if so, the nature of the hedging activity.

In the normal course of business, we may use a variety of derivative financial instruments to manage, or hedge, interest rate risk. When the terms of an underlying transaction are modified, or when the underlying hedged item ceases to exist, all changes in the fair value of the instrument are marked-to-market with changes in value included in net income for each period until the derivative instrument matures or is settled. Any derivative instrument used for risk management that does not meet the hedging criteria is marked-to-market with the changes in value included in net income. Qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements shall be included in future financial reporting.

Derivatives will be used for hedging purposes rather than speculation. We will rely on quotations from a third party to determine their fair values. FIDAC will evaluate the quotations provided by third parties by conducting its own analysis at least on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. If our hedging activities do not achieve our desired results, our reported earnings may be adversely affected.

Reserve for Possible Credit Losses

The expense for possible credit losses in connection with debt investments is the charge to earnings to increase the allowance for possible credit losses to the level that management estimates to be adequate considering delinquencies, loss experience and collateral quality. Other factors considered relate to geographic trends and product diversification, the size of the portfolio and current economic conditions. Based upon these factors, we will establish the provision for possible credit losses by category of asset. When it is probable that we will be unable to collect all amounts contractually due, the account is considered impaired.

Where impairment is indicated, a valuation write-down or write-off is measured based upon the excess of the recorded investment amount over the net fair value of the collateral, as reduced by selling costs. Any deficiency between the carrying amount of an asset and the net sales price of repossessed collateral is charged to the allowance for credit losses.

Income Taxes

We elected and qualified to be taxed as a REIT for our taxable year ending on December 31, 2009. Accordingly, we will generally not be subject to U.S. federal income tax (or applicable state or local taxes) to the extent that we make qualifying distributions to our stockholders, and provided we satisfy on a continuing basis, through actual investment and operating results, the REIT requirements including certain asset, income, distribution and stock ownership tests. If we fail to qualify as a REIT, and do not qualify for certain statutory relief provisions, we will be subject to U.S. federal income tax (and applicable state and local taxes) and may be precluded from qualifying as a REIT for the subsequent four taxable years following the year in which we lost our REIT qualification. Accordingly, our failure to qualify as a REIT could have a material adverse impact on our results of operations and amounts available for distribution to our stockholders.

The dividends paid deduction of a REIT for qualifying dividends to its stockholders is computed using our taxable income as opposed to net income reported on the financial statements. Taxable income, generally, will differ from net income reported on the financial statements because the determination of taxable income is based on tax provisions and not financial accounting principles.

We may elect to treat certain of our subsidiaries as Taxable REIT Subsidiaries (TRS). In general, a TRS may hold assets and engage in activities that a REIT cannot hold or engage in directly and generally may engage in any real estate or non-real estate-related business. A domestic TRS is subject to U.S. federal income tax (and applicable state and local taxes). We presently have not elected TRS status for any of our subsidiaries.

Should we establish a TRS, as such entity generated net income, it could declare dividends to us which would be included in our taxable income and necessitate a distribution to our stockholders. Conversely, to avoid a distribution requirement, the TRS could retain its earnings and we would increase book equity of the consolidated entity by the amount of the retained earnings.

Recent Accounting Pronouncements

General Principles

Generally Accepted Accounting Principles (ASC 105)

In June 2009, the Financial Accounting Standards Board (FASB) issued The Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (Codification) which revises the framework for selecting the accounting principles to be used in the preparation of financial statements that are presented in conformity with GAAP. The objective of the Codification is to establish the FASB Accounting Standards Codification (ASC) as the source of authoritative accounting principles recognized by the FASB. Codification is effective September 30, 2009. In adopting the Codification, all non-grandfathered, non-SEC accounting literature not included in the Codification is superseded and deemed non-authoritative. Codification requires any references within our consolidated financial statements be modified from FASB issues to ASC. However, in accordance with the FASB Accounting Standards Codification Notice to Constituents (v 2.0), we will not reference specific sections of the ASC but will use broad topic references.

Our recent accounting pronouncements section has been formatted to reflect the same organizational structure as the ASC. Broad topic references will be updated with pending content as it is released.

