Dynex Capital Inc (DX) 2006 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Dynex Capital Incorporated first quarter 2006 results 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 one followed by the four on your telephone. If at any time during the conference you need to reach an operator, press the star followed by the zero. As a reminder this conference is being recorded Thursday, May 11, 2006. I would now like to turn the conference over to Mr. Tom Akin, Chairman of the Board of Directors for Dynex Capital. Please go ahead, sir.

I'd like to welcome all of our Dynex shareholders to the call. From Dynex Capital this afternoon we've got Steve Benedetti, the Chief Operating Officer, and Alison Griffin. Before we proceed any further, Alison, can you read the Safe Harbor provision?

Sure. 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 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, variability in investment portfolio cash flows, availability of suitable reinvestment opportunities, defaults by borrowers, fluctuations in interest rates, fluctuations in property capitalization rates and values of commercial real estate, defaults by third-party services, prepayments of investment portfolio assets, other general competitive factors, the impact of regulatory changes and the impact of Section 404 of the Sarbanes-Oxley Act of 2002. For additional information see the Company's annual report on Form 10-K for the period ended December 31, 2005 as filed with the Securities and Exchange Commission.

Thank you, Alison. Well I'd like to welcome everyone to the call and I'd like to just comment that on this call we're going to change it up a little bit, change the format. We are going to really omit substantially a lot of the balance sheet statistics that we get into in a normal basis primarily because our balance sheet really hasn't changed that much. It is mostly our CMBS portfolio and if you have questions regarding that specifically beyond what I'm going to talk about in the call, Steve Benedetti and I will be more than happy to answer any questions after the call.

But I would like to talk a little bit about the first quarter and where we are, where we've come from and just a little bit of where we think we're going to. First of all in terms of the first quarter, I think a really great measure of what's going on is the book value of the Company and we were able to modestly improve the book value of the Company from $7.65 to $7.70. I know that doesn't sound like much but as well as I am sure many of you are aware, that it's been in light of a very difficult investing environment where we've seen most of the book values of our mortgage REIT competitors drop as interest rates went up.

The second thing that I think is noticeable in our report is the fact that our portfolio losses have now stabilized and if you notice in the first quarter we took a small gain of $100,000. Historically Dynex has been writing down investments and taking losses on almost a quarterly basis and we did present that we felt that that would be coming to an end this year and I think the representative small gain in the first quarter is testament that we're true to our word. At present we do not see the need for any more loan loss reserves the rest of this year. That could change obviously too from circumstances we don't see right now but as of right now that's the way-- that's what we feel.

Our CMBS, that is our Central Mortgage Backed Security assets or securitizations are our major asset on the balance sheet and I'd like to go into detail on a couple of the loans that had been in default because we've I think certainly pushed them forward in resolution. The first loan we liquidated in April of '06 at no additional loss to the Company and it is now for all intents and-- well it is now out of our balance sheet. Our second loan is basically a large building in St. Paul that we foreclosed on recently. We have a book carrying value of $15 million on that loan so it is a rather large loan but this loan we feel is very adequately reserved and, in fact, the area is-- the real estate in that area has been proving much better than we anticipated and we very well could have a gain on that, a small gain, so we do not see the need for any more losses in that. Those two loans were the major loans in that portfolio that were offering any kind of concern and at this point we do not have any other loans in the CMBS portfolio that we feel need to have any additional provisions.

In terms of what that does to our spread, many of you look at our spread and we were at a negative 16 basis points for the quarter and this is primarily due to two major items or factors. The first one is is just the very conservative nature of our current investment portfolio. As we've been saying for a while now, we have been expecting rates to continue to back up and we felt it was not an opportune time to put money to work, as they would have to-- you know, we would have to suffer maybe some kind of spread income but we would lose principal on that. So we have kept it very short and kept that yield very low and did not contribute much of a positive net interest margin because of the low yields on our portfolio. The second part, again, relates to the 15 million loan that we have that is non-performing. That loan basically cost us somewhere in the neighborhood of about a 6.6% cost and that plus the additional cost of operating that basically create a net loss or a net cost each quarter of about $300,000 a quarter or $1.2 million. That is fairly substantive and we are looking forward to the sale of that loan and changing that from a negative from our balance sheet.

