Dynex Capital Inc (DX) 2004 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Dynex Capital second quarter earnings conference call. During the presentation all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question please press the 1, followed by the 4 on your telephone. As a reminder, this conference is being recorded Tuesday, August 17th, 2004. I would now like to turn the conference over to Mr. Stephen Benedetti. Please go ahead, sir.

Thank you, Operator. Welcome, everybody, to our second quarter 2004 earnings release conference call. Tom Akin is also on the phone with us, and I'll be reviewing, of course, the forward-looking statement disclosure, first, and then some highlights and results for the quarter in a little detail. And then Tom will close the call with some discussion of the outlook for the Company.

First, let me review the customary Safe Harbor statement and the SEC rules regarding the use of non-Generally Accepted Accounting Principles or non-GAAP financial measures. I will 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 and economic -- general, economic, and market conditions; disruptions in the capital markets; fluctuations in interest rates; defaults by borrowers; 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 cost; and other general competitive factors. For additional information, see the Company's quarterly report on Form 10-Q for the period ended June 30, 2004, as filed with the Securities and Exchange Commission. In regards to non-GAAP disclosure, to the extent there is any discussed on this call, we will attempt to reconcile such non-GAAP numbers to GAAP.

Briefly, reviewing some highlights for the quarter, cash flow, overall for the quarter, from the investment portfolio was 19.4 million, including 7.4 million from the redemption of MERIT Series 12, and 12 million from the recurring cash flows from the investment portfolio. Reported results for the quarter, of course, include non-cash provision for losses and impairment charges aggregating $16.7 million. These non-cash charges should decline significantly in future quarters, as the Company is fully reserved for credit losses on its manufactured housing loan portfolio contained in MERIT's Series 13 and -- 12 and 13, and substantially reduced its investment in securities backed by manufactured housing loans contained in MERIT Series 11. As a result, going forward, our reported results should more closely approximate our economic results, that is, principally the cash flows we receive from the investment portfolio, less amortization expense for premiums and discounts on the assets and liabilities. Having now fully reserved for our MH Loan credit exposure and addressed impairment issues on the manufactured housing securities, we'd expect to begin reporting modest earnings going forward, absent any dramatic changes in interest rates or credit performance or other assets in the investment portfolio.

For the first quarter of 2004, previously mentioned, cash flow was 12 million, that was versus 11 million for the -- excuse me, for this quarter, versus the 11.1 million for the second quarter. 6.9 million of that 12 million was from our collateralized -- excuse me our secured finance receivables portfolio. 2.1 million from property tax lien collections, and 3 million from principal and interest payments on our other loans and securities. We would expect third quarter cash flow to decline modestly from pre-payments and likely declining tax lien collections in the near term. We also had previously discussed that our cash flows will decline approximately $250 thousand on a quarterly basis for every 25 basis point increase in interest rates. I will remind everyone that of our 1.6 billion of liabilities on our balance sheet, approximately 1.11 billion are fixed-rate with the balance being adjustable-rate, and we have swapped out 130 million of floating-rate liabilities to fixed-rate liabilities through mid-2005. We also reduced our servicing operations during the quarter for our delinquent property tax receivables portfolio, and in an attempt to rationalize the economics of that operation and save the Company more than approximately $1.1 million per year in G&A. We would expect quarterly G&A costs for that operation to approximate $700 thousand per quarter, going forward.

Turning to the results of operations, we filed our 10-Q, which will include, obviously, discussion on the results, so I'll just cover those, hit some high points on those. Obviously, our results were impacted by the high provisions for loan losses and impairment charges, as we already discussed, those are non-cash charges. Net interest margin was also impacted by approximately $2.1 million from the prepayment of some delinquent commercial mortgage loans in our commercial mortgage loan portfolio. This amortization expense also reduced our net interest spread by approximately 50 basis points, and as we reported in our Q our net interest spread for the quarter was approximately 90 basis points. Of the provision for loan losses, the 8.9 million in the -- reported in the financial statements, 7.6 million was related to MH. So going forward, that number will, obviously, substantially decline. There will be some modest provision for loan losses for manufactured housing loans as surplus cash is retained to cover losses on MERIT's Series 12 and 13, and will continue to record some provision, or likely to record -- continue to record some provision for commercial loan losses on commercial mortgage loans. Of course, the impairment charges were predominantly MERIT Series 11. The impairment charges were necessitated by increasing loss experienced during the third quarter -- the second quarter and Generally Accepted Accounting Principles effectively require the Company to use these loss rates in forecasting future performance for this security. The losses were due to large amounts of liquidations at repo during the quarter. And they may be seasonal in nature. In any event, unless losses dramatically increase from the second quarter levels, we do not believe additional impairment charges on MERIT Series 11 will be necessary for the foreseeable future. Just as a reminder, MERIT Series 11 contributed approximately 2.5 million to the investment portfolio cash flow during the second quarter.

