Dynex Capital Inc (DX) 2011 Q2 法說會逐字稿

Good morning and welcome to Dynex Capital Inc. second-quarter earnings call and webcast. (Operator Instructions). Please note, this event is being recorded. I would now like to turn the conference over to Thomas Akin. Please go ahead.

Thank you, operator, and welcome to all our investors to the second-quarter Dynex 2011 earnings conference call.

With me today are Byron Boston, our Chief Investment Officer; Steve Benedetti, Chief Operating and Chief Financial Officer; and Alison Griffin, Dynex Investor Relations. I'd like to turn the call over to Alison for our forward-looking comments.

Thank you, Tom. We would like to remind you that 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 can differ considerably 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 this morning, July 28, 2011, and our annual report on Form 10-K for the period ended December 31, 2010, as filed with the Securities and Exchange Commission. These documents may be found on our website at www.DynexCapital.com under investor relations, and now I'd like to turn the call back to Tom.

Thanks, Alison. Okay, I want to thank everyone for joining us on the call. I realize that these are very interesting times, and we all have many obligations right now. I just hope our legislators can responsibly discharge their's in a timely manner.

Overall, getting to the second-quarter results, it reflects the business model that we have employed since building out the Dynex portfolio in 2008. Our investment strategy then, as it is now, has been to construct a levered portfolio of high-quality assets with as short a duration as possible and to still achieve respectable returns.

Our second-quarter return on equity in excess of 14% with less than six times leverage demonstrates our success at providing investors a suitable return while taking substantially less leverage, duration, and credit risk that our peers. We feel that our current portfolio incorporates a risk-adverse strategy that has been at the core of our investment philosophy.

Our CIO, Byron Boston, will provide a deeper dive into our portfolio later on in the presentation.

For the quarter, I want to point out that we've increased our leverage from 5.2 to 5.9 times. However, we weren't fully invested for the entire quarter. The capital that we raised in March was not fully invested until almost the end of May, and our results don't reflect a fully-invested quarter. Today, however, we stand at our targeted level of leverage.

At present, there are many crosscurrents swirling through the investment landscape that add uncertainty to any investor's portfolio. We see no changes currently to haircuts, financing, or significant changing in the pricing of our portfolio, but realize this could change in an instant.

Since quarter end, we have seen no appreciable change to the value of the Dynex portfolio. We felt confident our investment approach will be defensible should this environment change.

With that, I'd like to turn it over to Steve Benedetti for a further discussion on this quarter's results.

Thanks, Tom. Good morning, everyone, and thanks for joining us on the call today.

For the quarter, we reported net income of $13.6 million, or $0.34 per diluted common share, versus $10.3 million, or $0.31 per common share, for the first quarter of 2011. Our net interest income increased to $15 million for the second quarter, from $12.7 million, as we deployed the remaining proceeds from our March common stock offering, as Tom indicated.

Our net interest spread for the quarter was 2.45% versus 2.68% for the first quarter of the year, with the decline in spread due primarily to the addition of lower-yielding agency hybrid ARMs during the quarter. On average -- our average asset earning yield was 3.61% for the quarter, versus an average cost of funds of 1.16%. The average earning asset yield was down from 3.9% last quarter.

We purchased $433 million in agency hybrid ARMs during the quarter, which yielded 3.18% on an annualized basis during the quarter. The weighted average balance of these ARMs for the quarter was $169 million, reflecting the fact that most of these purchases were not settled until late May.

During the quarter, we sold $30 million in securities, mostly post-reset agency ARMs, and invested the proceeds primarily in agency CMBS IOs. Our overall leverage at quarter-end was number 5.9 times our equity capital, and our average leverage during the second quarter was approximately 5.3 times our equity capital.

Our liquidity at June 30 was $177 million, consisting of $34 million in cash and $143 million in unencumbered agency MBS. As part of our normal risk management process, we stress our investment portfolio and funding for changes in prices and spreads, changes in interest rates, increases in repo haircuts, and increased prepayment speeds.

Our objective in managing our liquidity is to keep sufficient resources to meet potential demands and periods of high market stress, like was witnessed in 2008. We are confident that we have sufficient financial resources to weather any volatility coming from the downgrade in the credit rating of the U.S. Government.

