Dynex Capital Inc (DX) 2010 Q2 法說會逐字稿

Good morning, and welcome to the Dynex Capital, Inc., second-quarter earnings conference call. All participants will be in listen-only mode. (Operator Instructions). After today's presentation, there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded. I would now like to turn the conference over to Tom Akin. Please go ahead, sir.

Thank you, operator. And thanks everyone for taking the time to join our call today. On the call today with me is Byron Boston, our Chief Investment Officer; Steve Benedetti, our Chief Financial and Chief Operating Officer; and Todd Kuimjian, in our CMBS portfolio; and Bob Nilson in the RMBS portfolio as well.

Alison is not with us today as she just had a baby girl this morning, and we'd all like to congratulate Alison and [Violet]. Before we get started, I'd like to have Steve 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 can not be predicted or quantified. Forward-looking statements also may include without limitation, statements regarding future interest rates and the expected performance of certain of our investment.

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 that was issued yesterday, July 27, and our annual report on Form 10-K for the period ended December 31, 2009, and other reports as filed with the Securities and Exchange Commission. Tom, I'll turn the call back over to you now.

Thanks, Steve. I'd like to briefly cover some of the information included in our press release and then add some information regarding our investment portfolio and then I'd love to open it up to questions. As indicated in our press release, we earned $0.38 per diluted common share during the quarter and reported $9.80 in book value as of June 30. Our earnings were driven by higher levels of net interest income on the investment portfolio from higher-average earning assets during the quarter and aided by $1.1 million in yield maintenance received on a prepaid loan in one of our CMBS securitizations.

Premium amortization increased to $1.9 million versus $1.6 million in the first quarter as a result of the loan buy-out activity of Fannie during the quarter. For the fourth quarter of '09, as comparison, premium amortization was just $0.8 million. We continue to model high prepayment activity in MBS for future Fannie and Freddie Mac buy-out activity.

Our book value increase was driven by the excess of our earnings over our declared dividend, as we used our NOL and the growth in accumulated other comprehensive income from increased market prices on our investments. The CMBS, which we redeemed in December of last year, continued to increase in price, as rates rallied and spreads tightened during the quarter.

Agency MBS prices continued to increase as well as the market shrugged off the loan buy-out announcements of both Freddie and Fannie. It appeared that fixed-income investors are becoming-- are beginning to become more comfortable with the low interest rate scenario for a longer period of time and therefore are bidding up spread assets.

Our net earnings assets for the quarter were $941 million versus $907.6 million for the first quarter of 2010. As noted in our press release, our overall net interest spread was 2.75% versus 2.96% in the first quarter of 2010. The average yield on these assets declined to 4.76% from 4.95% due to premium amortization and agency ARM resets.

Our financing costs increased 2 BPs during the quarter as we added nonagency security repo financing and a $35 million swap during the quarter. Subsequent to quarter end, we added $43 million and 7.87 coupon A+ rated CMBS, issued by us in 1998, at a current spread to our financing cost of approximately 550 basis points.

All of these-- I'm sorry, our leverage limit to A+ nonagency securities is [three X] our equity capital and the position is being financed with three months' repurchase agreement financing. We now have the opportunity to redeem and refinance, at par, a CMBS issued by us with a current balance of approximately $80 million and a weighed average coupon of 8.29%. Approximately $24 million of this CMBS is rated AAA, $33 million is rated AA+, and $24 million is rated A. These were originally rated and-- originated and rated by Dynex in 1997. So these are very highly seasoned loans. The [829] coupon on these bonds is well above market for these types of securities as evidenced by the favorable price appreciation we have seen in previous CMBS we called in December.

Our goal will be to redeem the $80 million securitization as soon as we have the capital to do it. The CMBS loans are currently shown on our balance sheet as collateralized borrowing and $105 million in total on June 30. And so the redemption in our GAAP financials will be accounted for as a refinancing of the debt. Economically, we view it like an investment with a large spread to the financing cost, similar to the $43 million A+ bonds that we just redeemed.