Assets

Receivables (ASC 310)

In July 2010, the FASB released ASU 2010-20, which addresses disclosures about the credit quality of financing receivables and the allowance for credit losses. The purpose of this update is to provide greater transparency regarding the allowance for credit losses and the credit quality of financing receivables as well as to assist in the assessment of credit risk exposures and evaluation of the adequacy of allowances for credit losses. Additional disclosures must be provided on a disaggregated basis. The update defines two levels of disaggregation – portfolio segment and class of financing receivable. Additionally, the update requires disclosure of credit quality indicators, past due information and modifications of financing receivables. The update is not applicable to mortgage banking activities (loans originated or purchased for resale to investors); derivative instruments such as repurchase agreements; debt securities; a transferor’s interest in securitization transactions accounted for as sales under ASC 860; and purchased beneficial interests in securitized financial assets. This update is effective for us for interim or annual periods ending on or after December 15, 2010. At this time, we are evaluating the effect of this update on future financial reporting.

Investments in Debt and Equity Securities (ASC 320)

New guidance was provided to make impairment guidance more operational and to improve the presentation and disclosure of OTTI on debt and equity securities, as well as beneficial interests in securitized financial assets, in financial statements. This was as a result of the SEC mark-to-market study mandated under the Emergency Economic Stabilization Act of 2009 (“EESA”). The SEC’s recommendation was to “evaluate the need for modifications (or the elimination) of current OTTI guidance to provide for a more uniform system of impairment testing standards for financial instruments.” The guidance revises the OTTI evaluation methodology. Previously the analytical focus was on whether the entity had the “intent and ability to retain its investment in the debt security for a period of time sufficient to allow for any anticipated recovery in fair value.” Now the focus is on whether the entity (1) has the intent to sell the investment securities, (2) is more likely than not that to be required to sell the investment securities before recovery, or (3) does not expect to recover the entire amortized cost basis of the investment securities. Further, the security is analyzed for credit loss (the difference between the present value of cash flows expected to be collected and the amortized cost basis). If the entity does not intend to sell the debt security, nor will be required to sell the debt security prior to its anticipated recovery, the credit loss, if any, will be recognized in the statement of operations, while the balance of impairment related to other factors will be recognized in OCI. If the entity intends to sell the security, will be required to sell the security before its anticipated recovery, or does not expect to recover the entire amortized cost basis of the security, the full OTTI will be recognized in the statement of operations.

OTTI has occurred if there has been an adverse change in future estimated cash flows and its impact reflected in current earnings. The determination cannot be overcome by management judgment of the probability of collecting all cash flows previously projected. The objective of OTTI analysis is to determine whether it is probable that the holder will realize some portion of the unrealized loss on an impaired security. Factors to consider when making OTTI decision include information about past events, current conditions, reasonable and supportable forecasts, remaining payment terms, financial condition of the issuer, expected defaults, value of underlying collateral, industry analysis, sector credit rating, credit enhancement, and financial condition of guarantor. Our CMBS and Agency RMBS investments would fall under this guidance, and as such, we will assess each security for OTTIs based on estimated future cash flows.

For the quarter ended September 30, 2010, we did not have unrealized losses in investment securities that were deemed OTTI.

Broad Transactions

Consolidation (ASC 810)

On January 1, 2009, FASB amended the guidance concerning, noncontrolling interests in consolidated financial statements, which changes the presentation of financial statements. This guidance requires us to classify noncontrolling interests (previously referred to as “minority interest”) as part of consolidated net income and to include the accumulated amount of noncontrolling interests as part of stockholders’ equity. Similarly, in the presentation of stockholders’ equity, we must distinguish between equity amounts attributable to controlling interest and amounts attributable to the noncontrolling interests – previously classified as minority interest outside of stockholders’ equity. In addition to these financial reporting changes, this guidance provides for significant changes in accounting related to noncontrolling interests; specifically, increases and decreases in our controlling financial interests in consolidated subsidiaries will be reported in equity similar to treasury stock transactions. If a change in ownership of a consolidated subsidiary results in loss of control and deconsolidation, any retained ownership interests are re-measured with the gain or loss reported in net earnings. For the quarter ended September 30, 2010, we do not have any non-controlling interests.

Effective January 1, 2010, the consolidation standards have been amended by ASU 2009-17. This amendment updates the existing standard and eliminate the exemption from consolidation of a Qualified Special Purpose Entity. The update requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity (VIE). The analysis identifies the primary beneficiary of a VIE as the enterprise that has both: a) the power to direct the activities that most significantly impact the entity’s economic performance and b) the obligation to absorb losses and/or the right to receive benefits from the entity which could potentially be significant to the VIE. The update requires enhanced disclosures to provide users of financial statements with more transparent information about an enterprises involvement in a VIE. Further, ongoing assessments of whether an enterprise is the primary beneficiary of a VIE are required. For the quarter ended September 30, 2010, we were not the primary beneficiary of any VIEs.

