Dynex Capital Inc (DX) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the third-quarter 2007 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 Thursday, November 1, 2007.

I would now like to turn the conference over to Tom Akin. Please go ahead, sir.

Good morning everyone, and welcome to our third-quarter conference call.

On the call with me from Dynex is Steve Benedetti, our Chief Operating Officer, Wayne Brockwell, Portfolio Manager, Bob Nilson, head of Credit Risk Management, and Alison Griffin, Assistant VP in Investor Relations. Steve will start out the call today briefly reviewing the second-quarter results, and I will discuss market conditions and strategic initiatives. We will then open up the call for questions, but as always, before we get started, Steve will review the customary Safe Harbor and forward-looking statement disclosures. Thanks, Steve.

Okay, Tom, thank you and thank the lawyers for this.

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 materially differ 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 report on Form 10-K for the period ended December 31, 2006, as filed with the Securities and Exchange Commission.

With that, I will -- a brief discussion of results. We reported net income of $2.7 million for the quarter versus a net loss last year, same quarter of $0.2 million or $200,000; $2.7 million in income versus $2.7 million in income for the second quarter of 2007. Net income to common shareholders was $1.7 million for the quarter, or $0.14 per common share, and $4.3 million for the full six months or $0.36 per common share.

Net income was bolstered by solid performance in our existing investment assets. Net interest income after provision for loan losses was $2.6 million, which included a reversal of reserves for loan losses of $127,000.

In general, we've seen improved performance in our loan portfolios over the last several quarters, resulting in an aggregate $829,000 in reserve reversals over the last two quarters. We attribute this to the fact that our investment portfolio is comprised predominantly of very highly seasoned single-family and commercial mortgage loans.

As we indicated in our press release, as of today, we have one commercial loan that is delinquent with an unpaid principal balance on our books of $1.9 million. All told, we have reserve levels of $2.5 million on our commercial mortgage loans relating to our outstanding non-credit-enhanced commercial mortgage loan portfolio of $133.4 million, and we have $129,000 in reserves relative to our outstanding non-credit-enhanced single-family mortgage loan portfolio of approximately $66.9 million.

Net interest for the quarter did not include any unusually large income or amortization expense amounts related to loan premiums or prepayments. We've had those issues in the past, but there are none in this quarter.

As the press release indicated, net interest spread for the quarter was 139 basis points, versus 123 basis points last quarter, if you exclude certain non-recurring items, and 82 basis points for the same period in 2006. The net interest spread that we report does not include our earnings on our cash and cash equivalents and the yield on cash and cash equivalents for the quarter was approximately 4.86%.

A couple of other notes -- Other Income includes approximately $233,000 for the quarter to reduce our obligation under mortgage servicing rights. Probably everyone is familiar on the call with that obligation; it relates to potential payments that we have to make to the servicer of our old manufactured housing loan portfolio. Last quarter, we actually recorded an expense of $417,000 to increase the obligation, and so there is a little volatility in that and the volatility really relates to the performance of the underlying manufactured housing loans and in particular voluntary and involuntary prepayments. Excluding the reversal of the provision for loan losses and the income from the reduction in the mortgage servicing rights obligation, we would have reported approximately $1.3 million net income to common shareholders during the quarter, or roughly $0.11 per common share.

In terms of our balance sheet, you know, clearly, on a sequential basis, our investment assets continue to decline slightly more slowly now. We continue, of course, to build our cash position. During the quarter, as we mentioned in the press release, we purchased $10.5 million in equity and debt securities, which -- with anticipated yields in the 10% to 12% range. We view these purchases as an opportunistic way to deploy capital in companies with good management teams at discounts to book value and/or intrinsic value of the securities.

Briefly, recourse leverage today -- again, very low, approximately 0.25 times our equity, secured by highly seasoned, performing AAA-rated LIBOR-based assets. As indicated in our 8-K and press release, we resold a previously redeemed bond subsequent to the quarter end at a modest discount, the proceeds of which were used to further repay repo debt and increase our cash position. The bond resold at a price of $97.69 or a spread of roughly 110 over LIBOR.