Our book value increased to $9.59 at June 30 from $9.51 at March 31. This increase was due in part to our earnings in excess of our dividend and in part from net improvements in the market value of our investment portfolio. We saw strong price appreciation across the entire portfolio, which was partially offset by declining values from our swaps. This is expected and part of our normal hedging strategy, which Byron will discuss later in the call.

With respect to the Teamsters litigation, the case is currently on the docket for November, but that could change, depending on the availability of the Court. As we have stated before, we believe that these allegations are without merit and we continue to defend ourselves vigorously in this matter.

In summary, for the quarter, our annualized return on average equity was 14.2% and we paid a $0.27 dividend per common share. Our earnings yield, based on yesterday's closing price of $9.39, is 14.5%.

With that, I'll turn the call over to Byron for details regarding the portfolio and our investments.

Good morning.

Interest rates have proven again in 2011 to have been capped as economic activity has remained subdued. We're in a long-term corrective process in our economy that will continue for some years into the future.

We believe the yield curve will remain steep in a low-rate environment, hence providing a solid opportunity to generate spread income in the fixed-income markets. As such, we have increased our portfolio over the past six months as a result of a larger capital base.

We chose to focus most of our investments in the agency sector due to our discomfort with pricing in the non-agency markets and the overall relative attractiveness of the short agency sector. Our agency securities now represent 82% of our portfolio.

As Tom mentioned earlier, we prefer a more diversified mix of assets, and as such, we are aggressively looking at opportunities in the non-agency market to diversify our income stream.

A major theme of our investment strategy has been to minimize potential extension risk in our portfolio. As a result, we have continued to invest in short hybrid ARM securities. We have also increased the amount of interest-rate swaps, hedging future earnings and potential book value volatility. Our duration gap is at the shorter end of our targeted range of 0.5 to 1.5.

Furthermore, our portfolio will extend less than a year for a 150 basis-point move higher in rates.

We are very diligent in our approach to asset selection, and hence we avoid investing in TBA securities. As we have built our portfolio over the past three years, we have fully understood that tighter credit standards, higher relative pricing, and a more demanding mortgage origination process has made major changes in the expected refinanceability of mortgage securities.

As a result, we have structured our portfolio to take advantage of this trend. We continued to add seasoned premium hybrid paper in the second quarter. Our prepayment experience has been consistent over the past 12 months and below our expectations.

Our recent repayment experience continues to be favorable. Our agency MBS book pre-paid at 20.8 CPR for the month of July.

We also have continued to search for opportunities in both agency and non-agency CMBS paper. Our major focus has been to emphasize the multi-family sector. Dynex Capital has a long, 20-year history of lending money and purchasing securities backed by multi-family properties. As such, all of our agency fixed-rate paper and a substantial amount of our new CMBS investments have been backed by multi-family loans.

Furthermore, all of our investments within this sector are pre-paid protected securities and, hence, limits our exposure to voluntary refinancing.

As we continue to look forward into the future, we see an enormous amount of uncertainty. We have structured our portfolio to be very flexible to deal with this environment. We have a solid amount of liquidity, as Steve just mentioned. We prioritize -- we have prioritized our investments in liquid highly-rated assets, and we have built a culture of risk management that respects the fact that global risk remains very high.

Tom, I'll turn it back over to you.

Great. Thanks, Byron, and thanks, Steve, as well.

That's the end of our prepared remarks, operator, and we are free to open it up for questions.

(Operator Instructions). Jason Weaver, Sterne, Agee & Leach, Inc.

Good morning. Thanks for taking my question. I guess I'll ask what's probably the most common question in the space right now, and that's, assuming a downgrade in the U.S. sovereign credit rating, what is your take on the effect on mortgage spreads and funding markets? And how are you positioning the portfolio ahead of that to protect book value in the event of?

First of all, if you think about it, if there is a downgrade, I think that obviously the further out your portfolio is, the more volatility you have, and you'll probably see a steepening in the yield curve.

So, our very short-duration portfolio, as Byron pointed out we are at the short end of the 0.5 to 1.5 duration gap that we run, means that we should have less volatility. I think people will probably run to the short end of the curve as well. So, you could even see the short end of the curve move substantially to a positive.

As you know, there has been very little, if any, backup in rates. And in fact, today, this morning, again, treasuries are actually rallying.