Derivatives and Hedging (ASC 815)

Effective January 1, 2009, the FASB issued guidance attempting to improve the transparency of financial reporting by mandating the provision of additional information about how derivative and hedging activities affect an entity’s financial position, financial performance and cash flows. This guidance changed the disclosure requirements for derivative instruments and hedging activities by requiring enhanced disclosure about (1) how and why an entity uses derivative instruments, (2) how derivative instruments and related hedged items are accounted for, and (3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. To adhere to this guidance, qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts, gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements must be made. This disclosure framework is intended to better convey the purpose of derivative use in terms of the risks that an entity is intending to manage. We are currently not engaged in any derivative or hedging activity and do not intend to elect hedge accounting at this time; however, we will comply with all disclosure requirements set forth by the FASB concerning derivatives and hedging when applicable.

The FASB issued ASU 2010-8 in February, 2010. ASU 2010-8 provided technical corrections to ASC 815. This update provides a four step analysis to determine whether call or put options that can accelerate the settlement of debt instruments should be considered clearly and closely related to the debt host contract. If it is determined that such option is closely related to the host contract, bifurcation of the host contract from the derivative instrument is not necessary. If an existing hybrid instrument requires bifurcation under this update, a one-time election can be made to utilize the Fair Value Option for the entire contract. This update is effective on January 1, 2010 and has no material effect on our financial statements.

ASU 2010-11 was issued in March 2010 and defined a scope exception for embedded derivative features which involve only the transfer of credit risk that is only in the form of subordination of one financial instrument to another. Such instruments would not be subject to bifurcation under ASC 815. This guidance is effective for the first quarter beginning after June 15, 2010, however early adoption for the first fiscal quarter is allowed. We elected to adopt effective the first quarter of 2010. Adoption had no material effect on our financial statements.

Fair Value Measurements and Disclosures (ASC 820)

In October 2008 the EESA was signed into law. Section 133 of the EESA mandated that the SEC conduct a study on mark-to-market accounting standards. The SEC provided its study to the U.S. Congress on December 30, 2008. Part of the recommendations within the study indicated that “fair value requirements should be improved through development of application and best practices guidance for determining fair value in illiquid or inactive markets”. As a result of this study and the recommendations therein, on April 9, 2009, the FASB issued additional guidance for determining fair value when the volume and level of activity for the asset or liability have significantly decreased when compared with normal market activity for the asset or liability (or similar assets or liabilities). The guidance gives specific factors to evaluate if there has been a decrease in normal market activity and if so, provides a methodology to analyze transactions or quoted prices and make necessary adjustments to fair value. The objective is to determine the point within a range of fair value estimates that is most representative of fair value under current market conditions.

In August 2009, FASB provided further guidance (ASU 2009-05) regarding the fair value measurement of liabilities. The guidance states that a quoted price for the identical liability when traded as an asset in an active market is a Level 1 fair value measurement. If the value must be adjusted for factors specific to the liability, then the adjustment to the quoted price of the asset shall render the fair value measurement of the liability a lower level measurement. This update was effective for reporting periods following issuance. This guidance has no material effect on the fair valuation of our liabilities.

In September 2009, FASB issued guidance (ASU 2009-12) on measuring the fair value of certain alternative investments. This guidance offers investors a practical expedient for measuring the fair value of investments in certain entities that calculate net asset value (NAV) per share. If an investment falls within the scope of the ASU, the reporting entity is permitted, but not required to use the investment’s NAV to estimate its fair value. This guidance has no material effect on the fair valuation of our assets, as we do not hold any assets qualifying under this guidance.

In January 2010, FASB issued guidance (ASU 2010-06) which increases disclosure regarding the fair value of assets. The key provisions of this guidance include the requirement to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 including a description of the reason for the transfers. Previously this was only required of transfers between Level 2 and Level 3 assets. Further, reporting entities are required to provide fair value measurement disclosures for each class of assets and liabilities; a class is potentially a subset of the assets or liabilities within a line item in the statement of financial position. Additionally, disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements are required for either Level 2 or Level 3 assets. This portion of the guidance is effective for all interim and annual reporting periods after December 15, 2009. The guidance also requires that the disclosure on any Level 3 assets presents separately information about purchases, sales, issuances and settlements. In other words, Level 3 assets are presented on a gross basis rather than as one net number. However, this last portion of the guidance is not effective until December 15, 2010. Adoption of this guidance results in increased disclosure in the notes to our financial statements.