Long-term, we hope to finance these bonds through a (inaudible) transaction. Together, we expect the redemption of the $43 million in CMBS and the $80 million in CMBS to contribute meaningfully to our earnings for the next three or more years, depending on the prepayment activity of the underlying loans.

We will continue to strive to maintain our balance sheet at 50% to 60% agency MBS and 40% to 50% nonagency. The majority of securities that we have purchased since December, or called, have been added at a lower dollar prices or had some form of prepayment protection that will compensate us in the event of voluntary prepayment. As I mentioned in the press release, we continue to see favorable conditions for a hybrid investment model given the low rates, deep yield curve environment.

Our net interest spread is a healthy 275 basis points. We continue to manage our interest rate and liquidity risk, given the uncertainty of the environment, and particularly given government involvement in the mortgage marked and financial services in general. We are excited about the balance of 2010. We have a lot to do and we look forward to delivering solid results for our shareholders. Operator, I'd like to now open up the call for questions.

Thank you. We will now begin the question-and-answer session. (Operator Instructions). At this time we will pause momentarily to assemble our list. Our first question comes from Steve Delaney of JMP Securities. Please go ahead.

Good morning, Tom. And congratulations on the quarter.

Thanks, Steve.

So, let me start, I've got a couple things, but let me start with book value. So you moved up $0.40, and I guess it looks like about $0.15 of that was retained earnings on the items that you had from the yield maintenance et cetera, over and above your dividend. The other $0.25, can you give us a sense for how much of that was the CMBS being marked higher and how much was agency MBS net of the swaps going against you?

Right. I think, Steve, probably, you have a better exact breakdown of that.

Yes, sure. Hi Steve.

Hey.

The earnings excess, actually the way you calculate that is really your basic versus your dividend. So it's $0.18.

Got it. Okay.

And then the rest-- the rest is AOCI. The-- not all the swaps are-- effectively when we-- the swaps, we look at it against the entire book. So let me just give you the breakdown, if you will--

Right.

-- of the agency versus nonagency. So agency net appreciation was about $2.2 million.

Okay.

Nonagency was $4.8 million.

Okay.

And then the swaps were negative $2.6 million.

Minus $2.6 million. And the nonagency, there's just that one $5 million piece of RMBS, so that's almost all the CMBS, right?

Yeah, that's right. So that's a combination of what we called --

Okay.

-- in December and then some of the TALF bond as well.

Right. And I get your point about the swaps. It's-- it would be shorthand to say that that's only the agency book because with repo debt on some of your CMBS, you obviously want to have some swap allocated there as well.

Right.

Absolutely. And particularly since we've been adding some duration to the portfolio, Steve, we've been swapping it out.

Right. That makes sense. And the-- Steve, I didn't see this in there, it's a small item, but do you have your total common shares at June 30 handy?

Yes, it's [15,168,492].

Okay. Fifteen, one sixty- all right, great. And, Tom, and Byron, I guess, if you're on, you guys on your agency book, it had been held-- holding pretty steady. You had done-- I guess several quarters ago you kind of had become fully invested, but can you talk a little bit about your logic to let $19 million of those short reset ARMs go. You own them at a really good level and I didn't know whether that was anticipatory toward the opportunity you had with the $43 million CMBS call and you just wanted to free up some capital, or was it really something more of a port-- a portfolio decision related just to the agency books?

Well, it was a little bit of both, but I'll have Byron explain the exact details on that.

Okay.

Yes, Steve, really the main reason would be anticipating the need for capital and cash, focusing on the nonagency position at the (inaudible) call.

Sure.

And as the curve really has flattened, that's just a great opportunity. We've had a great run with that short duration book. From a strategy perspective, we chose to build the short end of a portfolio first. We thought those were the cheapest assets starting in 2008 as we built the book, and now it give us flexibility in terms of adding the additional assets that have longer durations.

Right. And obviously, just based on the data you guys put out about the $43 million and how you financed it, I mean, I don't know the exact-- we don't know the exact terms of your repo and your haircut, but just playing with some numbers, back of the envelope, I mean, the ROE on that transaction certainly is greater than the current ROE you'd get on short reset ARMs in the agency book.

Yes, it's not a question.

