Dynex Capital Inc (DX) 2003 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Dynex Capital Incorporated year end results conference call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question & answer session. At that time if you have a question press one followed by four on your telephone. This conference is being recorded Wednesday, March 17, 2004. I would like to now turn the conference over to Stephen Benedetti, Vice President and Chief Financial Officer, please go ahead, sir.

Thank you, operator. As we customarily do on these calls, I would like to review the Safe Harbor statement and the SEC rules record regarding the use of non-Generally Accepted Accounting Principles, or non-GAAP financial measures. I'll review the forward-looking statement first. This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 The words believe, expect, forecast, anticipate, estimate, project, plan and similar expressions identify forward-looking statements and are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. The company's actual results and timing of certain events could differ materially from those projected in or contemplated by these forward-looking statements as a result of unforeseen external factors. These factors may include, but are not limited to, changes in general economic and market conditions, disruptions in the capital markets, fluctuations in interest rates, the completion of the proposed recapitalization plan, defaults by borrowers, defaults by third party servicers, the accuracy of subjective estimates used in determining the fair value of certain financial assets, the impact of reselling issued financial accounting standards, and other general competitive factors.

For additional information see the company's form 10-Ks and form 10-Qs filed with the Securities and Exchange Commission. In regards to the non-GAAP -- any non-GAAP financial measure, we will attempt to reconcile these non-GAAP numbers on the call to those that are accepted by Generally Accepted Accounting Principles. Let me start off by welcoming again our chairman, Tom Akin to the call. Tom will participate in a discussion on the recapitalization transaction and other strategic initiatives and he'll also be available, of course, to answer questions. I'm going to switch things up a little bit on this call. We'll spend less time discussing the results for the quarter and more time on the announced recapitalization transaction and outlook for the company. We anticipate filing the company's annual report on form 10-K within the next week, and there will be the customary information that we disclose in our SEC filings in terms of company performance and attributes and discussion of results.

I would like to point out, I'm sure everyone saw in the press release, we did slightly change our presentation on the balance sheet in the statement of operations for our securitization structures. We now, where we previously called securitized assets collateral for collateralized bonds, we call them securitized financial receivables; and where we had nonrecoursed collateralized bonds in the liability section, we now have nonrecoursed securitization financing. This puts us more in line with industry standards of presentation. Briefly to touch on the result of operations, for the year we reported a $21.1 million net loss and an $11.7 million net loss for the fourth quarter. Results for the quarter and the year were negatively impacted by provisions for losses on loans and impairment charges. Provision for losses for loans includes reserves for the company's exposure to manufactured housing loans and commercial mortgage loans in which $37.1 million for the year; of which $31 million relates to manufactured housing loans and $6.1 million relates to the commercial mortgage loans. Based on current trends, we'd expect provision for losses for the first and second quarter to be similar to the fourth quarter of 2003 and by the end of the second quarter we anticipate fully reserving for our credit exposure on manufactured housing loans. So at that point in time we would effectively discontinue providing provision for losses on manufactured housing loans.

Impairment charges for 2003 and the fourth quarter include adjustments to the carrying value of our delinquent property tax receivables portfolio which includes both securitized and unsecuritized assets; and these impairment charges were based on reduced collection expectations, including proceeds from real estate owned. We also recorded an impairment charge on a debt security of $5.5 million, reflecting a decline in the value of this security as the company has received cash payments on it. The impairment charges on the tax lien is really concentrated in one portfolio and are the results of an analysis of future collectibility of this portfolio that we will touch on a little bit later in the call. Briefly, net interest margin was $9.9 million for the quarter and--before provision for losses was $9.9 million for the quarter and $39 million for the year; which compares to $12.4 million for last year's same period and $49 million for all of 2002 last year. Obviously our interest earning assets continue to decline. They declined by approximately $340 million during 2003 and approximately $90 million in the fourth quarter, and then our adjustable rate mortgage assets given the low rate environment continue to reset downward approximately 40 basis points a quarter although the ARM portion of our portfolio now is a much more modest portion of our overall investment portfolio.

