Dynex Capital Inc (DX) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2009 Dynex Capital earnings conference call. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference call. (Operator Instructions). I would now like to turn the call over to Mr. Tom Akin, Chairman and Chief Executive Officer. Please proceed, sir.

Thank you, Antoine, and thanks, everyone, for taking the time to join our call. I realize our timing here was a little off and that the Tiger Woods conference call is eminently more interesting than us, but thanks for joining us.

On the call with me today 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 area. Before we get started I'd like to have Alison read our standard Safe Harbor disclosure.

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 that was issued yesterday, February 18, and our annual report on Form 10-K for the period ended December 31, 2008 as filed with the Securities and Exchange Commission. I'd like to turn the call back to Tom now.

Thanks, Alison. I'd like to briefly cover some of the information included in the press release and other information regarding our investment portfolio. We earned net income of $4 million during the quarter, or $0.23 per diluted share. Our net interest income increased to $7 million during this quarter versus $6.6 million in the previous quarter. Our last -- our overall net interest spread was 3.15% for the quarter and our agency MBS net interest spread was actually 3.58%.

We continue the diversification of our investment portfolio as we refinanced, as previously mentioned, $111.3 million in AAA rated CMBS during the quarter. The size of our agency MBS portfolio was unchanged for the quarter. We continue to see compelling opportunities in both CMBS and agency MBS securities.

As previously mentioned, we are a TALF eligible borrower and we expect to take advantage of the legacy CMBS TALF program before its expiration in March. On a gross basis, agency MBS are 65% of our portfolio and non-agency loans and securities are 35% of our portfolio. As we have mentioned in the past, our non-agency loans and securities consist of assets or securities that Dynex originated during the 1990s and are well seasoned.

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 credit losses on the portfolio.

At the end of the quarter $87 million of our capital was allocated to Agency MBS including cash and equivalents that we allocate to this strategy in order to reduce our targeted leverage to seven to one for the business. This represents roughly 46% of our shareholders' equity allocated to the agency MBS strategy. This compares to $84 million or 51% of shareholders' equity in last quarter. With a call and refinance our cash was $21.7 million or 13.2% of shareholders' capital.

During the quarter we issued 357,000 shares and raised a little over $3 million of common equity under our controlled equity offering program. We saw our book value improve during the quarter by 12% to $9.08 at December 31. The recent news about the GSE buyouts have investors and mortgage REITs concerned about prepayment and reinvestment risk.

Before we dive into the details let me reiterate that Dynex has a diversified investment strategy with 62% of our assets and 46% of our capital invested in Agency MBS at 12-31. The remaining capital we have invested in assets on our balance sheet that will not be impacted by these actions by the GSE.

With respect to the details, we published a table in the press release which details our agency MBS portfolio as of January 31. Let me note that while the GSEs have published information at a macro level on delinquencies in their guaranteed [accruals], they have not provided enough information for any investor in agency MBS to reliably predict the impact on its investments.

As you can see from the table in the press release, 54% of our agency MBS have coupons below 5% and only 16 are above 5.5% of coupon. Our strategy in building out our Agency MBS has generally been focused on lower coupon assets and we believe that the lower coupons in our portfolio will be less impacted by these buyouts.

Nevertheless, we do expect some impact on our portfolio which should increased prepayments on this portfolio and increase our premium amortizations. On average we own our agency MBS at a premium of just 2.3 points as of December 31.

In terms of the macroeconomic conditions, the Federal Reserve continues to reiterate that it will keep short rates low, notwithstanding the increase in the discount rate we (technical difficulty) announced yesterday. This move was telegraphed by the Fed and was not unexpected. We do not anticipate that this will have any real impact on our business model and market participants this morning have echoed those sentiments.

For 2010 we will continue to focus on building out a diversified investment portfolio; the TALF program will allow us to participate in a financing program with the government that is non-callable for at least three years, has no mark to market provisions and fixes the interest cost for the borrowing period.

We opportunistically added swaps during the quarter and will continue to evaluate the cost versus benefit of adding more to hedge against future increases in rates. We feel very good about our diversified model and that we've built and look forward to a solid 2010. And with that, operator, I'd like to open it up for questions from the floor.

(Operator Instructions). Jay Weinstein, Oak Forest.

Well, you're probably about a dozen mistresses short of the Tiger, so you'll have to get working on it.

