Dynex Capital Inc (DX) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2009 Dynex Capital earnings conference call. My name is Anne, and I will be your coordinator for today's call. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session following the presentation. I would now like to turn the presentation over to Mr. Tom Akin, Chairman and CEO. Please proceed, sir.

Thank you, Anne, and good morning, everyone. Joining me today on the call is Byron Boston, our Chief Investment Officer, Steve Benedetti, our Chief Financial and Chief Operating Officer, and Alison Griffin, who heads up our Investor Relations department. Before we get started, I would like to have Alison read our customary Safe Harbor disclosure.

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 that was issued yesterday, August 6, and our annual report on Form 10-K for the period ended December 31, 2008 as filed with the Securities and Exchange Commission. And with that, I'll turn the call back to Tom.

Thanks, Alison. And thank you, everyone, for taking the time to join our call. As has been customary for the last few quarters, we will briefly review some of the high points for the quarter and then open up things for questions. In an effort to more effectively communicate our quarterly performance, we've expanded the press release to include details about equity allocation and agency MBS portfolio. We believe the equity allocation disclosure in particular provides excellent insight as to where we have invested our capital and what risk we are taking in our investment strategy.

As you've seen from the press release, our results this quarter and for the year reflect the generous returns available from the agency MBS market. Our net investment income increased to $5.9 million this quarter, versus $5.0 million in the previous quarter, and our net interest spread in agency MBS for this quarter was 370 basis points versus 335 last quarter. In addition, our agency MBS were marked at 103.6 at quarter end, versus 101.3 at December 31, 2008.

Prices have continued to strengthen into the third quarter, and our borrowing costs have continued to decline. While prices have increased on assets, the yield curve remains very steep, and we believe acceptable returns can continue to be earned in the agency MBS market.

At the end of the quarter, 87 million or 63% of our shareholders' (technical difficulty) was allocated to agency MBS or cash. The remaining 37% is invested in highly seasoned non-agency MBS. As I noted last quarter, the non-agency investments continue to perform in line with our expectations from a credit and cash flow perspective. We continue to believe that the new government TALF and PPIP programs will increase the value of these investments and will create opportunities for Dynex to possibly refinance these investments at generous rates.

We also believe that these programs may afford us an opportunity to invest additional capital into these highly seasoned assets by redeeming what we believe to be TALF-eligible bonds in our securitization financing deals. The redemption rights on this deal is owned by the joint venture, and we have provided an example of our presentation at the KBW Financial Services conference in June of the potential economics to us if these bonds are indeed TALF eligible.

As we sit here today, we are in the process of establishing a TALF account with a large financial institution in hopes of taking advantage of this (technical difficulty) opportunity. The important thing to note is that the redemption is at the joint venture's option, and we currently have no economics recorded in the joint venture for such an option (technical difficulty).

During the quarter, we [raised almost] $7 million of common equity under our controlled equity offering program. During the quarter, we entered also the Russell 3000 Index. We saw our book value improve from $0.18 to $8.54, and book value has continued to improve through July on the back of strong agency MBS pricing. As of now, our expectation would be that to the extent we earn in excess of our dividend, we will utilize our tax net-operating loss carryforward to offset our distribution requirement, increasing value in the process. This is an inexpensive and efficient way for us to raise capital and grow our book value per share in a very positive investment environment.

In terms of the macroeconomic conditions, despite the equity market's euphoria we still believe that there is substantial risk in the marketplace and remain cautious. We will stay under our (technical difficulty) targets for now and manage our exposure through a government policy generated finance event.

With respect to Dynex, we believe that our business model of opportunistically investing our capital in favorable risk-adjusted investments for the benefit of our shareholders remains on track. Given our investment in short-duration agency MBS and highly seasoned non-agency assets and the call rights that (technical difficulty), we believe we are better positioned than any other mortgage REIT to take advantage of the current environment. Operator, I would like to now open it up for questions.

Okay, great. (Operator instructions). And the first question comes from the line of Steve Delaney with JMP Securities. Please proceed.

Thank you. Good morning, Tom.

Good morning, Steven.

I was wondering if you could comment, other than what I would define I guess as re-engineering some of your legacy commercial real estate or residential mortgage assets to kind of take advantage of TALF or whatever, are you guys looking at beyond sort of your existing agency book, which is performing very well, are you looking into the non-agency RMBS or the CMBS market for opportunities as well, in addition to kind of working on enhancing the returns on which you already have in that space?

Right now I would say we are monitoring all of those opportunities, Steve, but the fact that we have these legacy assets already in our own balance sheet and in our backyard, it's sort of the old adage, we're going to clean up our backyard first before we start cleaning up someone else's. And we've waited almost a decade for these assets to be callable and for the environment to be appropriate for us to be able to monetize the value of these things, so we really are working pretty hard at getting that done.

As you know, it will have a fairly positive impact on our EPS. We have allocated a fair amount of our cash that's sitting around towards this TALF refinancing when and if it occurs, and we've steadfastly said that we're going to get that done before we start looking at other things. But it doesn't mean that we're not looking at all other opportunities. We are. It's just that I think these are so compelling on a risk-adjusted basis we've got to clean this up first.

And is that something, Tom, you think is reasonable that you've--I realize there's no certainties in the market, but is that something that internally you're hopeful that by the end of this year you can have something accomplished there?