In terms of the balance sheet, let me highlight a few -- a few items of note. Obviously, there is very little change in our investment portfolio, other than pay-downs from the year-end and last quarter-end. Most of our investments are now fixed-rate and these assets, as we previously discussed, are financed with 1.1 billion in fixed-rate financings and 467 million of variable-rate financing, of which 130 million has been swaped to fixed-rate. Our shareholders equity is 135.3 million, versus 144.8 million at the end of the first quarter. The decline is, obviously, due to the net loss, offset by the increase in accumulated other comprehensive loss, principally from the increase in value on the Company's $130 million hedge position. We reported book value per share of $6.40.

And assuming the securitized finance receivables securitization structures at fair value, which that fair value is, again, disclosed in our 10-Q, we would estimate book value per share at approximately $7.19. And, of course, that information, as I previously mentioned, is included in our 10-Q, where we provide the fair-value information for those structures. Included in the fair-value information in the 10-Q is a value of approximately $4 million for our MERIT Series 13 optional redemption right, which reaches -- it reaches its redemption date here at the end of this month. That value is based on the interest rate environment at the end of June. And we've had, I guess, roughly, a 30 to 40 basis point rally, with further rallying today since the end of June. And so we would expect the value, ultimately, at least today, on that optional redemption right for MERIT Series 13 to be higher than what is included in our 10-Q.

Let me briefly touch on our credit performance. Overall, the Company has net unreserved credit risk of approximately $40 million on our securitized finance receivables portfolio. As we've mentioned, all of the risk related to the manufactured housing loans in the portfolio is now 0 on a net basis, net investment basis, so none of that amount relates to loans. It does, however, relate to some principal investment on MERIT Series 11, but again, at this point, we don't think additional impairment charge will be necessary on that security. And it does, also, relate, approximately 19 million of that, relates to our net investment in our commercial securitizations. With that commentary, I'd like to turn the call over to Tom to give everyone an outlook. Tom? Actually, I think maybe Tom has dropped off.

Hello. I just got back, Steve.

Okay.

I apologize. Okay. Outlook and closing comments, I assume is where we're at.

Yeah.

We have finally gotten the point, now, where our results are not going to be substantially impacted by non-cash charges related to the manufactured housing in our portfolio. Absent any kind of dramatic changes in interest rates and credit performance on our remaining investments, we should begin to report modest income from our net -- from our continuing operations. We have evaluated the tax lien operations and pared them back in our portfolio to rationalize the collection costs versus the actual collections. And have determined that the tax lien operations are not going to be part of the Company's strategy, long-term.

We're going to continue the blocking and tackling necessary to maximize cash flow off the existing investments, and we look forward to reviewing investment opportunities that we know are coming first. For example, we talked about the call of the MERIT 13's that are occurring in August. And then the SASCO portfolio -- bond securitization that we should be able to call in early 2005. Our goal in the near term is going to be taking advantage of good opportunities to add investments to the portfolio, while reviewing longer term strategies. Longer-term, strategies may include an operating business strategy -- operating business strategy, so as to capitalize on the net operating loss carry-forward in the Company. The Board is currently evaluating opportunities available to the Company, and will be deliberate in that regard.

We anticipate our SASCO Series 2002-9 will reach its optional redemption rate in first quarter '05. And we will likely be adding complimentary assets to the investment portfolio in anticipation of calling and resecuritizing those assets. Finally, while one can never be sure of interest rates, the current market climate is quite favorable for Dynex's cash flow. Recent Fed announcements and discussions of measured increases should not greatly affect our cash flow, going forward. We are encouraged by that, and see no reason to change our investment portfolio until we see the opportunities that lie in our portfolio fully realized for our shareholders. And with that, Steve, why don't we open it up for questions.

Operator?

Thank you. Ladies and gentlemen, if you'd like to register a question, please press the 1, followed by the 4 on your telephone. You will hear a 3-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. If are you using a speaker-phone, please lift your handset before entering your request. One moment, please, for the first question. Ladies and gentlemen, as a reminder, to register for a question, please press the 1, followed by the 4 on your telephone. There are no questions at this time. I will now turn the call back to you. Please continue with your presentation or closing remarks.

Well, I'd like to thank everyone for being on the conference call. It's been a long time coming, but we're very happy to see that our manufactured housing portfolio is fully reserved for. We look forward to the rest of the year, and showing some modest net income, as we mentioned to you earlier.

Any other closing comments, Steve? None. Thank you. Operator?

Thanks much, everybody. And Operator, I think we can clear the line.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation. And ask that you please disconnect your line.

Thank you.