Financial Instruments (ASC 825)

On April 9, 2009, the FASB issued guidance which requires disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements.

Subsequent Events (ASC 855)

ASC 855 provides general standards governing accounting for and disclosures of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. ASC 855 also provides guidance on the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that an entity should make about events or transactions occurring after the balance sheet date.

In February 2010, FASB issued ASU 2010-09 as an amendment to ASC 855. This update eliminates the requirement to provide a specific date through which subsequent events were evaluated. The purpose of this update was to alleviate potential conflicts between ASC 855 and SEC reporting requirements. The update was effective upon issuance. We evaluated subsequent events through date of issuance of this Quarterly Report on Form 10-Q.

Transfers and Servicing (ASC 860)

On June 12, 2009, the FASB issued ASU 2009-16 an amendment update to the accounting standards governing the transfer and servicing of financial assets .This amendment updates the existing standard and eliminates the concept of a Qualified Special Purpose Entity (“QSPE”); clarifies the surrendering of control to effect sale treatment; modifies the financial components approach – limiting the circumstances in which a financial asset or portion thereof should be derecognized when the transferor maintains continuing involvement and defines the term “Participating Interest”. Under this standard update, the transferor must recognize and initially measure at fair value all assets obtained and liabilities incurred as a result of a transfer, including any retained beneficial interest. Additionally, the amendment requires enhanced disclosures regarding the transferors risk associated with continuing involvement in any transferred assets. The amendment is effective beginning January 1, 2010. At the quarter ended September 30, 2010, we have determined this amendment has no material effect on our financial statements.

Financial Condition

At September 30, 2010, our portfolio consisted of $228.5 million of CMBS and $166.0 million of commercial mortgage loans.

The following table summarizes certain characteristics of our portfolio September 30, 2010 and December 31, 2009.

	Quarter ended September 30, 2010			For the period ended December 31, 2009
	(dollars in thousands)			(dollars in thousands)
Investment portfolio at period-end	$	394,515		$	70,911
Interest bearing liabilities at period-end		173,060			25,579
Leverage at period-end (Debt:Equity)	0.6:1			0.1:1
Fixed-rate investments as percentage of portfolio		94	%		100	%
Adjustable-rate investments as percentage of portfolio		6	%		-
Fixed-rate investments
Commercial mortgage-backed securities as percentage of fixed-rate assets		58	%		45	%
Commercial mortgage loans as percentage of fixed-rate assets		36	%		55	%
Commercial preferred equity loans as percentage of fixed-rate assets		6	%		-
Adjustable-rate investments
Commercial mortgage loans as percentage of adjustable-rate assets		100	%		-
Weighted average yield on interest earning assets at period-end		7.42	%		9.67	%
Weighted average cost of funds at period-end		3.60	%		3.62	%

The following table summarizes certain characteristics of each class in our portfolio at September 30, 2010 and December 31, 2009.

	Quarter ended						For the period ended
	September 30, 2010						December 31, 2009
	CMBS			Loans(1)			CMBS			Loans
Weighted average cost basis	$	101.4		$	95.6		$	96.8		$	100.0
Weighted average fair value	$	108.2		$	95.6		$	95.7		$	100.0
Weighted average coupon		5.40	%		8.94	%		5.81	%		12.24	%
Fixed-rate percentage of asset class		100	%		86	%		100	%		100	%
Adjustable-rate percentage of asset class		-			14	%		-			-
Weighted average yield on assets at period-end		5.13	%		10.04	%		6.50	%		12.24	%
Weighted average cost of funds at period-end		3.60	%		-			3.62	%		-

(1) Includes Commercial mortgage loans and commercial preferred equity loans.

Results of Operations for the Quarter Ended September 30, 2010

We commenced our operations in September 2009. As a result, there is no corresponding period for comparison and we have presented information for the period ended December 31, 2009.

