Dynex Capital Inc (DX) 2007 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Dynex Capital second quarter 2007 results. 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 Friday, August 3rd, 2007.

It is now my pleasure to turn the conference over to Tom Akin, Chairman of Dynex Capital. Please go ahead, Sir.

Thank you. Good morning, everyone, and welcome to our second quarter conference call. We are going to try to make this as brief as possible as it is obviously getting very interesting in the mortgage market right now.

With me today from the Company is Steve Benedetti, our Chief Operating Officer; Wayne Brockwell, our Portfolio Manager; and Bob Nilson, who's head of Risk. Steve will start out the call today briefly reviewing the second quarter results and I will discuss the market condition and our strategic initiatives. We will then open up the call for questions.

Before we get started, Steve will review the customary Safe Harbor and forward-looking statement disclosures. Steve.

Thanks Tom.

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 qualified. 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; defaults by borrowers; availability of suitable reinvestment opportunities; variability in investment portfolio cash flows; fluctuations in interest rates; fluctuations in property capitalization rates and values of commercial real estate; defaults by third party servicers; prepayments of investment portfolio assets; other general competitive factors; the impact of regulatory changes; and the impact of Section 404 of Sarbanes-Oxley Act of 2002.

For additional information see the Company's annual report on Form 10-K for the period ended December 31, 2006, and other quarterly reports filed with and furnished to the Securities and Exchange Commission.

A brief discussion of results. This quarter net income was $2.7 million versus $1.6 million for the same period in 2006. Net income to common shareholders was $1.7 million for the quarter or $0.14 per common share and $2.6 million or $0.22 per common share for the full six months.

Net income was bolstered by the solid performance of our existing investment portfolio. Net interest income after provision for loan losses was $3.7 million which includes a reversal of reserves for loan losses of $702,000 resulting from the improved performance of underlying multi-family housing loan and collateral.

In general we have seen improved performance in our commercial mortgage portfolio over the last several quarters. And with reserve levels in excess of $2 million, relative to our outstanding non-credit enhance commercial loans of $136.7 million we believe the reserves are adequate.

Net interest income after provision for loan losses also included a $601,000 premium amortization for commercial loan prepayments. This amortization would have reduced our interest expense on securitization financing by a like amount and improved our net interest spread by 94 basis points.

Excluding this 94 basis points our net interest bread was 123 basis points, a healthy spread particularly when you compare it to others in industry. Note that this interest spread excludes earnings on our cash equivalents, which yielded approximately 5.28% for the quarter. As we mentioned in the press release we earned just over 11% on our invested capital in our existing investment portfolio.

In terms of other items in the income statement, other expense included a $426,000 charge for the increase in our obligation under our mortgage servicing rights. This obligation relates to potential payments we may have to make to the servicer of our old manufacturer housing loan portfolio which we sold several years ago.

If you were to exclude the reversal of the provision for loan losses, the premium amortization for the commercial loan prepayments and the increase in the mortgage servicing rights obligation. the Company would have earned $1.8 million during the quarter or roughly $0.07 per common share.

If you look at our balance sheet although our asset investments are -- continued to decline the declining is slightly more modest now. And of course we have continued to build our cash position over the near-term. Our investment assets are very seasoned and in particular our single-family mortgage loans would have been originated largely in the mid-1990s. Our commercial mortgage loans also are very seasoned and they would have been originated largely in the 1997 and 1998 timeframe.

In terms of our recourse leverage that we have some repurchase agreement financing, it's a very low point six times our equity and it is secured by AAA-rated assets. Our book value per common share is $8.01 versus $7.78 at the end of last year and our adjusted common book value per share is $8.19 versus $8.13 at the end of last year and $8.27 at the end of the first quarter. The slight decline in adjusted common book value per share was due primarily from the recent widening and credit spreads, the changing in the timing of cash flows on other investments and the adjustment to the mortgage servicing rights obligation that I had mentioned previously.

Briefly mentioning, with respect to the joint venture, we continue to have dialogue with our venture partner Deutsche Bank regarding investments. There are certainly more opportunities today and Tom will speak to that. But thus far none have been made.

With respect to litigation there have been no material developments this quarter.

That covers my comments on the results and the balance sheet and I will turn it over to Tom now for the strategic discussion.

Thanks, Steve.

As you heard Steve say, our balance sheet is in excellent shape today at Dynex. Our leverage is low and the portfolio's seasoned investments is performing well. As those of you on this call know we have intentionally kept the balances, our balance sheet strong in anticipation of a pending market dislocation.

Clearly that dislocation is upon us now. We have seen dramatic changes take place almost hourly in the financial markets; and the latest news from the (inaudible) sector is that that secondary market is no longer functioning.

Our challenge today is to be patient and selective in using our liquidity to opportunistically participate in this market. We continue to work with all of our business partners in sourcing investment opportunities. We have amply liquidity today and we do not want to rush in and buy too early. Rather we are going to be cautious, wait for investments which we believe will have acceptable risk return profiles.

We are more likely to participate in this market in high-quality assets versus adding credit risk to the balance sheet. This is a liquidity-driven event which necessitates care and diligence and asset location or asset selection. We believe the market will continue in a period of high stress and high volatility for the foreseeable future. And we want to keep most of our powder dry.

We continue to believe the combination of substantial free cash flow of almost $70 million and a net operating loss carryforward of nearly $115 million, combined with the experience of the members of the Board and management team of this Company is valuable to our shareholders.

