Dynex Capital Inc (DX) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the third quarter Dynex Capital earnings conference call. My name is Ann 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 no like to turn the presentation over to Mr. Thomas Akin, Chairman and CEO. Please proceed, sir.

Thank you, Operator and joining me on the call today is Steve Benedetti, Dynex's Chief Financial and Chief Operating Officer and Alison Griffin, who heads up our Investor Relations area. Before we get started I would like to have Alison read our standard Safe Harbor disclosure.

Sure, 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 can not be predicted or quantified. The Company's actual results and timing of certain events could differ materially from those projected 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 earlier this morning and our annual report on Form 10-K for the period ended December 31, 2008 as filed with the Securities and Exchange Commission. With that, I'll turn the call back to you, Tom.

Thank you, Alison. First, let me briefly cover some of the information included in the press release and other information regarding our investment portfolio. We earned net income of $6 million during the quarter or $0.34 per diluted common share. Our net interest income increased to $6.6 million this quarter versus $5.9 million. Our net interest spread in the agency MBS remained at 370 basis points for the quarter.

During the quarter, we purchased a net of 124.4 million agency MBS securities primarily seasoned short duration hybrid ARMs at an average price of $103.5 and an average, weighted-average coupon or WAC of 5.31%, and an estimated effective yield of 3.73%. We did not add any swaps this quarter. The duration on our agency MBS portfolio was 0.79 years at the end of September. Our agency MBS were marked at 104.2 at quarter end, versus 103.6 on June 30th of this year. As indicated in the press release, we've been able to roll a substantial portion of our repo borrowings over year-end. The financing markets for agency MBS and even non-agency MBS triple-A rated MBS has continued to stabilize and even improve. At the end of the quarter, $84.3 million or 51% of our shareholders' equity was allocated to the agency MBS portfolio. This compares to $64.9 million or 42% at last quarter.

Our cash was $21.7 million or 13.2% of shareholders' capital. The remaining 35% of our capital is invested in highly seasoned non-agency assets. As I noted last quarter, these investments continue to perform in line with our expectations from a credit and cash flow perspective. We have seen some weakness in the delinquency performance of these assets resulting in modest increases in our allowance for loan losses. However, we continue to believe that the seasoned nature of these loans will limit any credit losses on this portfolio.

During the quarter, we raised another $3 million of common equity under our controlled equity offering program. We saw our book value improve by $0.42 to $8.96, of this $0.42 improvement, $0.11 came from undistributed earnings. For the fourth quarter, we expect to continue to utilize our net tax operating loss carry forward to the extent that our earnings for the quarter exceed the current $0.23 dividend, increasing our book value in the process.

In terms of macroeconomic conditions, the Federal Reserve reiterated at its last FOMC meeting that the fed funds rate will remain low for an extended period of time. Investment conditions remain very challenging as we try to balance the portfolio in an environment where government policy is causing asset mispricing at the same time that the financial system remains vulnerable. While the fed has succeeded in stabilizing the short-term money markets, in this environment we continue to keep our leverage low in order to keep our financial flexibility high.

For the balance of the year, we expect to modestly grow our agency MBS portfolio while keeping our capital allocation very near 50%. Market conditions are somewhat challenging due to supply considerations which are driving up asset prices. We will continue to evaluate the addition of swaps to lengthen the duration of our liabilities and hedge against future increases in rates versus shortening the duration of the portfolio. We are still exploring investing additional capital in our existing securitization deals through redemption rights owned by the joint venture at accretive levels. This capital investment would support a refinancing of the AAA rated securitization financing bonds at lower rates, either through the TALF program or through a re remic structure. There is still a lot of uncertainty around TALF and the re-remic markets and we remain unsure about the exact timing and structure of this refinancing.

Operator, I would like to now open up the call for questions.

(Operator Instructions). Your first question comes from Jeff Porter with Porter Capital.

Great quarter, you guys are doing a hell of a job. Can you briefly talk about what your strategy might be in terms of refinancing some of the debt associated with the seasoned non-agency loans?

