Dynex Capital Inc (DX) 2006 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Dynex Capital, Inc. third-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. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded Tuesday, November 14th. I would now like to turn the call over to Tom Akin, Chairman of the Board. Please go ahead, sir.

Thank you, Maria, and good morning and welcome everyone to the fourth-quarter conference call. With me today from the Company will be Steve Benedetti, our Executive Vice President and Chief Operating Officer, and Alison Griffin, our EVP of Investor Relations. I will start out the call today by reviewing briefly second-quarter results -- actually, Steve is going to review second-quarter results, and I'm going to discuss our strategic relationship with Deutsche Bank and our strategic initiatives. We will then open up the call for Steve and I to answer questions.

Before we get started, however, I would like Allison to review the customary Safe Harbor and forward-looking statement disclosures. Allison?

Thank you, Tom. This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words "believes," "expects," "forecast," "anticipate," "estimate," "projects," "plans," 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. For additional information on these factors, we refer you to our press release issued yesterday and our quarterly report on Form 10-Q for the period ended June 30th, 2006 as filed with the Securities and Exchange Commission.

Thank you, Allison. And Steve, can you give us a brief discussion of our results?

Sure. Thanks, Tom. As you might have seen from the press release, we reported a slight net loss for the quarter of $215,000 and after consideration of preferred stock dividend, net loss to common shareholders was $1.2 million or $0.10 per common share.

The reported net loss is principally a result of the charge of $1.1 million on the initial capitalization of the joint venture with Deutsche Bank, and an additional loss basically through the joint venture's results due to a reduction in the estimated net realizable value on a delinquent loan which was in one of the securities that we contributed to the joint venture.

This loan has a $23.2 million principal balance and the security we contributed and based in part on the bid process for the sale of the underlying real estate, we have revised the ultimate expected loss to be incurred by the joint venture. As a 49.875% participant in the joint venture, we reflect our proportionate share of their performance.

Apart from this loan, we have one additional -- well, there is one additional delinquent commercial loan in the joint venture for $1.6 million. And in our balance sheet, because we still have commercial loans in our balance sheet, there is one delinquent commercial loan with the current unpaid principal balance of approximately $3.2 million. In our balance sheet, this loan is reserved up to an estimated loss severity of approximately 43%.

During the quarter, on the positive side from a results perspective, net interest income sequentially improved from quarter to quarter as well as improved over the similar period last year. And we continue to manage down our G&A costs. Overall, in addition, our provisions for loan losses continue to remain at very, very low levels.

In terms of the balance sheet, obviously our investment assets have declined, principally as a result of the contribution of the assets to the joint venture. We continue to build our cash position, of course, which now exceeds on the balance sheet $50 million. When you factor in our proportionate share of the cash that in the joint venture, our total cash position is approximately $70 million. And I believe, as mentioned in the press release, we have an additional $12.3 million in currently unencumbered liquid securities.

As has been the custom for the Company in the past, we'll include additional disclosure in the 10-Q relative to our remaining asset mix or capital allocation in credit weightings of our investments.

This quarter, we have included a disclosure of the adjusted common equity book value and book value per common share, which we believe is a better measure of the going concern value of the Company. Previously, we had included the information essentially necessary to calculate this value in our quarterly filings. We felt it important to more plainly communicate this information to our shareholders.

As reported in the press release of September 30th, we estimate this value to $8.08 per common share based on the fair value of our estimated investments -- the estimated fair value of all of our investments. Plus, obviously, cash and other assets and other liabilities unless the liquidation preference on the Series Do preferred stock.

This is meant to be a going concern value, and not a liquidation value, and does not include any value for the Company's tax net operating loss carryforward, and does not include any provision for losses related to any current outstanding litigation.

With respect to litigation, we suffered a slight setback in our litigation efforts recently as the court affirmed the class status of the litigation against GLS Capital, Inc., one of our subsidiaries. The court left open the door to reverse itself if, in initial discovery efforts, the litigation or in the litigation indicates that GLS followed prevailing statutes at the time, which GLS has indicated it did.

Remember, the plaintiffs originally filed this lawsuit in 1998, and the uncertainty as to the litigation has been a thorn in the side of GLS since that time. So from that perspective, some resolution in class status is helpful.

Plaintiffs to this point have conducted no discovery, and have no damages quantified. The court has also indicated that it might stay the conduct of the case pending the outcome of other related litigation in which GLS is not directly involved. If that happens, then this case will likely be on hold for the better part of 2007.

That's my discussion of results for the quarter. I'll turn it over to Tom for discussion of the joint venture and the strategic overview.