Net Income (Loss) Summary

Our net income for the quarter ended September 30, 2010 was $3.2 million, or $0.18 per share. Our net loss for the period commencing September 22, 2009 through December 31, 2009 was $1.0 million, or $0.06 per share. Our revenue was generated primarily by interest income. We attribute the net loss per share to our start up costs for the period ended December 31, 2009. The table below presents the net income (loss) summary for the quarter and nine months ended September 30, 2010 and for the period ended December 31, 2009:

Net Income (Loss) Summary
(dollars in thousands, except share and per share data)


	For the quarter ended September 30, 2010		For the nine months ended September 30, 2010			For the period September 22, 2009 through December 31, 2009

Net interest income:
Interest income	$	5,708	$	13,443		$	325
Interest expense		1,569		3,710			26
Net interest income		4,139		9,733			299

Realized gains on sale of investments		-		623			-

Other expenses:
Management fee		356		994			354
Provision for loan losses		63		113			2
General and administrative expenses		505		1,813			951
Total other expenses		924		2,920			1,307
Net income (loss) before income tax		3,215		7,436			(1,008	)
Income tax		-		1			1
Net income (loss)	$	3,215	$	7,435		$	(1,009	)
Net income (loss) per share-basic and diluted	$	0.18	$	0.41		$	(0.06	)
Weighted average number of shares outstanding-basic and diluted		18,120,112		18,120,112			18,120,112
Other comprehensive income (loss):
Net income (loss)		3,215		7,435			(1,009	)
Unrealized gain (loss) on securities available for sale		9,364		15,564			(373	)
Reclassification adjustment for realized gains (losses) included in income		-		(623	)		-
Total other comprehensive income (loss)		9,364		14,941			(373	)
Comprehensive income (loss)	$	12,579	$	22,376		$	(1,382	)

Interest Income and Average Earning Asset Yield

We had average earning assets, excluding cash, of $318.2 million, $254.1 million and $63.4 million for the quarter and nine months ended September 30, 2010 and the period ended December 31, 2009, respectively. Our interest income was $5.7 million, $13.4 million and $279,000 for the quarter and nine months ended September 30, 2010 and the period ended December 31, 2009, respectively. The annualized yield on our portfolio was 7.15%, 7.02% and 9.20% for the quarter and nine months ended September 30, 2010 and the period ended December 31, 2009, respectively.

Interest Expense and the Cost of Funds

We had average borrowed funds of $173.2 million and total interest expense of $1.6 million for the quarter ended September 30, 2010. Our average cost of funds was 3.60% for the quarter ended September 30, 2010. We had average borrowed funds of $137.5 million and total interest expense of $3.7 million for the nine months ended September 30, 2010. Our average cost of funds was 3.60% for the nine months ended September 30, 2010. We had average borrowed funds of $25.6 million and interest expense of $26,000 for the period commencing September 22, 2009 through December 31, 2009. Our average cost of funds was 3.62% for the period commencing September 22, 2009 through December 31, 2009. We attribute the increase in interest expense to the increase of financing costs to purchase additional assets.

Net Interest Income

Our net interest income, which equals interest income, excluding income earned on cash, less interest expense, totaled $4.1 million, $9.7 million and $253,000 for the quarter and nine months ended September 30, 2010 and the period commencing September 22, 2009, and ending December 31, 2009, respectively. Our net interest spread, which equals the yield on our average assets for the period less the average cost of funds was 3.55%, 3.42% and 6.05% for the quarter and nine months ended September 30, 2010 and the period commencing September 22, 2009, and ending December 31, 2009, respectively. We attribute the decrease in net interest spread to purchases of lower yielding CMBS.

The table below shows our average assets held, total interest income, weighted average yield on average interest earning assets at period end, average debt balance, interest expense, weighted average cost of funds at period end, net interest income, and net interest rate spread for the quarter ended September 30, 2010 and the period commencing September 22, 2009, and ending December 31, 2009.

Net Interest Income
(Ratios have been annualized, dollars in thousands)
					Yield on
	Average		Interest		Average												Net
	Earning		Earned		Interest			Average				Average			Net		Interest
	Assets		on		Earning			Debt		Interest		Cost			Interest		Rate
	Held*		Assets		Assets*			Balance		Expense		of Funds			Income		Spread
Quarter ended September 30, 2010	$	318,188	$	5,685		7.15	%	$	173,226	$	1,569		3.60	%	$	4,116		3.55	%
For the period September 22, 2009 to December 31, 2009	$	63,441	$	279		9.67	%	$	25,579	$	26		3.62	%	$	253		6.05	%

* Excludes cash and cash equivalents.

Gains and Losses on Sales

During the quarter ended September 30, 2010, we had no sales of investments. We also had no sales of investments during the period commencing September 22, 2009 through December 31, 2009.

Management Fee and General and Administrative Expenses

We paid FIDAC a management fee of $356,000 and $354,000 for the quarter ended September 30, 2010 and the period commencing September 22, 2009 through December 31, 2009, respectively. The management fee is based on stockholders’ equity.