So we've constructed a portfolio based on the uncertainties in the marketplace globally, and I don't think that we really -- since we have built it this way to begin with, I don't see us doing anything substantially different, but Byron, why don't you take this question as well?

Jason, a major key to managing a levered portfolio happens to be liquidity. And this is an essential part of our business that we discuss and focus on on a regular basis.

We've got a highly liquid portfolio. In addition, we carry, as Steve mentioned a second ago, a substantial amount of liquidity both in cash and unencumbered assets.

So we've stretched our portfolio to deal with rises and haircuts, anywhere from 1% to 6% in haircuts. We stretched that portfolio for substantial rises in interest rates and spread widening. And we [threw] -- we have a substantial amount of liquidity to deal with these situations.

On a normal basis, we are operating our business with a huge concern about events such that have taken place in 1998 and in 2008, and the uncertain events that could take place in the future, heavily focused on liquidity events.

This one will be a situation that is similar to this. We also believe that with a situation like this, it's the operational issues that may occur or any problem will be temporary.

At the end of the day, the U.S. government market will still probably be the largest, most liquid, deepest market on the globe, whether it's a AAA rating or a AA+ rating. But the fact of the matter is we run our business on a normal basis focused on this type of risk management, and liquidity is essential to a levered portfolio.

Okay, thank you. Just one more specific question. Byron, regarding your comments on your thinking about reallocating towards the non-agency sector at this point, can you just detail a little bit about what parts of that space look most attractive to you?

Well, we've always had a bias. We've always like the CMBS sector in terms of diversifying our book of business, and that goes back to 2008, and I mentioned before, we've got a long history in that sector.

We also have a long history on the non-agency resi side. We just [found] those opportunities more attractive. We also like the fact that the government always -- in a dire strait, the government provided financing support for the CMBS market.

So again, back to our thought process around liquidity in financing and making all of our decisions. So we started the CMBS market. We then work our way to the non-agency market. While we're broadening our minds, and we due on a normal basis, Jason, our opportunity set is broader than the securities you see in our portfolio, so we're constantly making relative value decisions.

In moving our percentage up to 82% agency, it was not because we hadn't done a fair amount of work looking at non-agency RMBS products and non-agency CMBS products.

At this point, prices have corrected from where they were at the end of last year. We've seen some opportunities. We've invested in some more multi-family deals offered by the agencies, both with explicit agency guarantees and [other] non-agency tranches that have come through the agency underwriting process.

We have also found some attractive opportunities as to select CMBS IOs and some other select CMBS deals. So we continue to look at the non-agency RMBS sector, but I tell you, it is very complex, Jason. I think today we heard in the market about S&P changing their rating on a CMBS deal that I believe one of the dealers had brought to market, and it's created great complications.

So, this is not a simple process in terms of investing money. Sometimes the environment is made out to be, this is nirvana because there's a steep yield curve and low rates. There's an enormous amount of complexity in the market, and we approach our job with that much more of a diligent approach.

Okay. Thank you again for that, and congrats on another solid quarter.

Douglas Harter, Credit Suisse.

Thanks. Just following up on that a little bit. Are you -- if you could just talk a little bit about some of the other non-agency investment opportunities you're looking at that might not be in the portfolio currently.

Doug, I'm trying actually to -- within our organization here, we've tried to broaden our minds trying to find the right pockets of opportunity.

Traditionally, we've been trying to prioritize the repayment of principal in our process, and as such that has really kept us generally in the just higher tier of credit ratings. Or just credit quality.

We have taken advantage of some Freddie Mac underwritten deals that are less than AAA, with some small amounts of investments from again, backed by multi-family products -- multi-family properties. We continue to look at the RMBS sector, but we have not added any additional money into the RMBS sector, but we continue to look at residential -- the residential loan securities market for opportunities. [Steve]

Yes, Doug, this is Tom Akin. As you know, our current non-agency portfolio is pretty high quality, fairly short duration.

And you know, we feel that at some point, there will be an opportunity to step a little bit down the credit curve, and we're constantly looking at that. We have several things we're looking at now. Obviously, if we do get a backup in that non-agency space where the spreads get more attractive than they are in the agency space, we want to be available to make a move.