Our book value per common share is $8.17, versus $8.01 last quarter. Our adjusted common book value per share is $8.21 versus $8.19 at the end of the second quarter.

A quick comment on our joint venture -- we continue to have dialogue with the venture partner regarding investments, but none this far has been made. As you saw from the press release, the joint venture distributed roughly 18 million in cash to each partner during the quarter as is set forth in the agreement, due to lack of investment activity, but both partners have the option of putting the cash back in, into the joint venture for future investment opportunities.

That concludes my comments on the results and the balance sheet. I will turn the call over to Tom.

Thanks, Steve. Most of you know on this call that we have intentionally retained capital and kept our balance sheet leverage low in anticipation of more compelling investment opportunities. With the current disruptions in the financial markets, we are seeing those opportunities now. I commented in the press release that investments with potential yields in excess of 12% were available in a number of different areas within the single-family and commercial mortgage space. We continue to work with all of our business partners in sourcing these opportunities. Our objective will be to add investments that we believe have solid risk-adjusted returns and will perform well for our shareholders on a long-term basis.

We are extremely careful not to buy someone else's problems. The credit crisis is not over and might worsen as we approach year-end. We are likely to participate in this market in high-quality assets, versus adding credit risk to the balance sheet.

We continue to believe that the combination of substantial free cash flow, substantial free cash and a net operating loss carryforward of nearly $150 million, combined with the experience of the members of the Board and the management team, is valuable to our shareholders. We have always mentioned that we're looking for at least a 10% return on our portfolio (inaudible) a lot of our cash is yielding, as Steve pointed out, slightly less than 5%. We are seeing opportunities greater than that, but we want to ensure that those opportunities are real and risk-adjusted. That being said, we believe that we will be able to deploy our capital at yields approximating 12% or greater, which could push our quarterly earnings run rate to 20% to 25% -- to $0.20 to $0.25 per common share fully invested.

It's been a long wait for our shareholders for an investment climate appropriately priced for risk. We want to thank all of our investors for their patience, and they think they will be rewarded. We look forward to the future. Our opportunities are quite dramatic now, and we're 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. We would like to open it up for questions if we can.

Thank you. (OPERATOR INSTRUCTIONS). Steve DeLaney, JMP Securities.

Good morning, Tom and Steve. Let me ask about the equity and convertible investments that you made in the quarter. Well, I guess, first, the accounting treatment -- are these going to be carried as trading securities so any mark-to-market gain would go through the P&L?

Wayne, can you take that question?

Yes, that would be available for sale, so it will be --.

Oh, they'd be, okay, [mark] through equity then?

Yes.

Okay, so they'd go into your book value but until you actually sell something, it would just be a book value pick-up?

Right.

Okay. I was wondering if you could comment if the -- the press release indicated that there's been appreciation of $1.5 million on these investments. I was wondering if that is reflected in AOCI, is substantially reflected at September 30.

No. Steve, probably around half of that number was in September 30.

Okay, in 9-30, okay, so we've got more pick-up in book value there.

Right, right.

That will just impact now; until you liquidate, that will just be an adjustment to book, right?

That's right.

Okay. Then if I could, I just want to try to understand the -- I think I understood the mechanics of the 8-K and the sale of the retained securities. Is it as simple as you sold something for $35 million, you paid down about $16 million of repos to get those down to $20 million, and the remaining $19 million or so took your cash up from, say, $35 million and change up to about $55 million? Is that the mechanics?

Yes, that's the mechanics. Of course, that bond sale, since it is a bond that we issued, it will increase our securitization financing line item on our balance sheet. You've got it.

Okay. Let me see, okay -- so the repo is at $36 million; the $20 million was pro forma. So I guess the question is, these were obviously -- because of the seasoning of the bonds and such, you found a market at what you thought was an attractive price to sell these retained securities. So it begs the question, do you have other securities that are -- let's use the term "marketable" -- at reasonable terms that are the collateral for the remaining $20 million? I guess is there more liquidity opportunity in the near-term from additional retained securities over the next quarter or two?

Yes, Steve. We still -- we sold one bond of a series where we also owned another AAA bond in that series that has a notional balance today of around $46 million. That's what's securing the repo debt of $20 million today. So there's --.