Okay. I guess just general on the-- there seems to be a little bit of a mixed view about the agency market these days as to whether it's still attractive to buy or too rich to buy, and I guess it all depends on your view towards funding and swaps but, Byron, are you comfortable, like you're getting-- we're getting a little pick-up in prepaids here with mortgage rates lower. I mean, are you-- are you comfortable continuing to reinvest capital and sort of maintain that portfolio at about the current size, or do you think you guys are going to continue to shift more into the nonagency space as the agency book runs down?

Well, the way we-- we talk about a target mix of 50% to 60% agency, 40% to 50% on the nonagency side.

Um-hmm.

And it's important to us to try to maintain a mix of the two asset classes. The agency book-- where the confusion is on the agency book is that agencies are at tight spread levels. People always talk historically, but in reality, the fundamentals of the agency market, of a mortgage market in general, has changed. And so the technicals are extremely powerful on the agency side of the business.

And this debate about where agencies are, what's the value in agencies, has been going on for some time and the technicals continue to dominate. So if you look at the structure, product sector, both agency and nonagency as a whole, you're talking declining volume in terms of supply.

Now, we stay down at these low levels, or maybe let's say we go to a lower level in mortgage rates, you may actually start to see more and more of this newer lower coupon 30- or 15-year, even high-- paper start to appear and you start to see more duration in the marketplace. Ultimately, maybe you have some type of movement out of the spreads. But in reality, right now the technicals are so powerful between international investors and domestic investors that the agency market should remain very, very well bid.

So me adding an agency security, I can get carry-- solid carry from agencies. I like-- really on a relative value basis, I want to maintain a solid amount of nonagencies because I just think some of those values, whether it happens to be on CMBS or nonagency RMBS, the selective opportunities there really do add yield to the portfolio, given we've already built a pretty solid agency book.

But-- and we also have some really selective opportunities on the agency side where we have been adding prepayment protected-type agency paper that has actually added very well to our portfolio. So the way I look at it, Steve, I call it selective opportunities across a variety of products. In 2008 it was kind of just buy what you see.

Right.

That's not the environment today.

Also, Steve, as you can imagine, the 550 spread that we got on the A+'s are extraordinary and I think the-- you want to-- if you have-- and it's unique to us because we called the bonds.

Exactly.

We didn't buy them in the open market. We're not going to call them--

Yes, you couldn't create that trade--

-- at a premium.

-- in the open market, obviously. Yes.

So that's true of the $80 million coming up.

Yes.

And so I think that our shareholders would be well served if we create the best portfolio we can for them, and if it gets a little bit more nonagency-ish for a short period of time until the opportunities change, then I think they'll be happy.

Yes. Well, guys, thanks for the comments and good luck with this next-- this $80 million CMBS opportunity, hope you can find a way to get that done.

Us as well.

Congrats.

Thank you. (Operator Instructions). Our next question is from Stephen Mittel of Knob Hill Capital Management. Please go ahead, sir.

Great numbers. One quick question with what you just talked about. The $80 million, how soon could you call that, or do you have a plan in the third quarter to call it or by the end of the year? That's the only question I have.

Officially, we can notice the bonds on Friday, I believe. Is that right, Steve?

Yes. Yes.

And that's just a couple of days from now. And then after that, it becomes a monthly call. That's available to us-- the bonds are available to us at par, at our discretion. And so we are very interested. Obviously, the 829 coupon is the average coupon there and it's higher than we've seen in any of our previous securitizations, so it would be something that we would be well served to do. We're actively working to get that done and we've got roughly 48 hours to--

-- or pull it off-- to pull it off?

Yes. Yes. But these loans are not as good as loans as we have in our portfolio. They're highly seasoned. They're mostly apartment buildings. Part of the loans have guarantees from Sun Life America, which was-- and assumed by AIG, so we have pool insurance on a partial amount of these loans. So we feel pretty strongly that the collateral is really good, and we have a high confidence factor that we'll be able to make something happen here.

Thank you.

Thank you. Our next question is from Jay Weinstein of Oak Forest Investment Management. Please go ahead.