And you utilize substantially less leverage when you make those kind of investments. And it's a trade-off between having a levered portfolio and with returns unlevered similar to a levered portfolio. It's really a risk-return analysis. At 84% agencies right now, we feel that we can take some of that risk, if it makes sense on a risk-return basis.

So has the backup in spreads that we've already witnessed in non-agency enough to make it interesting for you? Or is that -- you still would be looking for more?

I would say it's interesting at this point, but it's not compelling at this point.

And also, Doug, there's a couple of things that happen here because you talk about an asset, right, in terms of asset spreads, but you also have to think about financing rates.

So, the Street is extremely cautious in terms of financing. So when they see movements such as the spread movements that have taken place over the last six months in non-agency, both CMBS and non-agency RMBS, some of the Street financing rates have also gone up. So, it's not a -- it's not a simple decision as, wow, look at rates have moved out. I'm going to immediately move over into the non-Agency sector.

It is complex, and again, I want to really point out what has just taken place here with this -- apparently an S&P-rated CMBS deal brought to the market by one of the dealers, where now S&P is almost going back on the rating. So, you don't want to really quickly just run to the non-agency sectors because spreads have widened out. It's far more complex than that.

Great. Thanks for the color.

Steve DeLaney, JMP Securities.

Good morning, guys, and thanks for taking the question. So, just a couple of specific things about the portfolio. Byron, the new CMBS that you added, the $24 million, the IO strips, was this off of a new issue or a legacy outstanding issue?

All new issue.

New issue. And can you generally describe -- where in the capital stack is the IO? Is it just excess at the top of the stack? Or where does it fit in?

It's at the top of the stack, Steve.

Okay. Do they actually have ratings on the IOs? Or not? I don't know --

Steve, this is Todd Kuimjian. The -- how the Freddie Mac deals work, quickly, is they -- the underwriter takes the loans in, they structure a REMIC. The rating agents come in; they rate all the way down, from AAAs down to the unrated class.

And then, the AAA bonds are moved into another REMIC trust and they are guaranteed by Freddie Mac. So, the initial rating of AAA is good until the deal is actually done, and then the rating is pulled, and it's now an agency security. Our IOs are stripped off that agency piece.

Okay, and so this is multi -- this is agency multi-family.

(Multiple speakers) multi-family, exactly.

Yes. Got it. Second thing is, I'm just a little curious. You guys, you talk about the short duration, high quality, and all of that is obviously reflected in the portfolio. So I'm just a little curious as to your thought process in letting go of a small amount of the short ARM book, the $30 million that you booked a nice gain on. So what was the thought process there, given the fact that you like short paper?

Well, it's also a matter of reallocating. We're up to 82% agencies, and trying to reallocate into the non-agency sectors. As Steve mentioned earlier, we sold those securities. We invested in the non-agency CMBS sector. And that's the type of allocation we'll have to make is when we try to -- as we find opportunities in non-agencies.

So it'll probably be onesies, twosies like that, Steve. Smaller trades that take place as we pick through the sectors.

Got it. And you're, I guess, trying to find bonds that you think look a little -- that may be priced a little rich when you're trying to call the portfolio like that.

That's exactly correct. (Multiple speakers) go through and we're going to say, okay, where can we -- what's the best thing for us to sell at this point to take advantage of non-agency opportunities?

Generally, Steve, we don't like to sell cheap bonds.

I hear you. I hear you. Kind of like the stock market, right?

There you go.

Okay. So the last thing I have is on the CPR. Byron, can you give me that figure again for July? I think I wrote down like 20.8%, your CPR.

That's correct. 20.8%. That's the entire agency portfolio.

Now for the whole quarter, you were 23.2%, and that's a little interesting because what we're hearing on some other calls is that actually, especially people that were -- have a lot of ARMs, it seems like that July factors for June prepayments were actually higher than what people saw on average in the second quarter.

And I was wondering if kind of the anomaly here with you actually having a slower speed in July than for the quarter, does that have something to do with the mix of the additional new hybrids that were put in? Are they a little bit longer, and is that why -- is it due to the mix, I guess, or do you think it's -- or why do you think your CPR went down?

Two factors. One is a reporting factor and the other factor is the mix of the portfolio. So where the hybrid issues, if you just bought brand-new TVA 5/1 hybrids, or just bought just plain vanilla 5/1 hybrids. In other words, they're buying it because of the 5/1 hybrids.