Thanks, Steve. Clearly the biggest new for Dynex this quarter was entering into the joint venture with Deutsche Bank. While the venture immediately helped to diversify our risk and our commercial assets, more importantly, it gives us access to a partner with greater resources and investment opportunities which we might not have had on our own. We've been very impressed with the caliber of individuals that we have been working with at Deutsche, and I also want to emphasize that we entered into this partnership as equals, and we have input and approval of investment decisions made by the joint venture.

The joint venture will initially be focused on investments and mortgage-related and asset-backed securities. Principals at Deutsche Bank share our concern regarding overleveraging the balance sheet with interest rate and/or credit risk. And so we will necessarily be cautious in our initial investments. At this point, the only investments of the joint venture are the ones we have contributed -- that is, the commercial mortgage assets -- and the joint venture therefore continues to hold significant amounts of cash, as we stated in our press release.

So I want to take a couple of minutes and move to the strategic side of things. We believe we are currently in relatively good shape, particularly as you survey the landscape around us. We concluded our first joint venture, our balance sheet is in excellent shape, and we have significant capital available to reinvest at the appropriate time. We are actively engaged in the investment evaluation process, and this includes investments both within and external to mortgage-related assets.

This includes additional joint ventures for coinvestment strategies, as well. We think this is an efficient way to redeploy our capital without having to add substantial resources and overhead to the Company.

The pause by the Federal Reserve may provide opportunities to invest further out on the curve. However, we will continue to remain disciplined and will not add inappropriate risk to the balance sheet or material recourse leverage back into the capital structure of the Company until the risk/return rewards us correctly.

We will continue to repurchase common stock, although limitations imposed on buybacks due to our relatively low volume has restricted the effectiveness of that. We believe the combination of substantial free capital, a net operating loss carryforward, and the experience of the management team and the board of this Company is valuable for our shareholders.

I again must state that I appreciate everyone's patience, as solid investment opportunities are difficult to find. As we have stressed on many occasions, we believe this is a difficult investment environment, and one constantly in flux.

And our objective today is capital preservation. As Dynex's largest shareholder, I have a vested interest in making smart decisions with our capital, and we will do so.

Operator, that concludes our review of our second-quarter results, and we would like to open up the call for questions.

(OPERATOR INSTRUCTIONS). Steve Delaney, Flagstone Securities.

Your stockholders' equity of $135 million at September 30 -- Tom, you used the term -- one of your points of flexibility and opportunities to free capital. Can you share with us a sense of how much of your existing equity base you would consider to not be allocated to support existing investments? How much free capital are you sitting on today?

Steve, why don't you answer that? I have got a rough handle, but you might have more an exact number.

That's information we actually do put in the Q, Steve, I think sort of broadly. Broadly, though, I'll mention that -- you look at -- our cash capital is $52 million. We have roughly -- just referring to the numbers that are in the 10-Q, another $12 million basically of highly liquid securities that are not --

Not under repo?

Not on repo, right -- they're not levered at all. And then when you throw in the joint venture, our proportionate share of that cash -- it's roughly another $18 million.

Okay, so something over $60 million that you have complete control over, assuming that your JV -- you want to try to put that to work in that specific strategy.

Yes.

Okay. And on the -- obviously, the benefit -- the Deutsche Bank deal looks like a really smart deal for a company that wants to be efficient on its capital without going out and adding a lot of overhead and trying to duplicate platforms that other people already have. Is this something that you would attempt to look at the residential side of the business as well -- subject to credit concerns, but, for instance, a category such as non-AAA private-label RMBS -- that might be an area where you could find a partner like Deutsche Bank and do a similar JV?

All of those are wide-open. I would say if the risk/return -- the yields on those look interesting, absolutely. We also have been looking at the commercial mortgage area as well. We think that's an interesting opportunity there. And some of the returns there are much more exciting than the residential without the credit risk.

So yes, I think all of those are wide-open game. And as soon as we find the right situation, the right structure, and right price, I think that's wide open.

(OPERATOR INSTRUCTIONS). Mr. Akin, Mr. Benedetti, there are no further questions at this time. I will now turn the call back to you. Please continue with your presentation or closing remarks.

Well, I thought we get a couple of more questions on the joint venture. I hope it's clear to everyone that we see this as a great opportunity for the Company to be able to leverage its assets without having to add significant overhead and bring -- really start to use that net operating loss.

Again, I appreciate everyone's confidence. And we look forward to reinvesting this capital in the near future. And I hope everyone -- I hope everyone has the patience to stay with us in this process. We are seeing some major changes in the marketplace right now and we're looking forward to the remainder of this year and next year. Thank you much.

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.