Hey, good morning.

Jay, it wouldn't be a conference call if we didn't get something in for you.

That way-- I said I'm in town briefly, I said, and I just got power back yesterday. I've been watching that area; it's still a bit of a mess.

Oh.

But-- but just in time. I have two quick questions. What's the balance of the tax loss carryforward? Are you-- I-- I know you're nibbling away at it.

Yes, well correct me if I'm wrong, Steve, but I still think it's around [150], right?

Yes. I mean, it's not materially changed, really.

Yes, well that's like a million here and a million there, so it will take a while. Does-- so my question is, does it-- and like I say, I always kind of look at this from a simpleton's level, does it make sense to sell some of your agencies which have appreciated dramatically, over the-- of the bunch, and kind of raise the capital for this next transaction, and I assume the gain would then-- you would eat up whatever of the tax loss carryforward? Does that, on a simple level, make any sense?

Well, I think as Steve Delaney pointed out, we did do some of that, maybe not intentionally, but we did some of that when we raised capital to call the $43 million piece earlier this month. The bonds that we hold are very short-duration bonds. We bought them at very good prices, and we're not sure that selling a substantial amount of our mortgage-backed securities to do this next transaction is in really the best interest of our asset allocation strategy.

But I'll let Byron answer that because we-- we've been bouncing around quite a bit and, Byron, you've got an opinion on that as well.

Yes. I mean, we've been looking-- we've been asking for, Jay, on this, for the last several months, does it make sense for us to sell some of our-- our shorter nonagency paper and actually extend our duration. And in effect that's what we've done over the last-- our new money has all been invested in -- you go back to really since last fall -- our new money has been invested in other assets than the short agency paper.

The short agency paper is really minimum operational risk, in terms of managing that portfolio. It's simple. I understand our durations very well with that portfolio. I und-- what's more important is we understand how much our durations will extend in-- in terms of an upgrade environment. So as we look at adding the newer positions, with the newer nonagency positions, we look at it in terms of these calls, we'll be thinking. In March, we had an opportunity to add CMBS and we were able to raise a small amount of capital to be able to take those positions in at that time, so we want to make sure that we're looking at all options to do what's best for our shareholders to get the money to call the deals.

Of the $30 million that's on the-- it's on the balance sheet, I'm sure some of that has to be held for collateral or whatever. Is a good chunk of that, though, available to-- for this transaction?

Well, actually, for all intents and purposes, most of that capital is used for collateral--

Okay.

-- and--

It's always good-- it's always hard to tell.

We're pretty much with the $43 million we added at the end of the month, last month, or-- we're pretty much fully invested at this point and we're going to need to find some other avenue to be able to call these next $80 million bonds.

All right. Well, I will let-- you guys always do a better job of this than I could do, so I'll let you figure it out and I'm sure it will be fine. One last question that occurs to me, following up on somebody else's is, when you started really aggressively buying the agency paper, spreads were incredibly wide and it was obviously a really good time to start ramping that portfolio up. And with the tight-- with flattening of the curve, I assume things are not quite as good, but I still kind of gather from the comments that it's still a pretty attractive investment vehicle, even though it's not as attractive as it was a year and two years ago?

Absolutely. The ROEs are still very nice, and I think particularly the buy-outs by Freddie and Fannie has sort of created some pricing issues with the higher coupon stuff, and we see some value there.

Okay. And I guess I keep thinking of more things, this-- Tom, this is a question for you because I-- you and I go back so far and I remember, of course, when the stock traded 3,000 shares a day it was like a big deal. And what kind of reception are you getting from the institutional community, as share count again kind of creeps up and the volume seems-- is a little-- is certainly a lot higher than it used to be? Are you getting a little bit more feel from the kind of institutional community than you have in years past, or what--

I think we have to be realistic, Jay. We started the year with shareholder equity of $168 million. It stands today at $190 million. Obviously, a lot of that money we've made in book value and a lot of it has come from price appreciations and other things. But $190 million is still a microcap stock. And I'd say most institutions are waiting for us to cross the magic threshold, which may be $200 million, $250 million. But I would say we're still below the radar screen for a lot of the institutional buyers.

