Dynex Capital Inc (DX) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2008 Dynex Capital earnings conference call. My name is Mary, and I will be your coordinator for today.

During the presentation, all participants will be in a listen-only mode. After the speakers' remarks, you will be invited to participate in a Q&A session. As a reminder, ladies and gentlemen, this conference is being recorded. I would now like to hand the presentation over to your host for today's call, Mr. Thomas Akin, Chairman and CEO. Please proceed, sir.

Thank you, Mary, and good morning to everyone. Welcome to the Dynex third-quarter 2008 conference call. With me today from the Company is Steve Benedetti, our COO; Byron Boston, our CIO; and Alison Griffin, Head of Investor Relations.

First off, I would like to apologize to everyone for the fact that I have a cold, and if I sound a little nasally, it's because I'm trying to recover.

Second, I'd like Alison to read the customary disclosure statement, if you will.

Sure. 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 and/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 annual report on Form 10-K for the period ended December 31, 2007 as filed with the Securities and Exchange Commission.

Thanks, Alison. Well everyone, this morning, in my introductory comments on last quarter's conference call, I mentioned how the first six months of the year have been quite a wild ride for many mortgage investors with historic spread volatility, Freddie and Fannie guarantees called into question and many moves by the Fed and Treasury to shore up investor confidence. Little did we know at this point that this was going to be just the beginning. In rapid succession, we have had the conservatorship of Freddie and Fannie, the bankruptcy of Lehman Brothers, the breaking of the buck by $1 billion money market fund and the bailout of AIG. And acting of the TARP and loss of trillions of dollars in US equity values and a reduction in the Fed funds rate by 50 basis points. And this all happened in the third quarter and we are only talking about things within our own borders.

These systematic issues caused unprecedented volatility in the credit markets, which led to substantial spread widening in the mortgage assets and enormous pressure on financial institutions' balance sheets. For us, this has translated into marked-to-market adjustments on our seasoned collateral, particularly in the CMBS portfolio owned by the joint venture and negative adjustments to our AOCI in our agency RMBS portfolio.

For the short term, our book value and earnings are impacted, but long term, it adds yield and positive adjustments to AOCI if possible and if our loans from the 1990s continue to perform.

Our defensive philosophy has helped us throughout this difficult period, and we managed to earn $0.17 per common share in the quarter and pay a dividend of $0.23. We're also able to keep our book value per common share at $8 per share. We are very proud of this.

Volatile market conditions continued into October, but only recently are we seeing things beginning to loosen up. Counterparties are now extending credit over year end at very reasonable levels. We have seen excellent opportunities to add selectively to our Agency RMBS portfolio at good risk-adjusted yields with financing over year end.

Notwithstanding these types of opportunities, we remain protective of our capital and expect to proceed cautiously for the remainder of the year. We continue to be concerned as the year end approaches and seek to roll all our collateral well in advance of year-end pressures. We will continue to keep our overall leverage low despite what may be available in the markets. We do feel good about our financing counterparties and the trend in the markets given the substantial involvement by the Fed.

Our existing portfolio of well-seasoned, single-family and commercial loans are acting as expected with very low loss delinquencies.

We are moving Dynex's business model forward, but carefully given the extraordinary conditions in the marketplace. We are still not willing to risk short-term gains for the long-term viability of the Dynex franchise. As such, we will continue to protect shareholder capital and evaluate all investment opportunities with strict risk parameters.

Dynex is in a great position to capitalize on the investment opportunities as the markets settles into a more normal state. That's really all the comments I have in prepared remarks this morning.

Operator, I've got Byron and Steve here to answer questions with me, so let's open up the floor for questions.

(Operator Instructions). Steve Delaney, JMP Securities.

Good morning, Tom and everyone. I don't know if you can provide this level of detail here on the call, but you mentioned when you were focusing on -- my question is focused on the Agency portfolio this morning, and you mentioned a spread for the quarter of 170 basis points. And I was wondering if you could share with us the details there as far as the yield and the cost of funds that made up that (multiple speakers)

I've got Byron on the line here and that's a good one for Byron.