We have always mentioned that we are looking for at least a 10% return on our portfolio. A lot of our cash stays yielding, as Steve pointed out, slightly over 5%. We are seeing those opportunities and we are seeing opportunities greater than that, but we want to ensure that those opportunities are real and are risk-adjusted.

We look forward to the future, our opportunities are quite dramatic right now and we are now positioned correctly to take advantage of what is going to be a very, very interesting time.

Operator, that concludes our review of the second quarter results. Tom, why don't we open it up for questions.

(OPERATOR INSTRUCTIONS). [Jay Buck] of [Rockwood Partners].

Mr. Akin, I think that's a fine job and I think the same, pass that along to Mr. Benedetti as well. I think in a very difficult market environment that you both have steered the Company in a direction that I think we are well positioned to take advantage of opportunities in this location.

I'm just curious what do you think some of the best opportunities the Company might be able to source in the next six months might look like? Not specifically, but sort of broadly? And that's good for either Steve or Tom. And I would also like to hear comment what your thoughts are, Steve, on the current state of the securitization market?

Well let me just take a quick broad brush of all the different things that we are looking at. You know we have been in several meetings with our joint venture partner, Deutsche Bank. We have kept all of that available cash in that joint venture exactly there in cash and I think we are quite pleased that we did that.

We know that there are substantial opportunities right now. You know we are seeing double-digit returns almost everything we are looking at, but the nice thing I think, Jay, is that we don't have to try and hit the ball out of the park, so to speak. We can hit nice solid AAA type security type investments and still get the returns that we are looking for.

So we've been in meetings with Deutsche Bank several times over the last month or so; and I think that is going to be a great opportunity for us? In terms of our own capital, the gambit ranges pretty much across the board. We have been looking at joint ventures working in various areas of the mortgage marketplace as strategic business opportunities. And I think those discussions are going quite well.

The securities market is, clearly, the door is wide open there now to just buy securities. The question is is when? So I think we are taking a look at that carefully.

And also quite frankly there are a lot of mortgage companies that are in really dramatic distress right now and we are trying to open up the door to discuss opportunities with existing mortgage companies that may need some helping hand or a white knight or even a bail-out.

So I hate to be vague and not discuss anything specifically, but there -- quite frankly there are just almost too many opportunities right now. We are waiting for the the marketplace to calm down a little bit, but it appears that even this morning there's additional dislocation going on.

We feel that at least presently we are going to let this die down. We are not going to try to catch a falling knife, but we are going to wait until everything sort of settles here a little bit.

Steve, do you want to either Bob or Wayne speak to some of the securitization situations going on right now?

And also I'm curious what your thoughts are on the implications of Bear Stearns and if you -- I know you might be in meetings but they just -- they put Bear Stearns on the watch list now for downgrading for their debt SMP this morning. I'm just curious what your thoughts are on that and also the status of the securitization market?

Steve, do you mind taking that?

On the securitization market? Yes, and I will have Wayne Brockwell chime in here. Clearly the secondary market today is in a liquidity freeze and folks that are generating assets like American Home Mortgage, [Indiemac], Countrywide etc., and to a large extent the street firms and I think this is why you see what happened with Bear Stearns. Their balance sheets are getting very very full and there's no outlet for the product these folks are generating.

I think that's what you see with American Home obviously shutting down its origination business last night. We have heard in the market there are deals that are coming to market, but at significant subordination levels. The last deal that we heard was a subprime deal where the subordination to the AAA is increased to 30% of the capital structure of that deal.

Unclear to us whether the AAA bonds -- nothing below AAA sold. Unclear to us whether the AAA bonds really sold or whether they were just basically portfolioed by the underwriter. But it is clearly a very, very thin market and just a lack of bid of -- for assets that are being generated today. How long that continues is anybody's guess.

Wayne, I don't know if you have seen anything else that you might want to comment on in terms of the secondary market, securitization market.

No, I think Steve covered it pretty well. I think there's certainly -- there's a lot of assets that are floating around. I don't -- a lot of them are not clearing because of the bids that are being offered. You know, from the information that we are getting and I think Steve is right that I think many of the street firms are filling up, if you will. So you know, question that we had on this side and what we -- it's -- we're interested to really follow is to what extent that they -- where that watermark is or where they're full and where -- when their appetite for clearing trades at some of the levels that are being offered, when that really is going to hit the market and kind of where that -- you know when that ball starts rolling where it's going to really end up.

Thank you. Good job.

(OPERATOR INSTRUCTIONS). At this time Mr. Akin, we have no other questions at this time. I will turn the call back to you.

I want to thank all of the shareholders for their patience over the last couple of years as I know it has been very difficult to have us get on this call on a quarterly basis and hear that we have held our powder dry and that we have kept it for a future event.

I hope everyone feels a little bit better that that future event is upon us. I think this opportunity will accrue well to Dynex and I have always told everyone we haven't done anything particularly smart yet, in terms of reinvesting capital. We just have kept it out of harm's way.

I hope in the future that we will be able to prove that we can do something smart with this capital. I want to thank everybody for their patience in this process, but that opportunity is in front of us right now and as you can seek Wayne, Bob, Steve, myself are all very excited about the opportunity for Dynex going forward.

Thank you very much and we look forward to more eventful discussions of investments next quarter. Thank you much.

Thank you very much. Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask you to please disconnect your lines and have a great day, everyone.