So we got our first research coverage from Steve Delaney this last quarter, and we thank Steve for that. But we're still-- have a-- we're still stretching our wings as a microcap company and I still think we've got a lot to prove and we are not even remotely an institutional stock at this point. And we think that we have to work as hard as we can to generate the confidence from the investment community that we deserve to have the market capital like our brethren in-- and our competition.

The good news is small moves that we've seen in our portfolio have big moves in our book value in earnings. So it's been sort of a small and beautiful sort of thing, and we see that continuing as we make our own luck with securitizations that we've left on the balance sheet since 2005. So, no, we're not there yet. We're still working hard.

Was it--

We're like Avis--

Right.

-- we're number two.

Well, that's okay. As I say, I-- I've been-- I'm greatly appreciative for all the work over the last five years, or however long it's been, and I'm sure that you'll continue to do a terrific job, so thank you.

Thanks, Jay.

Our next question comes from Jason Stankowski of Castle Peak. Please go ahead.

Hey, guys. Congratulations on a good quarter.

Yes, I think they messed up your last name, Jason.

Yes. They're the first person to ever butcher my last name, so I wasn't fazed by it. I had two questions. One, I know the $80 million you guys had thought possibly could come a little later in either 2011 or 2012 in terms of the optionality of it. Was any of the value inherent in that optionality on the balance sheet as of June 30?

No. We had nothing on the balance sheet at June 30 and it was actually kind of post June 30, there was a technicality, which I'll have Steve describe, that allowed us really to call these bonds for the first time and accelerated the call from what we thought to be next year, or even 2012, into this year. Steve, can you give a brief outline of what happened?

Yes, Tom. As Tom mentioned in his comments, the balance of the deal was $105 million at June. What's callable now is $80 million. There were some prepayment activity on loans that had actually occurred in the past that the loans were amortizing off with-- it was basically fully defeased loans with cash, and they were-- basically the trust makes the payments contractually under the loan agreements until effectively the trust doesn't have enough cash to continue to pass a full principal and interest payment through.

So under the trust document, you just basically pay those loans off at par when that happens, and that happened this month, it happened more quickly than we had thought. So it represented basically a $25 million paydown to the trust in July, which brought, then, the balance to a balance where we could actually redeem the deal.

Okay.

So it was a technical issue under the deal documents that allowed us to do it.

And one of the things we liked about this pool was a lot of the money that was flowing through the pool was in yield maintenance. We had $25 million in just cash sitting there in yield maintenance but when the interest on that cash was not sufficient to be able to totally defease the bonds, then we had the right to basically take that cash and pay down the bonds, which we did. And so that created the even that we're looking at now.

And so what's the dur-- what's the, I guess, duration or-- obviously you have to make some prepayment assumptions, what-- is it a-- is it three-year paper, or five-year paper, what-- what general tenor does it have?

Well, if you recall, there are several tranches and each of them are going to have a different duration. But I'd say, on average, Steve, aren't we talking on the four- to five-year range, something like that?

I'd say three to four, Tom.

Okay.

Okay. So three to four--

And the nice thing about it, with an 829 coupon, you're talking about that spread with some fairly good prepayment protection for an extended period of time, which I commented on earlier.

Right. And so if you-- for whatever reason you were unable to get the capital and you didn't want to take it from the agency book, presumably with the kind of-- if it's four-year paper and a three-year duration, or whatever it is, if it's down in the twos and the threes, you have something really-- you have the option to buy for $80 million that in theory you could find somebody else that would-- you could flip it to for $90 million or something in that range.

Well, I think the-- there definitely-- well, I would say that we think they're worth more than par. I agree with you, I'm not sure they're worth that much.

Okay.

But I do think that the real value in these bonds, because they're such high-quality bonds, I mean the support on these bonds are just almost-- they're ridiculous. And we really want to use that spread for an extended period of time because spread income is really hard to find, and I'd just as soon not book a gain short-term and really look at, like we always look at every one of our investments, on a long-term basis.

Right. Right. But that's sort of the-- that [delta] is sort of the present value of that spread and you could avail yourself of that if you weren't able to get funding for the deal at the right price?