Right.

You more than likely have experienced some adverse prepayment experience. And for those securities that we've got a small percentage of our portfolio that might fall into that and really doesn't -- I'm really allergic to TVA securities and I have been my entire career.

So we have a small percentage of the security that might have some of those characteristics, and those securities actually picked up in July. But we've got the rest of our portfolio, it's been pretty hand selected across seasoned bonds, so we've got a 60-month [year old] bond. It may look like a new 5/1 to some. To us, it's probably a seasoned bond, a seasoned 7/1 or a seasoned 10/1.

And so, we have actually experienced pretty consistent prepayment speeds. The reporting part of that -- the reported number, because it's just on the hybrid portfolio. And let me give you -- I can give you some numbers here to just give you a background. The way the portfolio looks today, as of July, the consistency of it over the last, let's say, 12 months.

So -- combined, that's all agencies which would include the fixed-rate securities and the hybrids, 21.8 on the one-month basis; three months, 20.7; six months, 21.3; and 12 months, 23.2.

The hybrid portion of that is a little higher because the other prepaids, the fixed-rate securities, are more prepayment protected, exclusively prepayment protected, and they pull that number -- that average down, but it's pretty consistent. And I think from the beginning in 2008, we've been very diligent about hand-selecting the securities that go into this portfolio, and I can't emphasize enough that I am absolutely allergic to investing in TVA securities.

And Steve, I just want to add that we are a little slow in our portfolio acquisition. As you know, we -- in the raise in March, we didn't get it vested until May, and it's because we don't buy TVAs. We buy basically selected pools, and it takes a little longer, but it's the old adage, measure twice, cut once.

Guys, appreciate the color. Thank you very much.

David Walrod, Ladenburg.

Good morning. On your last call, you talked about the -- weighing the benefits of the capital raise versus some of the restrictions it would make on your carryforwards. Can you talk a little bit about the opportunities you're seeing there and how you're kind of weighing out those opportunities versus the impact on the carryforwards?

I'm going to have Steve answer that because we just had our accountants do a deeper dive into the restrictions of the tax loss carryforwards. Steve?

Hey, David. You're right about that. We -- I think we commented last quarter that we were around 45% or 46% relative to the 50% ownership shift on that technical test that the IRS applies in this situation.

There are very complicated rules around, when you raise capital, how you calculate the additional changes in that ownership shift test. Suffice it to say, I think, we could continue to raise -- not raises like you saw in December and March, but we could continue to raise capital without triggering those NOL limits.

That said, the analysis that we do as a Company whenever we're raising capital is, what are we going to do with the capital? Does it make sense given the current investment environment and current investment opportunities?

Okay, great. And then, on a different topic, you mentioned the Teamsters litigation in November. Can you kind of do a quick 30-second overview of what that is and what the potential risks are there?

Sure. Tom, do you want me to take that?

Yes, please.

Okay, so the Teamsters litigation is a claim against the Company and its subsidiaries -- and its subsidiary related to a transaction that the Company did in 1999 in the issuance of manufactured housing securitization bonds.

Teamsters represents one class of bondholders that -- and that litigation has been class certified, but they represent one class of purchasers of the bondholders that are alleging fraud in the representation of that deal, both at the issuance and subsequently as we were -- as the collateral in that deal really underperformed relative to, I think, expectations. But I think in the context of what was going on in the manufactured housing market, actually our deal performed as well as, if not better, than other deals in the market.

So the allegation here is that we fraudulently originated loans. We misrepresented the credit quality of the loans when we did the securitization. These guys bought the bonds in the secondary market in 2000. They owned them through 2004, and again, they are alleging fraud around the issuance of those bonds.

The exposure there -- at this point, the other side has not indicated what their damage claim is. That process would be ongoing as you move closer to trial. That trial, as we mentioned -- as I mentioned during the call, is currently on the calendar or on the docket for November, but it really depends on the Court's availability and that could change, depending on what other cases might also be on the docket at that time.

Have you taken any reserves against a potential loss?

There are no reserves accrued for a potential loss on that transaction.

Okay. Thank you.

Matthew Howlett, Macquarie.

