Dynex Capital Inc (DX) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Dynex Capital Inc. first-quarter earnings conference call. During the presentation, all lines will be in listen-only mode. Afterwards, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded on Wednesday, May 12, 2004. I would now like to turn the conference over to Stephen Benedetti, Vice President and Chief Financial Officer with Dynex Capital Inc. Please go ahead, sir.

Thank you, operator. Let me welcome also our Chairman to the call, Tom Akin. Before we start the call, I would like to go ahead and review the forward-looking statements disclosure and the Safe Harbor statement and SEC rules regarding the use of non-generally accepted accounting principles, financial measures.

Let me review the forward-looking statement disclosure first. This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Act of 1995. The words believe, expect, forecast, anticipate, estimate, project, plan, and similar expressions identify forward-looking statements that 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 the 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, (technical difficulty) defaults by third-party servicers, the accuracy of subjective estimates used in determining the fair value of certain financial assets of the company, the impact of recently issued Financial Accounting Standards, increases in costs, and other general competitive factors. For additional information see the company's annual report on Form 10-K for 2003, as filed with the Securities and Exchange Commission.

In regards to any non-GAAP disclosure discussed on this call, we will attempt to reconcile such non-GAAP numbers to GAAP. Any such reconciliation will also be included in the Form 10-Q would should be filed later this week. Let me turn the call over to Tom, who will discuss the recapitalization transaction. Tom.

Thanks, Steve. First of all I would like to welcome everyone to the call, and I would like to thank all our shareholders for approving the recapitalization plan, which will basically be converting the Series A, B, and C preferred stock into a maximum of 5,628,794 shares of preferred D. That will approximate about 56 million in preferred D stock.

As well, 1,288,554 shares of common stock will be issued. This satisfies all the dividend in arrears on our Series A, B, and C and is a very important step for the company. The mechanics still need to be worked out in terms of the specific dates of conversion, but we're expecting that to be done over the next two weeks.

We are issuing 823,000 of Senior Notes. Those Senior Notes did not meet the minimum of 5 million listing requirements on the New York Stock Exchange, and therefore will not be listed.

On a pro forma basis as of March 31, 2004, the implementation of this recap plan will increase public book value by approximately 19 cents per share. The Series D preferred will be listed on the New York Stock Exchange and pay a 95-cent dividend quarterly, with the first quarter payable in July.

The Board is now in a position with this important step to review and evaluate all of the different opportunities available to the company. But I assure our shareholders that we're going to be very deliberate in that regard and be very mindful of the risk in this market.

We're going to deploy our capital in the third quarter to retain all or a portion of the MERIT 13 senior securities, which are outstanding. As we mentioned before, the securities have an optional redemption date in August, and we're going to be very carefully evaluating the opportunities to call those securities.

At the same time, we have a SASCO Series 2002-9 securitization outstanding, and that securitization has an optional redemption date in January -- or in the first quarter of '05. We will be likely adding complementary assets from our investment portfolio to that, and resecuritizing the assets in SASCO.

Finally, we're going to be having our annual meeting in New York on July 20, and we look forward to seeing all of our shareholders at that time. Now, I would like to turn the call back over to Steve so we could have a discussion of some of the metrics for the quarter.

Thanks, Tom. Let me start this call a little differently. We will start with the cash flow discussion and then move into the results on the balance sheet. For the first quarter of 2004, cash flow from the investment portfolio was 11.1 million, and that consisted of 7.4 million from our securitized finance receivables portfolio; 1.8 million in property tax lien collections; and 1.9 million from principal interest payments on loans and securities.

During the quarter, we used cash flow to redeem the February 2005 Senior Notes that were issued in February 2003 in connection with the last tender offer prior to this one, as well as to pay -- to fund operating expenses in the company.

We would expect second-quarter 2004 investment portfolio cash flow to approximate 19 million, which includes 7.4 million that we received already this past April, last month, as a result of the optional redemption and then resale of certain classes of MERIT Series 12. Of course, this 19 million anticipates the current rate environment as well as delinquent property tax receivable collections of approximately $2.5 million during the quarter.