General and administrative or G&A expenses, including the provision for loan losses, were $568,000 and $1.0 million for the quarter end September 30, 2010 and the period commencing September 22, 2009 through December 31, 2009, respectively.

Total expenses as a percentage of average total assets were 0.83% and 1.74% for the quarter ended September 30, 2010 and the period commencing September 22, 2009 through December 31, 2009.

FIDAC has currently 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 quarter ended September 30, 2010 and the period commencing September 22, 2009 through December 31, 2009.

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

	Total Management		Total Management			Total Management
	Management Fee		Fee and G&A			Fee and G&A
	and G&A		Expenses/Average			Expenses/Average
	Expenses		Total Assets			Equity
For the quarter ended September 30, 2010	$	924		0.83	%		1.39	%
For the period commencing September 22, 2009 and ending December 31, 2009	$	1,307		1.74	%		1.84	%

Net Income (Loss) and Return on Average Equity

Our net income was $3.2 million for the quarter ended September 30, 2010 compared to a net loss of $1.0 million for the period commencing September 22, 2009 through December 31, 2009. We attribute the increase in net income to continued deployment of capital resulting in an increase in net interest income. The table below shows our net interest income, total expenses and realized gain, each as a percentage of average equity, and the return on average equity for the quarter ended September 30, 2010 and the period commencing September 22, 2009 and ending December 31, 2009.

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

	Net
	Interest			Total			Realized			Return
	Income/			Expenses/			Gain/			on
	Average			Average			Average			Average
	Equity			Equity			Equity			Equity
For the quarter ended September 30, 2010		6.20	%		(1.39	%)		0.00	%		4.82	%
For the period commencing September 22, 2009, and ending December 31, 2009		0.42	%		(1.84	%)		0.00	%		(1.42	%)

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 use significant 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, cash generated from our operating results and unused borrowing capacity under our financing sources.

We have financed our CMBS portfolio with non-recourse financings under the TALF, and based on market conditions we intend to utilize structural leverage through securitizations of commercial real estate loans or CMBS. We will, however, also seek to finance the acquisition of Agency RMBS using repurchase agreements with counterparties, which are recourse. With regard to leverage available under the TALF, the maximum level of allowable leverage under currently announced CMBS programs would be 6.7:1. With regard to securitizations, the leverage will depend on the market conditions for structuring such transactions. We anticipate that leverage for Agency RMBS would be available to us in the range of 2:1 to 4:1 but would likely not exceed 6:1. 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 as described herein.

The sources of financing for our targeted assets are described below.

The Term Asset-Backed Securities Loan Facility (TALF)

In response to the severe dislocation in the credit markets, the U.S. Treasury and the Federal Reserve jointly announced the establishment of the TALF on November 25, 2008. The TALF was designed to increase credit availability and support economic activity by facilitating renewed securitization activities. The TALF program stopped accepting applications for credit on newly issued CMBS on June 30, 2010 and on March 31, 2010 for all other TALF-eligible collateral.

Securitizations

We intend to seek to enhance the returns on our commercial mortgage loan investments, especially loan acquisitions, through securitization. If available, we intend to 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 expect to use repurchase agreements to finance acquisitions of Agency RMBS with a number of counterparties. 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 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 paydowns. 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 CMBS or mortgage loans 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 collateral debt obligations (“ CDO”). 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.

We held cash and cash equivalents of approximately $53.5 million and $212.1 million at September 30, 2010 and December 31, 2009, respectively. Our cash and cash equivalents declined as we deployed capital to purchase assets.

Our operating activities used net cash of approximately $2.6 million and $766,000 for the quarter ended September 30, 2010 and the period commencing September 22, 2009 through December 31, 2009, respectively.

Our investing activities utilized net cash of approximately $98.4 million and $71.3 million for the quarter ending September 30, 2010 and the period commencing September 22, 2009 through December 31, 2009, respectively. We purchased $98.8 million of commercial loans and preferred equity and $71.3 million of CMBS and commercial loans for the quarter ended September 30, 2010 and the period commencing September 22, 2009 through December 31, 2009, respectively.

Our financing activities used $2.6 million and provided $282.6 million as of quarter ended September 30, 2010 and the period commencing September 22, 2009 through December 31, 2009, respectively. As of September 30, 2010, we had $173.1 million outstanding under our secured financing agreement with the Federal Reserve Bank of New York (“FRBNY”) collateralized by our CMBS with weighted average borrowing rate of 3.60% and a weighted average remaining maturity of 4.3 years. The CMBS pledged as collateral under the secured financing agreement with FRBNY had an estimated fair value of $213.9 million at September 30, 2010.