I hope my wife is not on the call.

I had a couple of questions. The most general one is that, judging from the swaps that you've put on and what's going on in the agency market, I'm assuming that that opportunity which you took advantage of is at a plateau, standstill or whatever in terms of reallocating new capital. So, in order to reinvest and continue, as you say, diversifying is the TALF the first thing you look at? Where else are you kind of looking?

Well, I think we've always been opportunistic, Jay, as I've mentioned before. And our basically goal in orchestrating this portfolio is looking for the best risk-adjusted returns that we can find. I don't necessarily agree that the agency business at this point is not attractive, it is still very attractive, and you can even make the case that it's more attractive now that the details of what the GSEs are going to do are made clear.

I also think that looking at these lower coupon loans are still very interesting and the rates of return are still very attractive vis-a-vis the funding costs. We were very fortunate that our funding costs are so low because we started this process when the Fed funds rate was down below 1% or below 0.5% that we didn't need to go to these higher coupons, which we think are probably going to be the first ones to be called.

But what we're also looking for is also the ability to lock in our funding. I think that's very important. And the TALF program and what we're doing with some of the CMBS paper right now is very compelling. We're sitting roughly at a 50-50 asset allocation between agency and non-agency paper. And we at this point don't really see that changing dramatically over the near term. But let me have also Byron chime in here if he has anything more to add to that.

The only thing I'll say, Jay, is that there's still plenty of spread in purchasing an agency security, financial with repo and layer it on at (inaudible) interest rate swap. There really is still plenty of spread there.

Okay. Help me out, in terms of this whole -- did the whole GSE, the buying of these delinquent loans -- it seemed like it came as a bit of a surprise to me and the market in general. And I mean, is the motivation basically just essentially just calling stuff at par that they're kind of guaranteeing anyway? Help me out with why they're doing that?

Byron obviously worked at Freddie Mac for several years and has been on the phone with them a lot. So Byron, why don't you cover that for Jay. At least your best recollection.

It's more of a general question (multiple speakers).

Yes, they always had the ability to buy out these loans. And as defaults built up the agencies were not purchasing these loans out of the pools. There was always a belief that at some point in time they would start to pick up on their purchases. That's one of the reasons we first started building the portfolio, we didn't focus on really high coupon paper, we were just concerned about the (inaudible) buyout program.

The part that was a surprise -- let me just say the public information started to grow in the latter part of last year as new (inaudible) rules came into view. And I think really the bigger surprising piece is the concentrated amount of time in which they're actually executing the buyout. So, for example, Freddie Mac to come out and say we're going to purchase all of the loans in one month. That was a surprising feature.

For Fannie Mae to say we're going to do it over a few months, still probably a little more concentrated than anticipated, but was still more in line of what we might have thought as supposed to Freddy doing it all in one month. So the surprising feature was really the concentration of time.

And, Jay, the other thing is I don't think it's a coincidence that the program for the government to buy treasuries and agency ins corresponded with all these prepayments being done because obviously we're all going to end up with a significant amount of money that we can reinvest in mortgage bonds. And they're kind of creating a nice bid for themselves if they're going to be exiting the market. So it's a win-win I think.

You, as usual, (inaudible) into my next question which is what was your view on what was going to happen in March when they finish the buying of the MBS in the first place? So this is just sort of a continuation of whatever you want to call it, [quantitative] easing or whatever, just somehow keeping them in the market without continuing to swell the Fed's balance sheet, I guess. It's hard to say what's going on really.

This book -- yes, it doesn't. So one buyer leads the market and then you get multiple other buyers that will be in the marketplace simultaneously.

Yes, so, does that just sort of stretch out this whole program for just -- maybe I should say if they're going to do it in a compressed fashion it just kind of extends the whole buying program for a month or two but not for much longer than that?

It does put a bid in the marketplace. I think even with the Fed departing, given the amount of liquidity still in the system, there is an anticipated amount of widening in mortgage securities, but there was not a disaster scenario anticipated.

It seems like the people I respected the most were talking between 30 and 50 basis points I thought when the Fed got out of the market, which isn't insignificant but it's not the end of the world either.

Right.

Well, and I think the thing to remember too is that a lot of this discussion about buying mortgages really is out in the 30-year area where they really wanted to get those rates down. Remember, we're inside of 24 months average life and we're rolling down the yield curve and that paper is generally not going to be affected, I don't think.