The company currently finances approximately 1.1 billion of its assets with fixed-rate liabilities and approximately 503 million of its assets with floating-rate liabilities. You may recall the company has swapped approximately 134 million of these floating-rate liabilities to fixed-rate through mid 2005. As a result, we believe the company's cash flows are not substantially exposed to increasing interest rates, particularly if such increases are measured, as is the rhetoric that is coming forth from the Federal Reserve today.

Ultimately, however, the cash flows really beyond the second quarter will be impacted by the credit performance of the loans and the underlying securitizations, prepayments, collections on tax liens, and the overall interest rate environment.

As indicated in the press release, the company has the right to redeem, and Tom alluded to this earlier, actually all of the classes outstanding on MERIT Series 13, which is the manufactured housing securitization. And it reaches its optional redemption date in August of 2004. At this point, we anticipate redeeming the two most Senior classes in that transaction, and either retaining them for our own investment portfolio and financing these based on using repurchase agreement debt at a modest spread to one-month LIBOR, and/or selling all or a portion of these classes.

As I mentioned the bonds are secured by manufactured housing loans. They are fixed-rate, and their coupons are in the high 7s. After the optional redemption date those coupons will step up 50 basis points each, so they will be in the low 8s. They're split-rated bonds, currently AAA and AA- by Fitch and B/Aa3 by Moody's. So, the company anticipates utilizing its cash flow in August in some fashion with respect to those securities.

In terms of the results of operations, we will be filing our 10-Q shortly, so I'm not going to go into a whole lot of detail on the call. Overall, not unexpectedly, the results for the quarter on a net income basis were impacted by the continued high provision for loan losses. Provision for losses were 7.2 million during the quarter; 6.1 million of which was attributable to manufactured housing loans, with the balance attributable to commercial mortgage loans.

It is our current expectation that we will provide a similar amount of reserves next quarter and be substantially reserved in terms of our remaining credit exposure on manufactured housing loans. So, beyond the second quarter, the provision for loan losses will be much more modest on a go-forward basis.

Impairment charges were 1.7 million this quarter. Those relate substantially to a debt security collateralized by manufactured housing loans. We would expect impairment charges at some level to continue on that security. By way of reference, because of the accounting peculiarities for that type of security, we do report net interest margin on that security. And for this past quarter, net interest margin contribution for that security was 3.3 million.

Overall, net interest margin before provision was 6.4 million. Clearly our average earning assets are declining modestly from quarter-to-quarter. In addition, though resets have slowed on our adjustable-rate assets, we are having some resets and it's averaging approximately 15 basis points per quarter.

Our net interest spend for this quarter was 1.21 percent, and we alluded to this in the call, or in the press release, as a result of redemption in April and reissuance of the Senior classes on MERIT Series 12-1, based on the premium we received on those deals, we have effectively reduced our borrowing costs on approximately 155 million of securitization financing by approximately 150 basis points.

In terms of the balance sheet, a couple of areas to note. We had 55.4 million in principal payments on the securitized finance receivable portfolio; 27 million of that was single-family; approximately 22 million was manufactured housing; with the balance commercial mortgage loans. Otherwise, there was not a whole lot of substantive change in our securitized finance receivable portfolio.

As of the end of March, we currently have 367 million in single-family mortgage loans; 646 million in manufactured housing loans; and 752 million in commercial mortgage loans. Our net unreserved credit exposure on these assets today is approximately 55 million versus approximately 65 million at the end of the year -- at the end of 2003.

As I previously indicated, on our financing side, we have 1.13 billion of fixed-rate financing and 503 million of variable-rate financing of which 134 million has been swapped to a fixed rate.

In terms of our mark-to-market, the amount that we are marking our balance sheet -- the amount that is being marked-to-market on our balance sheet has come down significantly. It is approximately 271 million at March 31. Our accumulated other comprehensive loss, which is 3.5 million at March 31, is predominantly actually due to the loss on the 134 million in swaps that we have. And actually subsequent to the end of March, we estimate that swap valuation has improved by approximately $900,000.

As we have done in the past we will continue to provide mark-to-market information on our securitized finance receivable portfolio in our public reporting. Utilizing such information, the intrinsic value, if you will, of the company or basically the book value of the company assuming securitized financial receivables that are carried at fair market value approximates our current book value of $6.98 a share.