Now the final thing that I'd like to talk a little bit about is that we did call a substantial amount of our preferred D in the quarter and that is going to save us approximately 1.3 million in preferred stocks dividends. As many of you know, that preferred stock costs us a 9.5% yield.

The other interesting thing I'd like to talk about I think is an asset, an unrecognized asset on our balance sheet, is the tax loss carry forward. In the 10-K our December 31 combined net operating loss was approximately 140 million. As we move forward we have a couple of particular tax losses that we are going to be recognizing and we do think that by the end of this year that total number NOL will be approximately 150 million. It's not going to be a cash basis but it's going to be versus a tax basis. As we move forward and as we use this NOL, our book value can grow much faster without having to pay taxes and we sort of view our assets now as a zero coupon bond compounding the principle as we move forward. And again, I comment that most of these NOLs don't expire until 2019 so we do have a substantive amount of time and we do feel that we will end up using all of these NOLs.

The other thing I'd like to comment on is we have made some mortgage REIT stock purchases. We've bought approximately 3 million of equities in other mortgage REITs, agency-- government guaranteed agency paper type REITs. Our valuation analysis we're interested in companies at an 80% book to value. We feel that currently you can actually buy the mortgage, leveraged mortgage business, cheaper than you can make it and we have added to that portfolio.

So I guess finally in conclusion I'd just like to say that we feel our current 7.70 in book value is now very rock solid and feel that as we add assets to our investment portfolio we can now continue to grow that book value. Secondly, the investment climate, the investment landscape, has improved substantially over the last year and even over the last quarter. Yesterday, many of you are aware, the Fed Funds rate was moved up to 5%. The ten-year, which just a few months ago was down in the fours is now currently this morning approaching almost 5.20. We feel that we're seeing our many opportunities that exceed our 10% hurdle rate that we have not seen over the last two years and we are doing a significant amount of time analyzing all the different opportunities from a risk-return basis.

The other thing is I guess I'd point out, the portfolio losses that have plagued Dynex over the years we really feel are behind us and now we can start building on what we have without worrying about what we inherited and it think that is going to make our climate, make our opportunities much better.

Finally, I would like to say that we are having an annual meeting June the 15th, 9:00 AM at the Park Central Hotel in New York City at the Manhattan Skyline Salon A and we hope at that time to be able to outline a little bit more clearly an exact investment strategy. We have been working very hard. Steve and his team has been working very hard to basically analyze and review many different strategies that have been presented to us and we are quite confident that in the very near future we will be able to really substantively discuss this with our shareholders, possibly by June 15th. In any case, that said we'd love to take some question and answers. Frank, why don't you open it up?

[Operator Instructions] Our first question comes from the line of Jason Stankowski from Clayton Capital.

I just had a question, we've unlocked a lot of value over time in restructuring some of the pools and I know some things are potentially coming up '07 and maybe '09 and I'm just wondering if they represent significant value or if that sort of is just marginally potentially beneficial and also what the rate environment would need to look like to sort of maximize any value creation if there is any sort on horizon?

So are you referring to the possible re-securitization of our CMBS portfolio?

Exactly.

All right. Well, Steve I know you've been working on that. Why don't you comment on that?

Well, I think to refer to our earlier comment you made, Tom, I think our book value and sort of intrinsic value and maybe you didn't make that specific comment but you thought we had a solid book value. I would say that our book value is close to our intrinsic value and the intrinsic value in our mind includes the value of that option or redemption feature, Jason, and we disclosed this in our public filings. The first deal will reach its redemption date in early '09, the second deal in late '09 and then the third deal in early 2011.