If you're talking about specifically the CMBS securitization we had, Jeff, basically beginning April 15th of '09, of this year, we had the rights to call right near almost 100, $120 million of AAA CMBS paper, these are roughly [795] coupons at par. We have been working obviously the securities markets have been a little disjointed, particularly in CMBS but these bonds are very highly rated, they're senior, quite secure and we've been,ing to refinance those. And it's been long and complicated and we're still in the process of working on those. But obviously there is a pretty widespread between what be the refinancing rates currently in the market and 795 that we're paying right now. I don't know what else to tell you, other than we continue to try and make that transaction happen for our shareholders.

Okay, thanks.

And the next question comes from the line of Edward Robinson with Dynex Capital.

No, I'm sorry, I didn't ask a question.

Okay, Ed, thanks for being on the line, though.

Okay.

And the next question comes from the line of Jay Weinstein with Oak Forest Investment Management, please proceed.

Good morning, guys, how are you?

Hey, Jay, how are you doing?

I'm just fine, thank you. A couple of quick questions. On the, whatever you call continuous equity offering, whatever the phrase was you guys used to describe that, I understand the point possibly obviously is to try to raise capital and ultimately get the stock more liquid, but you've had trouble getting it anywhere near book value or have trouble sustaining it above that. And you have good liquidity, obviously you have a fair amount of cash around. How do you feel about your issuing stock below book value at this juncture, which is not a great way to go, kind of what your thoughts are on that program and whether or not it's accomplishing what you want it to accomplish?

Well, I think it's a pretty deminimis amount, only $3 million. We are not going to be selling the stock substantially below book value. We haven't been in the market for a while now, this quarter.

You traded above book for a couple of days, it seems like or blink of an eye, it wasn't very long for sure.

It was pretty quickly. Again, we do have a substantial amount of cash on the books but we do think that the investment climate is not horrible for our business right now. As I mentioned, we're buying short duration ARMs here, we're able to buy them at an average price of 103.5, not buying the 105, 106 bonds, we're not going to do that, rates of return are still very attractive for this investment, particularly we did not swap out our liabilities last year. A lot of our brotheren have swapped liabilities at 2% or 3% because we started our portfolio so recently, we didn't have to swap out our liabilities so we're floating here and earning, like I say, a 3.7% spread. If you multiply that by even five times, you're talking about rates of return in the high teens, low 20s. So I think because we don't have a swapped out portfolio and because we've got short duration assets and liabilities, it does make sense for us to issue some equity above book value, but I certainly don't want to issue substantial amounts below book value.

So then we're exactly on the same page because the whole industry, the whole sector sort of sold off, it seemed like, the end of the month, last month or whatever and I know that you guys have always traded at a much lower price-to-book multiple than just about all the rest of them, I choked it up to liquidity issues frankly which is probably still through true, so ultimately you'll probably get there, but that's always a tough call to make, liquidity of your stock issue over what you think are good economics.

Well, Jay, we continue to run the Company in the matter that we see fit. The market is going to price our stock where it wants to price our stock. Obviously starting the year with a book value right around $8, now it's moving up closer to $9, we think we've done our job, and I think continuing to pay -- continuing to increase our dividend by not paying out all of our earnings is a little different than most REITs, as you know, and the market is going to have to get comfortable with the way we do things. And I think our record speaks for itself over the last six years.

I have no complaints on that score, so continue to be a reasonably sizable shareholder. So, last question is, this is a little trickier one. Explain to me as somewhat of a clueless neophyte how exactly either you pledge these executes or this Re-Remic as you prefer to it, the nature of those transactions, how it freeze up capital and is accretive to shareholders, I'm a little murky on literally the mechanics of that kind of of transaction.

Well, let's take it as simplistic as we can, here. Because our securitizations are very old in nature, one of them has a dated call which is very rare in the securitization market. And that means that we had the right basically to refinance these bonds at par.

