Dynex Capital Inc (DX) 2008 Q1 法說會逐字稿

Greetings and welcome to the Dynex Capital Inc. first-quarter 2008 results conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Thomas Akin, Chairman and Chief Executive Officer for Dynex Capital Inc. Thank you, Mr. Akin. You may begin.

Good afternoon, everyone, and welcome to the Dynex first-quarter 2008 conference call. With me today from Dynex is Steve Benedetti, Byron Boston and Alison Griffin. First, I would like Alison to read the customary disclosure statement.

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 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 earlier today and our annual report on Form 10-K for the period ended December 31, 2007 and other reports filed with and furnished to the Securities and Exchange Commission.

Thank you. Well, the first quarter of 2008 was very difficult for many mortgage REITs as I pointed out in my discussion. We saw historic volatility in March, and in the usually benign market for mortgage agency collateral, we saw the collapse of a couple of major mortgage REITs.

We're pleased to report earnings this first quarter of $0.36 and are equally pleased to be declaring a dividend of $0.15, and that is up 50% from the first quarter's dividend of $0.10.

As we mentioned in the press release, as we fill out our investment portfolio, we would expect to continually -- continue paying a regular quarterly dividend.

We also are making good progress on the implementation of our agency MBS strategy. Byron Boston, a 25-year veteran of the mortgage industry, has joined us full-time, and we are building relationships with financing counterparties and have just begun purchasing securities in earnest. Despite our improving prices on the MBS agency mortgages over the past few months, the risk-adjusted returns in the strategy remain quite favorable. As of today, we've purchased approximately $68.7 million hybrid ARMs at a net spread to our financing cost of approximately 186 basis points.

By the end of the second quarter, we're targeting to have invested most of our remaining available capital in agency MBS. We continue to feel that today's market offers compelling opportunities in the agency space.

Total assets at Dynex are approximately $388.5 million as of March 31, '08 versus $374 million at 12/31/07. Investment assets increased to $346.7 million versus $333.7 million at the end of 2007.

During the first quarter of 2008, we purchased $27.7 million of seasoned hybrid ARMs. These agencies we finance with $25 million of repurchased agreement financing. We feel that we've put out a pretty comprehensive press release here, and we would like to open up the call today for any questions that might come up.

(OPERATOR INSTRUCTIONS). Matt Kelley, Sterne, Agee.

I was wondering as you start to build out this agency MBS strategy, can you give us a sense of how the agency dealers are treating the existing balance sheet as it pertains to terms for your new repo and haircuts and pricing, etc.?

Byron, why don't you answer that question, please?

Well, are you meaning in terms of looking at the current nonagency provisions and how that impacts on the term agency repo facility?

That is correct, yes.

We have not really seen a real connection if I was to say has anyone really looked negatively or because nonagencies have been less liquid than agencies. We really have no leverage on the balance sheet at the current time, and all the assets are extremely seasoned, well over 10 years worth of seasoning. So we really have not seen a direct connection to someone saying, well, we don't believe or we should see these types of requirements for your agency portfolio because you have this existing nonagency book on the balance sheet.

That conversation really has not come up. We have really more experienced a credit department trying to understand the assets on the balance sheet, but most really recognizing the value of having really seen this collateral.

Yes, let me just add, Matt, that we had some very interesting meetings in New York the first week we did our credit roadshow because it was also the week that Bear Stearns went into JPMorgan's hands. I have to tell you we were very concerned that the haircuts that we would be receiving as a smaller REIT would be somewhat more onerous than others, and we found that to be absolutely not true at all. Our haircut has been very consistent across the board, and I don't think we're going to have any issues in terms of having to pay a higher haircut or a higher spread, particularly because we have an unlevered portfolio. Whereas a lot of our repo counterparties were looking for a reason to say no, when they looked at our balance sheet they really could not if they wanted to be in this business. So it was good to see that Wall Street is still open for agency counterparty business.

Okay. And then just said the second question, can you just remind us again the mechanics of the joint venture for the CMBS assets and how that works and how that gets marked through the balance sheet as that changes in value?

As you know, they had a lot of adjustments to that this quarter, and I'm going to have Steve speak to that because he is intimately involved in it on a day to day basis.