A pretty big haircut on a AAA, isn't it?

Well, that's not really the haircut. We just feel we could get more it we wanted to.

If you wanted to.

The truth of the matter, Steve, is, from a strategic point of view, we wanted to raise cash because we have a significant number of opportunities. You know, we took the cash out of our the joint venture for the same reason, but until we really get that deployed, we don't really feel any more of a rush to sell off nice earning assets at this point.

I got you.

Steve, let me just add, that bond today is probably worth around 98. So it's about the same price as the other bond that we just sold.

I got you. Okay, great. Well, that's very helpful. Thanks, Tom and Steve.

(OPERATOR INSTRUCTIONS). Patrick Murphy, Flagstone Securities.

(multiple speakers) a couple of questions. I wanted to see whether or not you 1see anything interesting in the agency mortgage-backed? Then secondly, you have kind of a macro view on commercial real estate and whether or not there could be any valuation pressures in the commercial markets?

Well, we've been looking at the agency market, and we've been looking at a lot of different things. I would say the return characteristics of the agency market are very interesting right now. We are continuing to try and figure out ways to take advantage of that. There are several right now. We are really in negotiations that we can't talk about currently. But you know, the commercial mortgage market clearly, I would say the entire real estate market has some questions about pricing. I think that has to be built into any kind of model that you look at if you're going to be purchasing securities.

You know, I just want to reiterate that we're not interested in taking a lot of credit risk right now. We don't feel we have to take a lot of credit risk; we're not going to try and hit the ball out of the park. So anything that we're going to invest in is going to be of an extremely high credit. You know, obviously we would like to have a government guaranteed credit but you really can't get that in commercial mortgages.

The good news is that we are finally getting paid for taking some of that risk. You know, over the last couple of years, we don't feel we've been getting paid for that. I think that we were obviously correct in that assumption. But we're finally at the point that we're going to get paid.

The markets for probably particularly the commercial mortgages are going to get a little bit more difficult for collateral as we approach year-end. There's a lot of balance sheets that need to deleverage, so we're going to be helpful in providing some liquidity but only in the very, very high-quality areas.

Okay, that's great. Thank you.

(OPERATOR INSTRUCTIONS). Jay Weinstein, Oak Forest.

I apologize. I got on ten minutes late and missed a lot of the discussion (inaudible) I caught the question.

Tom, I did catch the comment where you talked about a run rate of earnings on kind of a more fully invested basis, but I did not catch the definition or what you thought kind of a fully invested position would be in terms of leverage I guess. What would you ideally like to see when you can find the right opportunities?

Well, at this point, the returns that we are getting are on an unlevered basis, Jay. The good news is we don't think we need to lever up. That doesn't mean that we're not going to lever up if we see an attractive investment, but the numbers that we're target about at this point, the run rates, we are really talking about an unlevered basis.

So you are really talking about deploying the cash you already have?

Yes, exactly. Now, there may be some implied leverage and some of the investments that we might make with that cash, but we are not going to put leverage on leverage like a lot of our -- a lot of other people have and are paying a price for it right now. But if it does make sense to increase our yield using leverage judiciously, we will. We will be looking at that as one of our opportunities. But the good news is, right now, we really don't need to take any leverage and all to, I think, get a nice return for our shareholders.

Well, I've told you in private and I will tell you in public how much I appreciate the job you guys have done, so you know, I think it's been almost a miraculous effort over the last five years, so keep up the good work.

Well, the only thing is, I've said before, is that we've succeeded in not losing money for our investors. Now, we have to prove that we can actually make some money, and we look forward to that opportunity.

Well, honestly, I think you've done that. I think the part you've done well is the harder part, and you're seeing that on a daily basis, so you're still alive, which is more than a lot of people can say, not to mention prospering, so congratulations.

Thanks, Jay.

Thanks, Jay.

There are no further questions at this time.

Great. Well, again, I want to thank all our shareholders for standing with us here for the last couple of years. It's been a long wait. It's one in which we appreciate the confidence that we've been given by all of you. We look forward to earning that confidence as we get an opportunity to deploy this capital. I look forward to the next conference call. Thank you much, everyone.

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. Thank you.