Sorry to interrupt, are those all in the joint venture and some in the joint venture and some you hold directly or where are all those bonds that you actually have the call rights to?

They are all in the joint venture.

Okay, thank you.

So we are working with our joint venture partner and we're trying to come up with a way, and it's real simple, it's basically imagine yourself that you had a house that you're trying to refinance, and you're currently paying 8%. Or Steve, is it 7.95%?

7.97%.

7.97%, so imagine you're paying a 7.97% loan and you're going to go out and refinance and you're going to look at all the different options that you can to refinance. The difference between that 7.97% and the amount you can refinance is basically what you can take in as profit for you as an individual, for us as a Company. So I think the total amount of bonds that we're talking about, now we obviously don't want to take a lot of risk in this refinancing, so we're really looking at the AAA bonds that have support structure of at least 50%, right, Steve?

Yes.

So we're talking bonds that much a significant amount of collateral between them and any kind of losses. And I think the chances of losses are indicative by the fact that they're rated AAA. So if we -- the rough amount of bonds, I think --

It's about 120 million.

It's about 120 million bonds so if we can through TALF Re-Remic or in some way lower that cost from 7.97%, we basically make about $1.2 million for every percent that we can refinance. Admittedly in the joint venture. So if it's 1%, it's 1.2%, 2.4%, and so our goal is to refinance it as low as humanly possible so that we can then add these assets, these -- center structure to our portfolio, and again, it's going to be what we feel to be extremely high-quality, low-risk transaction. And it's specific to Dynex because we own these call rights which are not available to most institutions.

So the credit -- I mean, obviously six months ago these call rights didn't have a lot of value because I assume there was no way that you could have called them and repriced them at a lower rate but the credit markets have done what they've done. So I'm assuming that there in fact is demand, would be demand for this reissue at a lower -- you guys assume a significantly lower rate than 7.97%.

Yes. We wouldn't obviously do it unless there was a substantial profit to be made for us in doing it. And I think we've proven that we're fairly careful about taking our risk, and I pointed out several times now over the years that we measure twice and cut once. So we might be a little slow in the measuring process, but when we actually put this trade on, it's going to be, I think, a very low-risk trade and one in the best interest of our shareholders and it will maximize the opportunity for these bonds.

I know the joint venture is scheduled to dissolve, but I obviously have to reconcile these issues, so assume that you have these call rights or whatever that transaction would be, would keep the joint venture at least alive and around long enough to do that and see where you go from there?

I'd rather not discuss the specifics, Jay, at this point, because there's a lot of different ways we can skin this cat.

Okay.

As you know, I'm the largest shareholder of the Company and we're working very hard to move this ball forward because I see it as one of the most attractive transactions Dynex has done in quite a while.

Okay. And is by year-end still doable? I know that was sort of a target, I didn't know if it was still on schedule for that.

We're --

I won't hold you to it.

It's, you know, it will happen when it happens. These call rights are not going away. So if it happens now, next week, a month or a little bit, but we are -- we do realize that time is of the essence and we're trying to move forward. But the government is also being a little bit murky in what they're trying to tell us and do in the TALF and that's creating problems in the Re-Remic market, too. I wouldn't say problems but it's creating some uncertainty.

That's what the government does best, so that doesn't surprise me.

But we hope to have this transaction done by the end of the year, absolutely

Okay. Good luck, and thank you for all your efforts, as you know, I'm greatly appreciative.

Thanks, Jay.

And the next question comes from the line of Jason Stankowski with Castle Peak, please proceed.

Hi guys.

I thought we were almost going to get through a call without a question, Jason.

I think we beat the call rights to death and it's great to hear, I assume what we're hearing out of [Kymera] regarding Re-Remic's is what gives you the confidence that something possibly can be done by the end of the year, and that that market is slowly coming to life a little bit more.

Well, remember these are really seasoned extremely high quality with a lot of credit support-type bonds. So if anything can get done, we're feeling pretty strong that these will be a good consideration.