We haven't seen it get affected and I can't imagine it would be affected to any large degree. We might be wrong, but that's pretty attractive paper right now. And I think when this is all said and done people are going to realize that this really is not the area that everyone is looking at.

One last question I think. That refinance transaction that you mentioned, is that $0.07 a share each quarter or just in the first quarter?

Well, obviously it's dependent on our financing costs. So we don't want to make -- we don't want to make statements about what (multiple speakers). But it's assuming it would be (multiple speakers).

(multiple speakers) exactly the same, just so I'll understand.

If you assume that rates don't move and we continue to finance this, it will be $0.07 per quarter, that's correct.

That's what I was (inaudible) I'm sorry. I just wanted to make sure I understood that. But it (multiple speakers).

I just went to make sure, Steve, that's correct, right?

Yes.

And so the -- you had a small right off in the fourth quarter. So is that kind of -- the accretion to book value is essentially over time -- it's not like a one or two quarter thing, it's more of an ongoing basis, is that correct?

What do you mean by --?

Well, it was -- my impression probably was wrong that once the transaction was completed there was going to be some sort of immediate accretion to book value in terms of -- but it's more of an ongoing -- it's not an immediate accretion.

That's right.

It just increased -- it just increased your ongoing income rate?

Well, if we had basically sold off all the bonds and taken that spread -- or taken the price appreciation of those things then it would have been a one-time pop.

I see.

But we really looked at this thing over the four-year average life that -- it was the gift that kept on giving. And we, especially with these coupons being pretty close to 8%, you'd have to have a pretty draconian LIBOR increase before we start having any issues with these things. And we really wanted to hang on to these things and just finance them over the term of the loans.

And I know some of the other mortgage REITs have either invested or invested a fair amount of money in non-agency RMBS. I assume that's something you've looked at. Do you have a general comment on your view of that business?

I know Byron has a very strong comment on that, so I'm going to turn that over to Byron.

Yes, Jay, can you repeat that again?

Just your view on the non-agency RMBS that some of the other mortgage REITs have put a fair amount of money into. When they bought them I'm not sure, but I guess it's at least something else to look at?

Yes, it actually is. We have a philosophy of a diversified portfolio and if you look at our balance sheet we've got agency securities, non-agency RMBS and we have non-agency CMBS. And one of the guiding factors here, because we are a leveraged player, is where can we borrow money on the best terms. So, obviously our initial thought process was focusing on CMBS, and especially via the TALF program where the terms are really great from a borrowing perspective.

There is -- I think you can still find some value in the RMBS sector. I think there is government support behind the agency sector, I think there is government support behind the CMBS sector, and I think the RMBS sector is a little bit of an orphan child. And even when I speak around the Street I still seem to find just a little bit more of an edge of comfort on the CMBS side in terms of financing.

So I think it's going to be a relative value question that will vary on a month-to-month basis as to where that value happens to be. What I will say is today versus 12 months ago all asset levels have risen. And I think that the idea of being able to just simply quickly pick and find easy bonds, whether it's CMBS or RMBS, has decreased and it takes just a little more scrutiny.

Yes, I agree with that.

And one of the things that we clearly want to be differentiated from our competitors is that we really are high-grade. I mean, all of the stuff we're looking at, when we look at some of the RMBS that these other mortgage REITs have bought, they've been AAA, they were AAA's, but now they're BBB's and lower and there are a lot of bonds that they're taking some credit risk.

We continue to feel that if we can get paid, taking as minimum amount of credit risk as we can, that is stay really in the high-grade sector, and we have an attractive spread at doing that, that's what we're going to do until we can't do it anymore. And right now there are still plenty of things, Jay, for us to do and not take a lot of credit risk or really any credit risk to speak of.

All right, I think I've kept you through the Tiger -- I think Tiger's conference is over. So maybe somebody else will have a question now.

Thank you, Jay. Thanks for the support.

(Operator Instructions). There are no additional questions at this time.

Okay, great, operator. Well, I want to thank all our shareholders for their confidence and for being on the call. I apologize for the timing up against Tiger. We continue to move forward with our strategy, we're very happy with our results in 2009 and we really look forward to the opportunities in this environment for 2010. Thank you again.

Thank you for your participation in today's conference call. This concludes the presentation. You may now disconnect. Good day.