Then, of course, we issued senior notes in February of 2003 which attributed or contributed additional interest expense of $1.8 million and those notes were paid off in March of 2001. Briefly reviewing the balance sheet, the investment portfolio as I previously mentioned continues to decline from the prepayments of assets. We added -- we did add $29 million in seasoned single family mortgage backed securities to the company's investment portfolio in December. These assets have a very attractive return profile for the company. They are minimal delinquencies. The securities have an average weighted coupon of approximately 7.6% and they have a fairly reasonable prepayment speed. Of course, we used repurchase agreement financing to help us finance that call and that was the first new financing for this company in quite some time. In terms of remaining optional redemption rights that the company has, we added these assets pursuant to the calls of some previously issued securities that were not on our balance sheet.

We've now, to our belief, have satisfied or-- we don't have those-- any more optional redemption rights for off-balance sheet transactions. What we do have, however, of course are the optional redemption rights related to our on-balance sheet transactions and I'll touch a little bit on that a little later in the call when I talk about our cashflow results. As I mentioned, we took some impairment charges on our delinquent property tax receivables, those are included in other investments. We are not accruing interest on those assets. Instead, as cash is collected, we are using that cash to reduce the investment on our balance sheet. Property tax receivables are carried at $34.9 million and the related real estate owned is carried at $3 million in our balance sheet at the end of the year. We collected $3.4 million on these assets in the fourth quarter and $12.4 million on the assets for all of 2003.

When we recorded the impairment charge, we adjusted the carrying value of these assets to estimated collectible amounts. These estimated collectible amounts exclude any interest which accrued from this point forward and which is collected at some future point, if collected, and it also excludes any costs of collecting this portfolio, that is expensed through general and administrative expenses. Generally, these portfolios are static and as more desirable liens redeem, collecting the remaining liens get more challenging and expensive. However, we believe these assets are reasonably valued at year end. I also would like to point out that the senior notes of $10 million at the end of the year were fully redeemed in March of 2004, which basically retired those senior notes a full one year ahead of their that maturity. Book value per common share is $7.55 versus $8.57 from the prior year. We had--the decline is generally due to the net loss during the year. We did get some improvement in common book value per share from the tender that we completed in February. I will discuss a little bit later in the call the mark to market of the company assuming the securitization finance receivables are carried at fair value.

Touching on cashflow, cashflow from the investment portfolio was $13.2 million for the quarter versus $14 million for the third quarter; and that consists of $7.9 million received in cash from our securitization finance receivables, $3.4 million in property tax lien collections, and then $1.9 million from principal and interest payments on loans from securities. The cashflow was used, obviously, to finance the hair cut on the call of the seasoned single family mortgage back security that we added to our portfolio, and then for the payment of the senior notes both in November and, again, in March on their full redemption. We expect the 2004 first quarter portfolio cashflow to fall below $12 million, principally due to declining delinquent property tax receivable collections due, in part, to some seasonality issues; but also, as previously mentioned, in part to the aging of these portfolios. The $12 million over the -- the -- the first quarter investment portfolio cashflow guidance of less than $12 million, excludes $7.3 million in estimated premium that we will receive from the call and reissuance of certain classes of bonds that are included in securitization financings.

One of our securitizations has an optional redemption--date specific option redemption right for this month--at the end of this month. The company will call in certain of the higher rated classes of those -- of that transaction and then reissue those approximately one month later, so in late April. The $7.3 million, obviously, comes from the premium on those classes and is generally attributable to some overall improvement in the manufactured housing lending market; which has spilled over into, obviously, the asset backed market for manufactured housing paper, and has significantly tightened spreads on that product over the last 3 to 6 months. We have another manufactured housing loan securitization transaction which reaches it's call trigger in August, 2004. We're evaluating our options with respect to that particular transaction. The coupons on the most senior classes on those transactions are a full 100 basis points higher than the transaction that we will call this month.

The issue with that particular transaction is, is it has--Moody's and Fitch have recently released revised ratings on that particular transaction and there are some fairly significant differences and views on the senior classes between those two ratings agencies; and we are not sure how that might impact any potential execution on calling and reselling the bond. Of course, that's our option and we will only exercise the call if it adds value to the company. Apart from those two deals, we estimate the SASCO 2002 transaction will reach its call trigger sometime in early 2005.