So I think it's in terms of the intrinsic value of the Company it's already more or less reflected and in terms of where the rates would need to be, the coupons on that collateral today and the deal in '09, roughly 775, which for that collateral type today is probably 100 plus basis points higher than it would otherwise be. And then as you get a little further out, the 2011 deal, those lines are probably just a hair inside of that 775. They're probably closer to about 750 on the coupon, so you're looking at some cushion, considerable cushion between where rates are today and where they could be on a forward basis and still have value in those calls.

And when you refer to intrinsic on the balance sheet we've discounted all those at 16%, is that correct?

Well, not on the balance sheet per say for those three deals. Those are at cost less estimated reserves for losses but when we provide the intrinsic information, value information in our supplemental in our quarterly filing, we discount those cash flows at 16%. That's right.

And that's an after tax number so any delta sort of already priced in and we have to wait until those dates to actually capture any value because their call dates contractually. There's nothing to do with them sort of to accelerate that at this time?

Well, let me discuss that a little bit. I mean we can obviously sell off the optionality of that to some other institution and so the good news is there is some optionality there that has value. The bad news is the rates have dropped-- or rates have gone up enough that the value of that optionality obviously is inverse to the rise in interest rates.

Right.

If interest rates were to suddenly drop down dramatically, then that whole thing could change but I believe that it is sort of a heads we win tales you loose sort of scenario because we do have the ability to call those bonds and if they're worth something, then it's good for us. If they're not worth anything, then we can't call them and just go away.

Great. Thanks again, guys, and look forward to hearing were we might be putting some of the large amount of cash we have.

Our next question comes from the line of [Warren Delmar] a private investor.

Thank you for the good report. I was curious as to whether the stock buyback that you've announced and have started has had any significant change; you haven't mentioned that as a possible use of the available cash?

Well, let me start with this, Warren. Nice to have you on the call. We are going to continue to buyback stock. We do feel that trading at 87% of book value with the solid book values we have is extremely cheap. Obviously there are some significant limitations, the amount of stock we have having to do with the average volume and things like that. So we don't see any changes in that going forward but, Steve, why don't you be a little bit more specific because you're very aware of the restraints we have?

Yes, we are like you, Warren, from the standpoint that at this point we, as the Company possesses insider information, I shouldn't say like you, but like an insider as it possess insider information it generally tries to [inaudible] a bunch of caution, avoid actively buying the stock, but as Tom mentioned that is an investment option and will remain an investment option for us as the window is open for the Company to be buying shares.

I believe the original announcement on the buyback referenced a million share buyback. Is that still the eventual target if it goes forward?

The million is what's approved at this point by the Board. I think, and Tom I'm sure you can speak to this, I mean it's more of the opportunities for the use of the capital and if the buyback remains compelling, that would be where we would potentially participate.

One of the things while we want to be sensitive to is the fact that we do have about $135 million in equity capital in the Company. We don't want to buy so much of the stock that we become an insignificant player in the world of especially finance companies. Also we have to weigh the return on other investments that we're going to be getting year after year after year versus the one time return of buying back our stock so we're going to play both sides of that and monitor that carefully but rest assured, Warren, I mean I own more stock than anybody here at the Company and to the extent that it's best to buy back the stock, we will.

[Operator Instruction] There seems to be no further questions at this time.

Great. Thank you, Frank. Well, finally conclusions, I want to thank all of the employees at Dynex for their hard work this last quarter and the hard work they're going to have going forward. We're very excited about the opportunities that are being presented to us right now. We have basically been waiting for this opportunity for reinvesting our capital and I can tell you that what we do here over the next couple of years is really going to dictate the future of this Company or maybe in a much longer period than that. We are going to be very careful. We're going to take our time. We're going to realize that the saying in the annual report, "Invest in haste, repent at leisure" but we are going to make sure that we take our capital now and intelligently on a risk return basis redeploy that capital. The good news is there are a lot of opportunities out there and these are opportunities that were not here last year and I think that bodes well for our future. I look forward to seeing everyone in June and with a little bit of luck we'll have some specifics to talk about at the annual meeting. Thank you much for your time.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day everybody.