Byron's been working on it pretty hard. I'll let him answer that question because I think he's been on the front line with arranging the financing for this and setting up our TALF account.

Steve, the short answer to that is yes. We would definitively hope that's something before the end of the year. As we look at other products, as Tom mentioned, we continue to come back to look at these assets and say -- we look at the seasoning on these assets, we look at the structure of these assets, and we continue to prioritize this. So the short answer is yes, we've got a laser-beam focus on this issue right now.

Okay, that's helpful. And Byron, I guess since you've got the floor, my last question is probably directed best to you anyway. You guys have not found it necessary, and I think appropriately so, not to put swaps on to this point, given that you've been buying these short-to-reset kind of hybrids. And I think the Fed has clearly indicated where their current mindset is about short rates.

But I guess looking at sort of what's going on in interest rates with the ten-year moving higher, are you starting to think about, "Okay, I only have 25 months to go," but there's probably a likelihood that some of these things may just roll over at that point rather than just burn off. And maybe at some point before the two-year swaps run away from us here, are you thinking about at some point trying to lock in some term funding against that? Given that you really can't necessarily look at all that as being a two-year bullet.

Yes. It is an absolute -- I will call it a daily issue. We are --for not having a swap on, we probably put twice as much work into it as someone who does have a swap book. That's how serious we are about that issue.

We've continued to purchase the short-duration assets because we have concern about extension risk. And when we look at our portfolio and we say, "Okay, what if we got caught off guard," this portfolio does not extend very much. It extends less than three-quarters of a year. It's a very short-duration portfolio that's throwing off an enormous amount of net spread, but we're putting a lot of effort into that issue around the overall swap market.

Obviously, to manage one of these portfolios through a really sustained, long-term, up-rate cycle, you want to be involved with plain-vanilla interest rate swaps. So yes, the answer is we are evaluating it. We've put an enormous amount of time in it. We continue to say it's great to own a very short portfolio and get this much net spread from it, so we haven't turned our face away from owning the short-duration assets as opposed to simply trying to buy something new that really will have a very, very long duration.

Got it. Okay, well, thanks a lot, guys, and nice quarter.

(Operator instructions). And the next question comes from the line of David [Foznik] with Stifel Nicolaus. Please proceed.

Good morning, Tom.

Good morning, David.

How are you?

Good.

Good quarter. Years ago, I would have thought that should the common get to 10, you would have called the dividends -- called the preferred to save on the dividend cost. Now the reverse is the case. What's your thinking of the preferred versus the common if and when your stock gets above $10 and is callable?

Well, as you know --

I know it's not your call alone.

Yes. I think the cost of capital on the preferred 9.5% is our dividend rate on that. As you know, I think it's $44 million we have outstanding. And at this point, it's a fairly -- with an interest rate environment, we're getting rates of return in the high teens, as much as 20% or more. It doesn't make any sense to pay off 9.5% debt.

I agree.

That capital is quite attractive. And frankly, if we could do more of that, we probably would. And there are some features about that preferred that was -- it's impossible to reopen that preferred. But we're quite happy to have that on our balance sheet, and I don't see anything changing that over the near term.

Amazing how the world turns.

It is. As you know, you've been with us a long time, and it's been a long time getting to this point, but we're very happy to see that finally Dynex's common is out-yielding its preferred, which is the way God intended the capital structure to look like. And we've returned to a more normal situation. But as you know, I am a large holder of the preferred, and we're very comfortable with a 9.5% cost of capital, that if we can go out and earn a greater spread than that, that's another way to be accretive to our shareholders a second time.

I imagine that you are, as a holder, comfortable getting a 9.5% return, in the event that things don't turn out as good as we all expect them to.

Well, we managed this thing through some pretty difficult times, David, and I would have to say that the environment we're in right now is substantially better for an agency REIT than it's been historically. And one of the reasons we maintain a very conservative posture is that we don't want to ever be in a position where the market dictates to us what we can and cannot do as a company or as a REIT. So we're judiciously looking at this non-agency opportunity. We're going to measure twice and cut once to make sure that we do put this trade on, this opportunity on. We're going to have the ability to get the maximum amount of return with the least amount of risk.

The good news is as things get better and better, the financing markets are opening up. Our opportunities to be able to do something very accretive for all our shareholders on this non-agency pool of assets becomes greater and greater. The real great thing about this is that we have the ability to buy these bonds at par any time we want. There is no market sensitivity to these bonds because we own the call right. It's exclusive to us. The bonds could go to 110 and we could still buy them at par, so it's a great situation to be in, and it's unique to Dynex.

Thank you.

Thank you, David.

(Operator instructions). And there being no further questions, this concludes today's question-and-answer session. I would now like to turn the call back over to Mr. Tom Akin for closing remarks.

Well, we want to thank all our shareholders, those of us who have been with us a long time and those of you who have recently joined us. We are continuing to perform as we have outlined from years ago. Our strategy remains intact. We are looking forward to incremental adding to that strategy as we execute on this non-agency securitization opportunity in front of us.

We look forward to next quarter. I certainly hope that we have a TALF investment in place to discuss by then. But we appreciate all of your patience and being shareholders of Dynex, and we look forward to next quarter's call. Thank you very much.

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