Briefly, let me touch on the mark to market issues with the company. On our balance sheet, we only mark now around $286 million of assets in our investment portfolio. As most of the participants on this call know, we provide, supplementally, information on the rest of our securitized finance receivable portfolio in the 10-K which, again, we'll file hopefully within the next week. Assuming all securitized finance receivables are carried at estimated fair value, book value for common share is approximately $6.80. As required by SEC rules, the following is a reconciliation of the book value per share of $7.55 versus the $6.80 number that I just gave you. Book value is reported in our financial statements of equity as $149.85 million at December 31st. At December 31st it is a preferred stock liquidation preference of $67.72 million. So common equity after deducting the preferred stock liquidation preference is $82.3 million, which is the $7.55 a share.

If you subtract the adjustment to fair value for the securitized finance receivables carried at historical cost, that's a downward adjustment of $8.13 million or 75 cents per share and, therefore, common equity and book value after the fair value adjustment is $74 million or $6.80 per share. Again, a similar reconciliation will be included in our 10-K. As I alluded to earlier, the company's credit risk in its portfolio is limited to the securitization financing structure. We are getting near the end of our credit risk on two -- at least having to reserve for our credit risk, on two of our manufactured housing securitization transactions. Overall on our balance sheet we still had $64.7 million of credit risk; $11.9 million relates to those two transactions that I alluded to earlier. There is another $22.4 million that relates to a transaction that is a combination of manufactured housing loans and securities. The $22.4 million-- the credit risk is recorded for reserved for, if you will, in our financial statements through the impairment charge that we take in our results of operations and that is because this particular transaction is accounted for as a debt security under Generally Accepted Accounting Principles; as opposed to a loan.

I would like to touch just a minute on the litigation update. Of course, we announced that the results of the litigation in Dallas County, Texas last month. At this point, right now motions have been filed in that litigation with the Court and brief oral arguments were heard earlier this month. There's a hearing on either entering the jury verdict or setting aside the jury verdict early next month in the same court. I will remind everyone on this call that Dynex Capital was hit for a verdict of $252,577 related to an alleged breach of contract on some loans to fund -- improvements on some loans that it had purchased from its former affiliate, Dynex Commercial, and then depending on what the court does, Dynex Capital may or may not be responsible for some portion of legal fees awarded by the jury. Again, that is to be determined by the court. If the Court-- we'll make motions to set aside the verdict. If the Court enters verdict against the company, we'll continue to evaluate our next steps; but at this point, it is anticipated that the Company would appeal any judgment entered against it. We believe and, of course, counsel believes that the verdict was reached in error and that we would be successful on appeal. I would like to turn the call over to Tom to talk about our announced recapitalization plan and the other strategic initiatives or issues concerning the company.

Thank you, Steve. Good morning everyone. In January of '04, the company announced a recap plan for the company's series A, B and C preferred stock that we plan on closing in the second quarter of '04; and hopefully some where in the end of April. We believe very strongly that this is going to enhance our ability to engage in strategic transactions that will benefit all shareholders of Dynex. I would like to just spend a couple of minutes and focus on the recap plan, which pending SEC approval, we are going to commence in the next couple of weeks. First off, the recap plan needs to be affirmed by both the preferred stockholders and the common stockholders. We need everyone to vote for the plan, as any abstention, or any nonvote will be considered a negative vote. So, we really want to make sure that all shareholders, when they receive their ballots, that they put in an affirmative on this plan as we believe it is in the best interest of both the common shareholders and the preferred shareholders. The board and the strategic direction committee deliberated very carefully, and we believe that this plan is fair to our shareholders and really gives the company the best chance to move forward in many new strategic transactions that we see opening up to the company once we recap the company and make current all our capital structure.

Although we really can't outline any of the strategic parameters right now, there are many potential opportunities that we will be constantly evaluating. One of them that is obviously going to be a focus to all shareholders is deriving some benefit from the net operating loss that the company has. In reviewing what each shareholder does with their tender for the senior notes or the series D preferred, we would like to remind you that the senior notes are going to carry an attractive 9.5% coupon and have a maturity of approximately 3 years. Or, actually, a maturity of three years, not approximately three years. The senior D preferred will have a 9.5% coupon as well and be convertible into common stock at $10 a share, which is substantially more attractive than the current conversion price of the outstanding preferred. So, for investors interested in the security of a senior note, we are offering an alternative for them and for those interested in remaining with some equity interest in the company, we have an option for them as well. We believe that the nature of this is -- is -- is of great interest to all shareholders and we did not offer a cash component as we feel at this point it is unnecessary.