Great. And can you talk about anything else you're seeing beyond the saying space? Are there other niches that you're digging into in terms of your outlook for 2010, where else we might be deploying some assets?

Obviously, we keep an eye out on all the markets. We're looking at a lot of different opportunities. This opportunity is basically in our front yard. It's there, it's an easy one, it's one that we have control over. So I would say that we were kind of focussed on getting this done. This has a risk return scenario that we would be crazy not to first and foremost look at this. We still think the agency bonds that we're buying and we're setting up, obviously we have half of our capital there, still very attractive. You think once we get this trade done, we're going to be looking -- we're going to continue to look at a lot of other assets. There may be some other CMBS type stuff in this same vein that we may be able to avail ourselves of. We believe that we'll basically get all our capital to work, Jason, when we do this transaction. We're obviously sitting on about 13% of our shareholders' capital in cash, and that's not earning as much money as we'd like to see it earn. So that would give us the ability to really improve our earnings in 2010. So we're first and foremost going to focus on that, get that done, start to utilize our NOL, even a little bit more further and then we can look at some other things. But we're looking at things all the time, don't think that we're not.

Okay, great. Thanks for growing book value and great job in the quarter.

Thank you.

(Operator Instructions). And the next question comes from the line of Peter Deering with D.R. Distributors.

Hey, Tom, congratulations on a great quarter.

Thank you, Peter.

Can you refresh my memory on the preferred and the call rights? And are there any plans to call the preferred?

Well, there's one preferred, it's series D, 9.5% coupon, it's a $10 par preferred as it's trading at $10.10 on the New York Stock Exchange, and that would be a current yield somewhere around 9.40%, 9.35%, I'd have to do the math here real quick. But in any case, the preferred is either callable at par for cash or we can convert it into stock at $10 a share. So with the stock at $8.20, we're still a ways away from that. We're 25% away from that before we are going to get any conversion of the preferred do common. We have, in the past, called some of the stock at par when the -- we felt like it was a good use of our capital. But obviously we feel that earning excess of 9.5% is very doable in this market. So I don't think we have any plans currently to call any of the stock at par.

Terrific. And are those call rights owned by the joint venture or Dynex?

They are owned 50/50 by Dynex and the joint venture, correct. They're in the joint venture, so we each own half, 50/50.

Got it. Congratulations.

Thank you much, Peter.

(Operator Instructions). And the next question comes from the line of Jeff Porter with Porter Capital.

The call rights on the preferred stock, that's just Dynex, that's got nothing to do with the joint venture, correct?

That's correct, it's not call rights, the preferred is callable. There's no rights, basically the preferred is callable at par. So it's like a typical preferred and it's also convertible at $10 a share.

One question on the liability side. I think in the lease you mentioned that you have secured 40% of your repo financing going over year-end. Do you anticipate trying to get all your REPO financing locked up through year-end in the next couple of weeks? Is that -- because the banks want to sort of tighten down their balance sheets for year-end, you think they might be reluctant to keep the rates as low as they are.

I think it always makes sense to go over year-end if it's an attractive trade for you but Steve why don't you answer that question for Jeff.

Sure, Tom. Jeff, most of our REPO that has not been locked up over year-end will roll this month. Most of the counter parties that we have still outstanding that haven't rolled over over quarter end will carry out REPO 60 to 90 days. So I think by the end of this month, unless something dramatically changes in the marketplace in the next couple of weeks, we should have everything locked up by Thanksgiving over year-end.

Okay. And one follow-on question. There's been some dislocation among the rest of the publicly traded mortgage REITs recently. Would you look at buying some public equity of some of your competitors if they get down at appreciable discount to book value as a use of money as opposed to just directly doing the agency trade yourself?

Well, as you know, we did do that in early, I guess it was '07, late '07 we did that, and we did make some pretty reasonable amounts of returns for our shareholders on that. The prices we paid were well in large discounts in the 75%, 80% of book. We have, I think, and that was primarily put on because we didn't have really the business plan in place and we didn't have our lines of credit in place. we didn't have our lines of credit in place. But I would say at this point we are -- we're not really looking to that as part of our business model right now. I can't -- I never say never, but I don't think that the modest discounts we've seen right now of, let's say, 90%, 95% are attractive enough, but I don't really want to tip my hand in terms of what we would do, at what level we'd be interested. But we might be at really big discounts.