At September 30, 2010 and December 31, 2009, the secured financing agreements for CMBS had the following remaining maturities:

	September 30, 2010		December 31, 2009
	(dollars in thousands)
Overnight	$	-	$	-
1-30 days		-		-
30 to 59 days		-		-
60 to 89 days		-		-
90 to 119 days		-		-
Greater than or equal to 120 days		173,060		25,579
Total	$	173,060	$	25,579

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 September 30, 2010 our total debt was approximately $173.1 million which represented a debt-to-equity ratio of approximately 0.6:1.

Stockholders’ Equity

During the quarter ended September 30, 2010 we declared dividends to common shareholders totaling $3.1 million or $0.17 per share, all of which were paid on October 28, 2010. During the period commencing September 22, 2009 through December 31, 2009 no dividends were declared.

On September 16, 2009, we announced the sale of 13,333,334 shares of common stock at $15.00 per share for estimated proceeds, less the underwriters’ discount and offering expenses, of $189 million. Concurrently with the sale of these shares Annaly purchased 4,527,778 shares at the same price per share as the public offering, for proceeds of approximately $68 million. These sales were completed on September 22, 2009. In all, we raised net proceeds of approximately $257 million in these offerings.

On September 30, 2009, we issued 9,000 shares of restricted common stock in accordance to the equity incentive plan to our independent directors, which vested immediately.

On September 15, 2009, we repurchased 750,000 shares of common stock from certain of FIDAC’s officers and employees at $0.05 per share for $37,500.

Related Party Transactions

Management Agreement

On August 31, 2009, we entered into a management agreement with FIDAC and subsequently amended on September 16, 2009, 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 and determinable payments. The management fee is payable quarterly in arrears in an amount equal to 0.50% per annum for the first twelve months of operations, 1.00% per annum for the period after the first twelve months through the eighteenth month of operations, and 1.50% per annum after the first eighteen months of operations, calculated quarterly, 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

In connection with our initial public offering we sold Annaly 4,527,778 shares of our common stock at the same price per share paid by other investors in our public offering and Annaly owns approximately 25% of our outstanding shares of common stock.

On May 21, 2008, we issued 1,000,000 shares of our common stock to certain of FIDAC’s officers and employees for an aggregate purchase price of $50,000. On September 15, 2009, we repurchased 750,000 shares of common stock from those holders on a pro rata basis at the initial per share purchase price.

Restricted Stock Grants

On September 30, 2009, we awarded 9,000 shares of restricted stock pursuant to our incentive plan to the independent members of our Board of Directors. These shares vested on the date of the grant.

Clearing Fees

We use RCap Securities Inc., or RCap, a SEC registered broker-dealer and a wholly-owned subsidiary of Annaly, to clear CMBS trades for us and RCap is entitled to customary market-based fees and charges arising from such services.

Contractual Obligations and Commitments

We have not entered into any lease, operating or purchase obligations as of September 30, 2010.

As of September 30, 2010 we financed our CMBS portfolio with non-recourse financings under the TALF. Pursuant to our non-recourse financing under the TALF, we have entered into a long term debt obligation with the FRBNY. The table below summarizes our contractual obligation at September 30, 2010.

	Within One Year		One to Three Years		Three to Five Years		Greater Than Five Years		Total
Contractual Obligations	(dollars in thousands)
Secured financing	$	-	$	11,218	$	161,842	$	-	$	173,060
Interest expense on secured financing		6,211		18,196		2,431		-		26,838
Total	$	6,211	$	29,414	$	164,273	$	-	$	199,898

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 the consummation of this 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 or 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. As such, we are not materially exposed to any market, credit, liquidity or financing risk that could arise if we had engaged in such relationships.

Dividends

To qualify as a REIT, we must pay annual dividends to our stockholders of at least 90% of our taxable income, determined without regard to the deduction for dividends paid and excluding any net capital gains. 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 warehouse and repurchase facilities if applicable, we must first meet both our operating requirements and scheduled debt service on our warehouse lines and other debt payable.

During the quarter ended September 30, 2010, we declared dividends to common shareholders totaling $3.1 million or $0.17 per share, which were paid on October 28, 2010.

Capital Resources

At September 30, 2010 we had no material commitments for capital expenditures.

Inflation

Virtually all of our assets and liabilities are financial 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.