Now, looking forward into our outlook and strategic directions, we are continuing to evaluate all of the attractive alternatives--or the most attractive alternatives available for the use of the company's capital and we have formed a committee, our strategic direction committee, to review all these alternatives. As we review the alternatives, the committee is also seeking ways to generate value from the net operating loss carryforward that the company has. Although to date we haven't developed any specific plan we will continue to utilize this tax carryforward, particularly post the recapitalization of the company; if we are successful. Just to give you a couple of -- a couple of opportunities here. Steve alluded to the call and -- of the securities this month. We also have an opportunity to review the transaction in August '04. And at the same time, the resecuritization of the SASCO 2002s which are expected to occur in early 2000, give the company the potential to, I believe, increase shareholder value. These alternatives may also include investing and/or purchasing an operating business, although at this point we have no -- no clear -- no clear things to discuss. The company really would like to -- I would like close by saying I would like to take as many questions as possible on the recap plan. We plan on having a conference call to discuss specifically the recap plan, once everyone has the information available to them. And we at the board would strongly encourage you to vote affirmative from both the common shareholder point of view and the preferred shareholder point of view. Steve, with that, why don't we take some questions.

Thank you. Ladies and gentlemen, if you would like to register a question, please press the one followed by the four on your telephone. [Caller Instructions] One moment, please, and we will take the first question. The first question comes from Todd Emhoff from Wachovia Securities. Please, go ahead with your question.

Yes. Good morning, guys. Just a question about the tax liens. If we could get a little more specifics on that. How bad is it? What -- what was the cashflow in the last couple of months? And is that both Cleveland and Pittsburgh that are problems, or just one or the other; and what is the problem and can we expect whatever that problem is to get worse or get better or stay the same?

I guess I'll take that one. Todd, it is strange to hear you introduced as somebody from Wachovia Securities. But I will try to answer your question. The portfolios, as I mentioned earlier, are static portfolios and obviously the more desirable liens have redeemed first and you continue to sort of work down and through the portfolio; you get to assets that are of more marginal value and the asset gets to be more difficult to collect. The impairment charges that we took for the year included both impairment charges on the Pennsylvania portfolio and the Ohio portfolios, but it was substantially all in the Pennsylvania portfolio as the company has sharpened its pencil on, if you will, on the attributes of that portfolio and refined its collection estimates and its collection techniques on that portfolio given its seasoning and age; we felt it prudent to make an adjustment to the carrying value of these assets.

We will continue to carry these on nonaccrual, so all cash received will be applied to pay down the asset. Again, I would say that we believe the assets are reasonably stated. I think cashflows, in the near term, will decline relative to the fourth quarter. However -- and it may take a little longer to extract the value out of the Pennsylvania portfolio than we might have otherwise previously projected. The first two months of the first quarter were not particularly good. Some of that was seasonality issues. We have seen some improvement in March thus far, month to date, and we are -- and that is in Pennsylvania and we are expecting -- we expect that to continue as we get into April, May June in particular because those are prime REO sales months.

Todd, this is Tom Akin. I have been up to Pittsburgh. We spent some time. We really have I think made an effort to be very careful about looking at that tax lien portfolio and being very conservative about the way we've got it valued. It is of great focus right now to the company. And we believe that, you know, we're going to be able to--with that focus we're going to be able to make that portfolio perform. But going forward, clearly we are going to have to work hard to get those -- those cash tax liens to the cashflow out.

Great, thanks, guys.

Mr. Benedetti, there are no further questions at this time. I will turn the conference back to you. Please, continue with your presentation or your closing remarks.

Okay. Well, if there are no further questions, then I would like, on behalf of Tom and I, to thank everybody for taking the time to participate on the call today and we are optimistic that the SEC will get back to us in the very short-term here with their approval for us to be able to commence the recapitalization plan. And, as Tom mentioned, we will have a call as soon as everyone has the materials to go over some of the mechanics and answer questions at that point in time. And I, of course, am available at the Company if anyone has any follow-up questions to the call.

Thanks much, everyone.

Ladies and gentlemen, that does conclude the conference call for today. Thank you for your participation and we ask that you please disconnect your lines.