Okay. Thank s a lot.

(Operator Instructions). And the next question comes from the line of Peter Deering with D.R. Distributors, please proceed.

One last question. Your dividend strategy for your common stock, are you going to keep that in place for 2010, using your NOL's to -- and keep the dividend stable?

Peter, we're constantly reviewing that strategy. We will have a meeting on that here to discuss what we want to do for 2010. For 2009, we made it very clear that's what we want to do. Obviously, unlike a lot of other REITs, we do have a tax loss carry-forward that allows us to basically retain capital tax-free for our shareholders. We're getting a lot of input from our shareholders on that. We do think the opportunities in the marketplace currently allow us to do both, that is to raise our book value and pay an attractive dividend so we've continued to do that. But I really can't speak to 2010 right now. But I will let you know as soon as we've decided.

And how large was that tax loss carry-forward on the books right now?

It's -- Steve, I believe it's still right around $150 million, isn't it?

Yes, it's right around $150 million and it's not on our GAAP books of course but it is right around $150 million.

And remember this is an asset, its value's not included in our book value at all, it's just a number that we have. It's at the REIT level to to the extent we don't pay a dividend, we do not have to pay taxes on that, neither do our shareholders. So we like that.

And will your auditors allow you to keep marking that at zero in terms of your book value?

Yes. Because Peter, we don't pay taxes at the REIT, so there would not by a deferred tax asset at the REIT level.

Okay. And how seasoned are your CMBS's? I forget.

Well, CMBS portfolio is, all of those assets are at least 10 (inaudible).

That's all I have. Thanks.

And the next question comes from the line of Trevor Cranston with JMP Securities. Please proceed.

I was wondering if you could talk about how you're thinking about the agency MBS investment environment today with the Fed commenting on the market, and also if you're still able to find assets like you bought in the third quarter, like short duration ARMs with the 370-type yield, that number, surprising relative to what some of your competitors have been talking about. Thanks.

Well, I know that we have just recently purchased bonds at that level and remember, we're very small vis-a-vis our competitors, we don't need to buy large amounts. We only added $124 million for the entire quarter and as you know, for our competitors, they're talking billions. So I think we are able to sneak between the cracks buy a few of the smaller pools and we are -- our average price of 103.5, we've been consistent that we don't want to have a portfolio with a lot of high-priced bonds in there. So we like the short duration, we like to get our resets as quickly as possible. So I don't see that changing anytime in the near future.

Okay. And then on the REPO, can you give us any details about the portion of the book you've been able to extend over year-end in terms of the average term and the rate you're paying on that?

Steve, do you mind answering that, taking that question?

Not at all. We've rolled them generally 90 days, and we're paying right around 40 basis points for 90-day money.

And where are you guys seeing short REPO today?

As in 30-day?

Yes, 30-day.

Somewhere around 30 to 32 basis points.

Okay. That's all I've got. Thank you.

Thanks, Trevor, say hi to Steve Delaney for us.

And the next question comes from the line of Peter Deering with D.R. Distributors.

One last question on the REPO, how many repo partners do you concurrent have now?

14

Alright, is that stable --

Basically the same as last quarter, which I think we said on the call 14, I don't think it's changed.

Got it. Thanks.

(Operator Instructions). And this concludes the -- today's question-and-answer session. I would now like to turn the call back over to Mr. Thomas Akin for closing remarks.

Well, thank you. And I'd like to thank all our shareholders for joining us on the call today. I look forward to the fourth quarter. We feel our strategic plan has been solid, it's been in place for a while now and it's acting very well to perform in this market. And I think in the markets going in the future. Thanks again for being on the call with us and we look forward to speaking with you soon.

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