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 risk 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 take.

Credit Risk

We will be 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 may utilize third parties to assist in performing underwriting and due diligence reviews. 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 standards. FIDAC’s surveillance process includes ongoing analysis and oversight by a third-party servicer and us. Additionally, the MBS and other commercial real estate-related securities which we acquire for our portfolio is reviewed by FIDAC to ensure that we acquire MBS and other commercial real estate-related securities which satisfy our risk based standards. FIDAC’s review of MBS includes utilizing its proprietary portfolio management system. FIDAC’s review of MBS and other commercial real estate-related securities is based on quantitative and qualitative analysis of the risk-adjusted returns MBS and other commercial real estate-related securities present.

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 beyond our control. 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 will 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 loans 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 harm 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 described 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 warehouse facilities and repurchase agreements would provide financing based on a floating rate of interest calculated on a fixed spread over LIBOR. Our structured financing through the TALF is at a fixed rate for the life of the loan based on swap rates at the submission date of the loan. 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 it 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, excluding the fixed rate borrowing with the TALF, 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 mortgage loans and CMBS. If prepayments are slower or faster than assumed, the life of the mortgage loans and CMBS 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 duration numbers 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 above 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 and RMBS and CMBS 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 and MBS. 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 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 September 30, 2010 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 Value
-75 Basis Points	(0.86%)	3.20%
-50 Basis Points	(0.57%)	2.14%
-25 Basis Points	(0.29%)	1.07%
Base Interest Rate	-	-
+25 Basis Points	0.29%	(1.07%)
+50 Basis Points	0.57%	(2.14%)
+75 Basis Points	0.86%	(3.20%)

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

For CMBS and Agency RMBS, 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. 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. If we are unable to readily obtain independent pricing to validate our estimated fair value of the securities in our portfolio, the fair value gains or losses recorded in other comprehensive income may be adversely affected.

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 mortgage securities, Agency RMBS and related debt against 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 a third party to assist in performing an independent underwriting and due diligence reviews;

·	using FIDAC’s proprietary portfolio management system to review our MBS;

·	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 September 30, 2010. 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, and securities are included in the period in which their interest rates are first scheduled to adjust and not in the period in which they mature. The interest rate sensitivity of our assets and liabilities in the table could vary substantially if 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	$	25,000		$	-		$	209,818		$	151,649		$	386,467
Cash equivalents		53,475			-			-			-			53,475
Total rate sensitive assets		78,475			-			209,818			151,649			439,942

Rate sensitive liabilities		-			-			11,218			161,842			173,060

Interest rate sensitivity gap	$	78,475		$	-		$	198,600		$	(10,193	)	$	266,882

Cumulative rate sensitivity gap	$	78,475		$	78,475		$	277,075		$	266,882

Cumulative interest rate sensitivity
gap as a percentage or total rate
sensitive assets		17.84	%		17.84	%		62.98	%		60.66	%

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 FIDAC 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 4T. CONTROLS AND PROCEDURES

Evaluation of Disclosure 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.

Changes in Internal Controls

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 previously disclosed in Item 1A – Risk Factors of our annual report on Form 10-K for the year ended December 31, 2009 and our subsequent quarterly reports on Form 10-Q. 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 subsequent Form 10-Q 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.

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).
10.1	Management Agreement (filed as Exhibit 10.1 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).
10.2	Amendment No. 1 to Management Agreement (filed as Exhibit 10.6 to the Company’s Registration Statement on Amendment No. 6 to Form S-11 (File No. 333-160254) filed on September 16, 2009 and incorporated herein by reference).
10.3	Mortgage Origination and Servicing Agreement between CreXus Investment Corp. and Principal Real Estate Investors, LLC (filed as Exhibit 10.2 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).
10.4	Equity Incentive Plan (filed as Exhibit 10.3 to the Company’s Registration Statement on Form S-8 (File No. 333-162223) filed on September 30, 2009 and incorporated herein by reference).
10.5	Form of Common Stock Award (filed as Exhibit 10.4 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).
10.9	Form of Stock Option Grant (filed as Exhibit 10.5 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).
10.10	Stock Purchase Agreement between Crexus Investment Corp. and Annaly Capital Management, Inc. (filed as Exhibit 10.10 to the Company’s Quarterly Report on Form 10-Q (filed on November 6, 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.

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)

November 5, 2010

By: /s/ Daniel Wickey

Daniel Wickey

Chief Financial Officer (Principal Financial Officer)

November 5, 2010

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