Yes. We could always sell them, yes, that's true.

Yes. Yes.

Okay. And the last thing, you guys mentioned at the beginning of the call that you're-- you continue to model high prepayments after the accelerated buy-outs from Fannie and Freddie, and I was just curious, what you're seeing in prepayments and sort of what happens if those high prepayments-- if Freddie and Fannie doesn't come back with another big buy-out, is that what everybody expects, or-- I know there was some talk during the buy-out that there was going to be potentially a lot lower prepayments after the buy-outs?

Is that expected to just be for a little while or is that-- are you seeing that happen in the marketplace, sort of what-- what's the current market thinking on prepayments and CPRs in terms of how you're modeling them?

Well, Byron loves to answer this question, so I'll let him field this.

Yes, I do get-- I'm over here salivating. But really, Jason, I'm going to give you just a couple of different data points. Let me summarize by saying the market is observing to see what happens in terms of foreclosures, which will ultimately be what will drive-- defaults and foreclosures ultimately will drive Freddie Fannie buy-outs into the future. What we have-- here's our experience.

So Freddie buy-outs came through in March. Our prepayments dropped enormously on our Freddie Mac portfolio over the last couple of months and it's been very attractive in that sense. But it's still uncertain whether you're going to see-- how much you'll see in terms of roll rates from 90-day buckets into foreclosures and then on out the door, in terms of a property sold and Freddie and Fannie buying out paper from the pools.

We continue to model-- we always have modeled faster prepayment speed. So, for us, on average, over the last two years we've run this book, we've targeted 25 to 30 CPR averages. When prepayments were slower, it was fantastic. We got-- that's obviously additional money, but we, from the-- day one of buying agency paper, we recognized the buy-out issue as being a risk, because of the rising defaults, delinquencies and foreclosures.

So could there-- there could be an economic shift here such that-- our worst-case scenario with the amount of shadow inventory, and people talk about shadow inventory but there's another group of people who are really on the edge. They may not be part-- they may not be in foreclosure yet, but they're really struggling. And so we have-- we continue to model at a higher level our prepayment speeds than let's just say-- assume some who had model speed in the teens at some point in time.

In addition, we have short reset paper. So the short reset paper, even though it's been great where people have their mortgages reset down, you could potentially see slower prepayment speeds from that, we also want to recognize that as long rates the curve flattens, long rates come down, it does create an opportunity for some people to refinance and lock in longer term rates for longer-- lock in low rates for a longer period of time. So it's uncertain.

Our experience so far, the Freddie book since March has prepaid in the teens. So it's been fantastic. Will the Fannie Maes pay in that level? Fannie Mae had a much worse credit portfolio than Freddie Mac and so we'll be observing to see that, but obviously pre-- slower prepayment speeds will be gravy in the bank for us and we'll be happy about that, so--

Okay.

-- does that give you--

Yes.

I just want to add here that Byron used to work for Freddie Mac so there might be a little prejudice there.

So, long story short is, you continue to book things conservatively given the myriad of options that could happen with defaults and prepays and foreclosures. But if for some reason things settle down a little bit and the massive buy-outs created a little bit of a little bit of slack in the prepays, it would just be better for us. We would end up having modeled it conservatively?

Yes.

And one thing I would want to add, one of our bullet points in the CMBS side was that seriously delinquent loans declined $4.2 million in the quarter. And we did not have any new commercial loans becoming seriously delinquent in the quarter. And I just want to add that no one has asked a question about that, but we feel pretty good about that as a commentary for the quality of our CMBS portfolio right now, in addition.

Okay, great. Good job, guys, and good luck-- good job on getting coverage from JMP. It's step number one. Have a great week.

Thanks, Jason.

Thank you.

(Operator Instructions). We have a question from [David Shawsnick] of Stifel Nicolaus, please go ahead.

Good morning, guys. I have an indictor on Dynex earnings, and the indicator is that heat in Richmond, is this valid? Number two is, what is-- this all relates to dividends on the preferred, the probability of dividends -- I think my phone is going out -- the probability of dividends being inc-- increase the probability of div-- of the preferred being called, if the stock gets above $10.