That excludes any optional redemption rights that we have on that MERIT, the value of any optional redemption rights that we have on MERIT Series 13, which again reaches its optional redemption date in August. We estimate based on today's rates that that value would approximate $3.5 million.

We also would estimate that the fair value of our securitized finance receivable portfolio would have declined by approximately $5 million since the end of the first quarter, due to changes in the forward LIBOR curve since the end of the first quarter.

Briefly, let me update on the litigation. It is in the press release, but there is a hearing later this month down in Texas whereby the court will be hearing the motions for either entering or a setting aside the jury verdict. Of course we will be arguing to set aside that jury verdict, as we believe it was reached in error. Ultimately, if the court does enter the verdict it is our expectation today that we would appeal that. There of course we have 30 days to make that decision once that verdict is entered.

That concludes my comments, and I want to turn it over briefly to Tom again to look at -- to discuss outlook and some closing comments.

Thank you, Steve. Well, we want to make sure all of the shareholders realize that the recapitalization transaction, now that that is behind us, the company is now going to turn our energies to new opportunities.

Interest rates already look like they are heading higher, and the good news is that most of our portfolio is fixed-rate both on the liability side. As Steve mentioned, we only have 500 million of floating-rate securities, and a fair amount of those have been swapped away using the interest rate swaps. So as rates rise, it shouldn't dramatically affect our cash flow.

We're going to continue to do the blocking and tackling necessary to maximize our cash flow off our existing investments. We have got some near-term opportunities to look forward to. For example, the transaction that we did in the second quarter, or actually in April, of the MERIT 12s is an example of some of the thoughtful process that we can bring to bear. That is also going to be helpful when we take a look at the MERIT 13s here in August and the SASCO securitization in 2005.

We did not have any arrears on our preferred as you take a look at our balance sheet. Those of the banks and institutions are willing to loan us money to fund these deals, I think we're going to be much more favorably received.

Our goal near-term is to take advantage of these good opportunities, add to our investment portfolio, and review our long-term strategies. Longer-term strategies may include operating a business strategy so as to capitalize on our large net operating loss carryforward.

I want to again thank our shareholders for approving the recapitalization plan and for bearing with the substantial amount of losses that we have had in the manufactured housing portfolio. But, as Steve pointed out, this second quarter we should have the substantial amount of those reserved for, and we can move forward to creating value for our shareholders. With that, operator, I think we're ready to take some questions.

(OPERATOR INSTRUCTIONS) Dan Osborne (ph) with Vantage Point Capital.

Congratulations guys on getting the recap done. That is great.

Thanks, Dan.

Got a question regarding book value and the $7.4 million redemption. You said that pretty much the mark-to-market NAV if you will and the book value is pretty close right now. Is that correct?

That is correct, Dan.

The 7.4 million when that was redeemed, should I look at that as in addition to the 698, or is the 698 kind of include that number?

The 698 would include that 7.4 redemption that we did in April. It would not include the value of the redemption that we have available to us in August.

Okay. So for transactions that in essence have already happened we are not going to see -- what is that? A 60 or 70 cent pop from the 7.4 million; it is already in that number. Okay. That is clear.

And then the second question would be, you talk about that there is a premium that was received, but the borrowing costs have dropped. Is that like actually 7.4 million in cash received by the company? Or is that just kind of the value of the fact that we're lowering the borrowing cost by 150 basis points?

The way it works, Dan, is that the coupons step up outside of the deal. We of course reissue the bond at the stepped-up coupons and received a premium on it. So, the deal cash flows will be used to pay that stepped-up coupon.

We have then received that 7.4 million in premium, which will be amortized over the life of those bonds and will therefore reduce our effective rate of 150 basis points. Somewhere from 7.1 percent or so to approximately 5.6 percent.

So from a reported basis we won't see a 7.4 million gain; it will be higher net interest income over the remaining life of the deal?

Exactly. Just to make absolutely clear, actually those deals, because the surplus -- that 12 1, that surplus cash is being trapped to cover losses, there is a little bit of net interest margin already in there. But it is basically reversed out to provision for losses. So there is no net income contribution. But there will be going forward for the amortization of that 7.4 million.

As those bonds that we issued at 103 or 104, 3 whatever that number is, gets amortized?

That's right.

Okay. Again, congratulations and thank you very much.