Yes, the joint venture, as you know, it is a single line item in our financial statements. That joint venture owns -- it owns subordinate securities in CMBS that we created back in the late 90s. It owns the direct interest in one transaction and, in effect, the cash flows of another transaction. So there's two securitization trusts cash flows that are, in effect, owned by the joint venture. Those assets are mark-to-market through, in the case of one of the trusts through the P&L under FAS 157, or excuse me, 159, and for the other trust basically through the equity through accumulated other comprehensive income.

On our balance sheet, we reflect those values in the same manner as the joint venture marks the assets to market through the P&L, we market through the P&L as we absorb their results, and for the AOCI adjustments, we do the same.

Of course, the economics of one of the trusts come to us and then we remit them over to the joint venture through that obligation to joint venture underpayment agreement. So we have the economics still consolidated in our balance sheet, and then we flip them over to the joint venture via that agreement.

I think simply, Matt, we basically have a 50-50 ownership of some of those commercial mortgages that we originated back in '97 and '98, and there really is not anything much more complicated than we are sharing the economic interest in that on a 50-50 basis.

Okay. And just getting back to the agency strategy, as that continues to get larger, do you imagine eventually putting on swaps as well in conjunction with the repo to extend funding?

Absolutely. Yes, we have a whole investment strategy and a hedging strategy, and it is very much with swaps in mind as a large part of that hedging vehicle. We are going to be talking more specifically about this at our annual meeting, and we will be unveiling the whole strategy. But there will be a significant number of swaps vis-a-vis any position we take on it.

And Byron, I don't know if you want to expand any more than that.

I think the real key is that we want to hedge out and manage our duration appropriately for the assets that we've put on. And to the degree they are putting on assets with longer durations and longer durations could be anywhere beyond a [three-one], we want to use swaps appropriately to manage the overall duration of the portfolio between the repo financing and the asset.

Jason Stankowski, Castle Peak Asset Management.

I was just curious you mentioned there is $10 million of mortgage REITs on the books that you bought during March, and you will be most likely liquidating those throughout this quarter?

We do not really want to speak to our market timing, but the goal is to obviously be in the mortgage REIT business and not necessarily hold equities in the mortgage REIT sector unless we have to.

Okay. Has that been a profitable trade so far for you guys this quarter?

Absolutely.

Great.

We own those securities at fairly good discounts to the current market.

Great. And is there any update you are able to give us on the status of financing after you have gone effective?

Not at this time.

Steve Delaney, JMP Securities.

I got on a little bit late, so if you covered this, I apologize. But I was on a call this afternoon with a peer company, and given the dislocation in March, they took advantage of an opportunity to repurchase a tranche of their own securitized debt at something crazy like $0.39 on the dollar. And it caused me thinking about your call coming up this afternoon, I recall that back sometime in 2007 I believe Dynex also did something like that, and I wondered just looking at the sort of -- you have some resi securitizations in commercial that are quite seasoned. Is that something that you guys are aggressively trying to seek out noteholders who may just want to clean up their balance sheet or portfolio, and do you see that as an opportunity for Dynex here over the next few quarters?

Well, on the resi side, I don't see that as being anything that we could really do right now. The resis that we own are pretty much in loan form right now. And the CMBS, the commercial mortgages, we could absolutely what you call basically collapse the deal by buying back the bonds and paying off the loans and ending up with, as you know, a substantial difference.

We have looked at that from time to time, and I cannot say that we're contemplating that in the near future right now. It is a rather complicated process to go through, and it is very possible it might be available, but it is not something that is on the tip of our tongue right now.

Steve, anything else you can think of that might fit Steve's question?

No, Tom, I think you really hit the highlights. And, of course, we own redemption rights as well on -- one deal is kind of right around the corner. So that one to be able to buy it at a discount is really likely not an option given the redemption right.

Yes, Steve, in the press release, we disclosed or that we have one of our securitizations, a small one, $34 million, that is actually callable in June of '08. So that is basically next month. And that we think that most of the borrowers of that -- of those commercial mortgages are going to repay us. And if we do get prepaid, we own those at a discount, and we have reserves against it. So I would say that is probably more likely what is going to happen, and we have a much larger securitization in our CMBS joint venture that is callable or redeemable in February of '09. So both of those particular loans are of rather short duration, and I think it would be hard to affect what you are talking about right now.