Steve Benedetti with Byron. For the quarter, about 4.5 coupon on the securities and (inaudible) on the financings.

Okay, got you. And that 4.50 is net of your WAC less your premium amortization, right?

Right.

Okay good. And forgive me, I can't recall from the second quarter Q, but have you guys put any swaps on?

Steve, we're not -- we have a very low duration --

I know you do.

-- swap and we don't really need swaps for our portfolio. We've intentionally tried to stay away from swaps in all honesty because of the credit derivatives market. They have sort of -- they really haven't helped anybody to any large degree this year. And in fact, they have hurt them several times, so if we get longer in the portfolio, we will probably put the swaps on, but I think at this point with the concerns we have, we're going to keep down the middle of the road.

And your 22 months to reset is -- I guess this is for Byron. That's contractual with no assumption for prepays? That's just your contractual average term to reset?

Yes, that's correct.

Okay, so that is extremely short. So, okay good. All right, well that helps. So your 280 cost of funds really just represents your average repo costs. Pretty straightforward.

Yes. That's right. There's no complications from swap calculation.

Okay. And just one final thing, guys. How many counterparties at the end of the quarter or if you can share where you stand now; how many counterparties are you signed up with and how many are you currently using?

We have 11 counterparties that we are currently signed up with, but we are only using seven of those at this time.

Okay, very good. Well, congratulations on doubling the portfolio and moving the ball down the field.

Thanks, Steve.

(Operator Instructions). Jeff Porter, Porter Capital.

I guess this might be a question for either Steve or Byron. So we've got 22 months maturity to average reset on the asset side. Can you give us a flavor of where we are on the liabilities side in terms of the duration or the repurchase agreements and what sort of a blended average is?

I think on average, we can pretty much assume we're targeting 30 days. We've got some money that we put out longer. And we're putting out some longer money now, just attempting to roll ourselves over year end. But on average, we are in or around 30-day money.

Okay. And could you comment on what you have seen in that market over the last couple of weeks? Are things -- rates are coming down. Is also credit availability becoming better or the counterparties started to compete for your business?

Well, if I were to describe what has happened since really since Lehman, since the week Lehman went under, you certainly had this huge dichotomy across the spectrum of lenders. And it appeared that each lender was very different depending on their specific situation. There was a lot of fear at one point in time as you crossed over quarter end. And since that point, things have gotten better. Conversations have gotten better. Obviously spreads have gotten better.

There continues to be, as with us, concern as to what happens as we approach year end. But there is more conversation now about year end really representing more of a situation of higher yield as opposed to just a complete outright credit contraction. But that's kind of the conversations that have evolved over the last two weeks or so. Prior to that, there was an enormous amount of fear in the marketplace, and I'm speaking from the lending perspective.

Yes, Jeff, it really is starting to appear with everything that has happened that September 30 may be a difficult roll time than even December 31st right now. We are seeing a lot more interest in rolling paper over 12/31 than we even saw at 9/30 to be honest with you.

Okay. Well, that sounds good. Thanks a lot.

Thank you. There are no other questions in queue at this time. I would like to turn the call back to Mr. Akin for closing remarks.

Well I'd like to thank everybody for being on the call. Obviously, we've been very conservative in our business strategy up until now. I think it's paid off well. But I don't want anyone to think that we're not going to take advantage of the market and the opportunities that are out there when the time is appropriate.

Right now, spreads are very wide. We are getting financing over year end and we're putting money to work there right now. But we are not going to risk the Dynex franchise for short-term gains. We really feel this is a long-term business model that we want to stay in. And we feel very strongly as we go into 2009, spreads almost by definition are going to have to be very attractive and we want to make sure that we have plenty of dry powder to take advantage of those when the opportunities arise.

I want to thank everybody for their support and again, we're going to be talking about our dividend sometime in mid-December and we will let you know what the payout is going to be at that time.

I want to thank all our shareholders for their support. Look forward to seeing you next quarter.

Thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a great day.