Well, as you know, David--

It's a big decision.

As you know, the preferred D, of which there's about roughly more than $40 million principal out, and it's a $10 convertible preferred.

Right.

And if the common trades above $10 for 20 days in a row, then we have the right to basically exchange preferred for common-- or common for preferred. And that's-- obviously $0.50 from here is where the stock sits right now. We also have to pay a dividend to the preferred share equal to any common share dividend that we pay.

Currently the preferred is the $0.2375 dividend and the common has been sitting at 23. It's not coincidental that it's been slightly below the preferred dividend. We did start the dividend in this $0.23 rate quite a few quarters ago. We believe our earnings are pretty stable, pretty substantial. We do have a large tax loss carryforward, but as indicated today, our dividend is now down below 10% and we feel that the total rate of return of the value increase, which is tax free, and the dividend paid out quarterly or annually, is obviously taxable, and as we all know, tax rates are not going down any time soon, particularly for anybody of any substance.

So I think we're going to be monitoring that. I do think that we're going to have to reconsider the dividend, given the amount of earnings that we have right now, and we'll be taking a look at that and obviously we'll be looking to increase the dividend as opposed to decrease it.

That, I understand. I had forgotten the preferred D is participating preferred then?

That's contract.

Okay. All right. Thanks a lot. Phone's going out. Enjoy the weather.

Thank you, David. I mean the way we look at it, just for everyone on the call, for all intents and purposes, the preferred is-- the common is around $10 a share right now. For all intents and purposes the preferred is almost common at this point.

I had forgotten that it's participating, which was really the essence of my question.

All right. Thanks, David.

(Operator Instructions). We have another question from Jason. Please go ahead.

Hey, I had a question. With regard to the preferred, are you seeing the market-- is there any market again for preferred at a lower rate? Obviously, if we're successful in closing this next $80 million piece, it seems like we should be well on our way to crossing the $10 mark, and I'm knocking on wood, but is there abil-- is there the ability to layer on a 8% or a 7.5% preferred in place of the current, or is there just talk of that in the marketplace yet?

Well, I think one step at a time. We're obviously getting-- be interested in the best way to raise capital at all points in the cycle.

Yes.

So-- and also we're looking at the sustainability of our earning stream, vis-a-vis what we're going to be paying out. So right now our ROEs are obviously quite substantial and-- but we-- the next step is basically to deal with the current preferred that we have, which is convertible preferred, and that's where we're-- our focus is right now. We'll look at those opportunities as we go down the road. You have not, other than Annaly's convertible preferred offering--

Right. Right.

-- a few months ago, I don't think you've seen another preferred deal in the marketplace in the mortgage REIT sector, but that doesn't mean we can't take a look at one.

Okay. I was just curious if anybody had been talking about them, if they're out there or if it's just basically Annaly that can do that stuff at this point?

I think it's all a matter of what's the best way to raise capital. If you take a look at Anworth, for instance, they have the ability to add on to their preferred program and they do that pretty steadily each quarter.

Yes, and that's pretty accretive in these type of times to the common?

Correct.

Yes. Okay, thanks.

(Operator Instructions).

Operator, I think we've kind of exhausted our questions at this point. Why don't we close the call off and let people get on to other things.

Okay. Do you have any closing remarks today then gentlemen?

Please. In conclusion, I'd like to thank all our shareholders for their patience as Dynex has filled out our portfolio and took advantage of the optionality in our portfolio. It's been over seven years since I joined the board of Dynex, and over that time we've navigated some of the most difficult investment terrain in the last century. I'm pleased now that we stand on very solid ground and our prospects are quite good for the future.

Dynex' employees have contributed mightily to our success and I want to thank them for their loyalty and diligence as well. Running a mortgage REIT is like running a marathon, not a sprint. One needs to continually pace yourself for the long haul. I feel quite comfortable with our pace, our team, and our position in the market and look forward to the remainder of the race. Thank you for your time on the Dynex call.

This concludes today's conference. Thank you for joining. You may now disconnect.