Well, it sounds like you may get some principal put back to you at better levels than you are carrying the asset on your books.

Well, the one thing that has happened obviously is, as the market has discounted CMBS in a huge way, we have to mark that to market. And our collateral is so old, as you know, that that resi stuff we have is from '92 to '97, and a lot of those LTVs are very, very low in the CMBS papers we originated '97 and '98. So that is very old paper as well.

But unfortunately we have to mark it to the market, and the market does not at this point take into consideration how seasoned that collateral is. So we're not really concerned about defaults or delinquencies right now because there really aren't any to speak of. But it is just a mark-to-market issue related to spreads.

Tom, one last thing, did you indicate about the annual meeting and the agency's strategy, are you going to broadcast your annual meeting to the public?

We're going to have it available at the website, yes.

At the website? Okay, very good. Well, thank you so much.

[Kent Baum], Deutsche Bank.

Could you talk about what effect these two callable bonds might have on book value if they are called?

Steve, I'm going to let you take that because I know that is a complicated question. That is a when and if I might add as well.

Yes, the first one that Tom was referring to, really it has a redemption date next month, and the expectation is those ones actually originated in 1993. The call date has synced up to when the loans first are eligible to prepay, and so our expectation is based on the behavior of the borrowers over the last three to six months, our expectation is most of those loans are going to prepay. So there is not a lot of value in redeeming it.

We do own that deal at a net discount, and so to the extent the borrowers do prepay the loans, there will be some discount flowing through to our P&L. So that issue will be a positive impact.

In terms of the other -- the second deal Tom referred to, the February '09 deal, frankly, a lot depends on what happens between now and February '09. The rates that we had to discount, the joint venture discounted those bonds at, if you sort look at where CMBS spreads are in the subordinate bonds, they are well into the '20s.

And to the extent that one or two things happen, either spreads on CMBS come in or, frankly, there is more liquidity in the secondary market. Because when you redeem these bonds, typically the idea is you flip the whole loans or resecuritize the whole loans. To the extent there is more visibility and liquidity in that market in February '09, there again you would have some potential upside in that redemption right.

The flip side is things can always get worse from here in the CMBS space. So it is really you have got to look at where things ended up at the end of March relative to expectations for February '09.

What effect would it have on book value if these two things were to take place?

Well, in the first event, which is right around the corner, it would be a positive impact on book value. And in the second event, depending on where spreads and rates went from here forward, it could be positive or negative.

Thank you.

Yes, I think we disclosed there as of March 31, we had unpaid principal balance of $41.4 million, estimated at a fair value right now at $19 million. So there is about a $12 million delta between the principal balance and the fair value. And remember we own 50% of that, so that would be $6 million. But again, that is out February '09, and we don't know what is going to happen between now and then.

But we did announce that that is '97, '98 vintage paper, and the loan to values are pretty attractive for us.

Operator, do we have any more questions?

Jason Stankowski, Castle Peak Asset Management.

Just along Kent's question, thanks for playing out what would happen in the February '09. What is the general range of economics we would be looking at here in June for the smaller deal? Is it sort of a $1 million pickup or a $5 million pickup, kind of what range?

Steve, do you have -- I'm trying to get a number out of you here.

Yes, we really had not disclosed that, Jason, but it would be in between those ranges.

Okay, great. I guess we will wait and see. Thanks.

We do not want to count any chickens before that hatch even though it is only a month away. But obviously our accountants don't know for sure, and we don't know for sure that all these loans are going to repay. But as Steve pointed out, they are 93 vintage, so they have been outstanding for 15 years, and you would like to think that most real estate people after 15 years want to refi and take their money out, so that is what we're expecting. And the coupons are such that they should be able to do that, but again we don't want to assume anything in this sort of environment we're in.

Jay Weinstein, Oak Forest Investment Management.

I will ask a quick question. Remind me of the mechanics of the tax loss carryforward, how it works if you could use it, and how kind of that is tying into your dividend policy in this quarter and going forward?

Well, as you know, as you can see from the balance sheet, our tax loss carryforward is rather large. It remains rather large. And it does give us the flexibility to either declare or not declare a dividend without really affecting our REIT status. As you know, last year we did not pay a dividend, even though we've earned over $0.40 for the year, and we feel, though, that now that the Company has stabilized and we're getting back into a more normalized cash flow where the balance sheet we think will continue to throw off acceptable returns, our goal is to pay as much of a dividend as we can. But at the same time, we would like to take any kind of extraordinary gains in the portfolio and really add them to book value.