Kent Baum (ph) with Deutsche Bank.

Good job, guys. Question, what is the value proposition on the MERIT 13s and also on the SASCO securities? Second question would be, what is your intent in terms of cash use going forward?

Tom, you want me to take a stab at at least the first piece of that?

That's great.

On the MERIT 13s, right now based on current rates, we would -- just looking we think there is only value much like in the 12s in the two senior-most classes. And we would peg that value at around $3.5 million.

In terms of SASCO, I wouldn't want to put any number out there at this point in terms of what we think the value in calling and resecuritizing that deal would be, since we are so far away from the call date. We do have a mark-to-market on that deal at March 31 of approximately 19 million in our supplemental information; and our current equity in that deal is around 9 million. Our current over collateralization is around 9 million on that deal.

Maybe, Tom, in terms of uses of cash flow, I think in the near term Tom commented that we have the opportunity to redeem this 13. And there is certainly significant value in calling a bond at par that has an 8-plus coupon, and pledging that on a Repo borrowing, and enjoying some spread for a while. The A3 bond, which is the senior-most bond in that deal is a very short life. The A4, which is the next senior bond, if you will has a little bit of a longer life; and maybe that will be something that we balance at that time, how much of that A4 we may or may not take down.

I think the basic value, though, is buying back collateral that we know has a very -- I think a fairly short average life and a pretty good rating at a substantial discount to the marketplace. And being able to basically finance those securities at a substantially lower interest rate.

As Steve pointed out, the coupon on those are going to be greater than 8 percent, and we are able to buy those at par. We probably are going to be able to finance those, even with rates backing up here, at a substantially lower rate than that. And I think that we will want to use our cash to be able to call and finance as many of those as possible.

The net spread on that should be fairly substantial and of great value to the company. We hope that the market is substantially in reasonable shape to do the SASCO resecuritization, although we're not going to be probably -- we will probably be reissuing that, but there are certain assets in our portfolio that we're holding right now to add to the SASCO deal. Those assets would be of great value to us being able to carry them at financing rates that are fairly low.

Great. Good job. Thank you very much.

Joseph Stieven, Stifel, Nicolaus & Co.

First of all, congratulations. I just wanted to go back to clarify something on the agreement that you entered into regarding the resale of the manufactured housing securitization. You're saying that will not result in a gain in the second quarter? It will simply result in a much lower cost of funds for you guys; is that correct?

Yes, Joe, that is just a reissuance of a bond at a premium.

I just wanted to make sure. Actually my other questions were also addressed. Steve, one final question for you. Will you guys have your pro forma balance sheet in your Q?

I'm sorry; a pro forma?

Balance sheet for the total restructuring in your Q.

Joe, we had not planned on it. No.

Would that be helpful to have a pro forma balance sheet in there?

Now that it is in theory passed, obviously it's not done yet, but yes. I think it would be great.

We will do the best we can.

Just because we are piecing it from the outsider's prospective. We're trying to piece it together, but you guys have all the facts and it would be a lot easier for you to just hand it over to us.

I think the Q has to be out by the 15th? Right?

By the 15th; it falls on Saturday, so Monday. Yes.

So the best of our ability, if we can will try to conclude that, so it will give you some clarity on what we look like.

Again, congratulations, guys.

What on the balance sheet specifically are you -- ?

Just to go through and just get all the pieces. I was just calculating the exact shares, and just for modeling going out, it makes it easier to make sure you got the right base to start with.

Okay. All right.

Again, congratulations, though, guys.

(OPERATOR INSTRUCTIONS) Mr. Benedetti, there are no more questions at this time. I will now turn the call back to you.

Well, I want to thank all our shareholders for their interest in the call. The interest in Dynex. We are doing our very best to maximize shareholder value here. The recapitalization plan I think is a huge step forward for this company, and it's going to allow us to move forward with creating, I think, more value.

We look forward to the future here. We've got a lot of options. As Steve mentioned we have cash on the books, and we have the ability to buy back some of our securitizations at substantially below-market prices. All of this is going to bode well for us in the future, and we look forward to speaking with you about it as we go forward through the year. Thank you much everyone.

Ladies and gentlemen, that does include the conference call for today. We To thank you for your participation and ask that you please disconnect your lines.