So we would like to create a win-win, and that is continue to pay a substantial dividend, a market if not a little bit higher than market dividend, and at the same time drove our book value for longer-term shareholders. Ordinary income in a dividend is taxed at a much higher rate than capital gains on stock appreciation. So we want to give our shareholders a little bit of both.

Right. Because you had talked over the years about using that type of loss carryforward as it being an effective use of the cash that you would hopefully some day generate. And I was actually even a little surprised that you declared the dividend last quarter because I had sort of assumed either you would retain it and grow book value and use up the tax loss carryforward.

Well, I think if you were Warren Buffett and you had the ability to sort of dictate to your shareholders what you're going to do and not do, that probably would be a good idea from a philosophical finance point of view. But I do think that declaring a dividend as a REIT, as a small REIT right now, creates a win-win. It gives people current yield, and a lot of people like current yield in a REIT. Our real goal, our real mantra here is to establish a solid balance sheet that we can grow book value and also grow a solid dividend off of.

So I think it is a win-win situation, and I think that if we can't get the right investment portfolio, put to bed both sides, you are going to be very happy.

Okay. Yes because generally I guess REITs only grow their book -- by and large, grow their book value just by issuing equity above book when it trades there. And you guys have a little flexibility to grow your book value because of the tax loss carryforward really even without issuing equity. I know that may be part of the plan, but you don't necessarily have to. Is that accurate?

Well, I think that if you take a look at last year, we traded below book value for most of last year, and I think we only started trading above book value when we started offering a dividend and opportunities in the market presented themselves for us to do both. We did announce, as you know, we have effective a $1 billion shelf. We would like to raise more capital. The spreads right now are extraordinary. The risk return that I have been sort of harping on for the last three years of not being here are here. The opportunities are here, and we will bring to bear everything we can to take advantage of that, including raising more equity at a multiple of book value so that we will be able to take our book value up both from an earnings point of view, a retention of earnings and offering more equity at a price in excess of our book value.

Alright. So, in essence, kind of referring to something you said before, it is sort of a policy of the ongoing earnings from the portfolio you are building is what you are kind of looking to throw off in dividend, and if there are some extraordinary items along the way, whether these securitization redemptions you have been talking about, etc., etc., those you might just sort of retain into your book. Is that a reasonable description of what you said?

I think that is a fairly reasonable description, absolutely.

I'm not going to hold you to it, but that is just kind of the way I'm understanding it.

I mean I think it is a virtuous cycle that we like to get on where we're paying a dividend, growing our book value and increasing the size of the Company so we can get to critical mass. I think we're at the front edge of that. I think it is very achievable, and I think it is going to be a win for all the shareholders.

I think remember the thing about this Company is that we are effectively owners/operators. The board owns almost 25% of this Company. So this is not other people's money per se. This is our money. So you can be rest assured that we have taken care of the capital and protected it, and now we're going to use that same philosophy as we grow out the portfolio.

Right. As you know, I have been around longer probably than most, so I have always appreciated that. And I'm a believer. So thank you, and I will look forward -- now that you say the moment has finally arrived, I'm looking forward to watching you work with it.

Thank you so much for your patience.

Like I say, it was fine. You were doing the right thing, and look at all the trouble everyone else has gotten into. I think that staying with your courage of your convictions was really quite impressive, so congratulations.

It is not always easy.

No, I'm sure it was not. We are all in the same business that way. We know how it goes, so I really understand.

Operator, do we have any more questions?

(OPERATOR INSTRUCTIONS). There are no further questions in the queue at this time.

Okay. I would just like to conclude that again we feel that today's market offers compelling opportunities in agency securities. We have got the manpower. We have got the portfolio and the people in place to make this occur for our shareholders.

Our annual meeting is this week in Richmond, and we hope that our shareholders can attend the meeting in person and hear our plans for the future of the Company. For those who are not able to attend the meeting, we will post our presentation materials on our website, and I look forward to seeing all of you on our second-quarter conference call.

Thank you so much.

Ladies and gentlemen, this conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.