Thanks for taking my question. Most of my questions have been answered. Just on the securitized loan, the legacy securitized loan, the CMBS, anything interesting that could go on in the six months? I know you've called a few deals, resecuritized them. Anything else that could be on the docket?

Matt, this is Byron. There are -- we still have the right to call or collapse further these deals. So, there are opportunities that exist.

The opportunities, however -- as you can see, we haven't done anything with them today, and there are other complexities to it, whether it happens to be financing and some other accounting issues. So, if that opportunity does present itself, Matt, we will take advantage of it, and we are actually, on a weekly basis, looking at that to see if it -- if we can make that work. So, there are still [parts of that] deal that are out there that we have the right to call.

Matt, with the uncertainty in the market right now, it's probably not on the front page, but I think as the market continues to unfreeze here a little bit, it will move up the ladder.

Obviously, this whole government debacle is not going to encourage anyone to take any more collateral financing risk right now. So, I would say it's nothing imminent. We need to get over a couple of these hurdles here before we can look at it again seriously.

Okay. We'll certainly look forward to that.

And then, just a broader question for you, Tom and Byron. Just on the securitization, I mean we have the jumbo limits coming down, presumably, in September. Dynex back in the day was a big conduit, a big securitizer of residential mortgage loans.

How do you foresee Dynex playing in that market -- presumably when it does get started? And where you think we are in terms of kicking -- getting the non-agency market back up and going again?

We think it's going to be a while. Obviously, there are a lot of aspects to the non-agency market getting going.

As you know, every day that we get closer to the 2012 election, the less gets done on heading -- getting these things done. Look at QRM. It's taken forever for QRM to get dealt with, and we don't see any movement in that right now.

So I think we're going to be in an environment where securitization is going to be extremely difficult. The rating agencies have no clarification. We don't know what is going to be the size of the jumbo. There's some talk about not changing that number now, later on this year, from the agencies.

So again, there's a lot of crosscurrents, and we can't even seem to get the most simplistic things done, so it isn't encouraging that something as complicated as restarting the securitization market is going to happen anytime soon.

For that reason, we have obviously gone to the agencies that are in the larger capacity. We'd like to have more non-agencies and more opportunities in the non-agencies, but until the market really gives us an all-clear sign, I think we're going to have to remain risk-averse.

Can I just add, Matt, that, again, that issue I think as you -- this issue around this one CMBS deal with the rating agencies just highlights the real complications that exist now dealing with the rating agencies, to even have a bond rated. So as Tom said, this will be a slow process.

Okay, great. Thanks, guys.

(Operator Instructions). Ken Bruce, Bank of America Merrill Lynch.

Thank you. Good morning, gentlemen. My first question really relates to the non-agency repo market, and I appreciate your earlier comments and your general risk management position, but could you remind us as to what kind of leverage you want to be applying in your non-agency investments? And if you could, just remind us as to where haircut levels are today, if you are seeing any, if there's any discussion recently, I guess, as to whether that needs to change at all?

Current leverage targets are between three and five times on non-agencies, and haircuts, depending on the bond, are anywhere -- quoted anywhere between 10% and 30%.

I would say that we, as much as we may like a non-agency investment, if we -- when we look at the world of financing, we have enormous respect for how quickly a Bank of America Merrill Lynch could pull that financing on non-agencies versus the agency sector. So we proceed with caution.

Understood. And is that a similar level of haircuts for -- in the CMBS realm as well?

Yes, exactly.

That's a pretty wide range. Again, it's in the 30s. I think we are seeing -- some of the haircuts have improved. So let me just say that. So the financing has improved.

Haircuts that may have been 20 before have come down to 15; some 15s have come down to 10. We just don't take it for granted. When we look at the environment, the financing on non-agencies has improved, just on a relative basis versus a really bad situation back a year or two ago.

But I think we are a long distance from a very fluid financing of non-agency securities similar to what existed, let's say, five, 10 years ago.

And Ken, I just want to point out that with all the noise regarding the government and the downgrade, we have seen no changes to any of our haircuts on our non-agency paper.

Yes, that seems to be a very common theme that we have seen now from most of the mortgage REITs that have been able to discuss that particular point.

So, it's obviously of great concern, just given the headlines, but it feels like the market may be overreacting a little bit as it relates to concern at this point.

The -- I guess -- as you're kind of looking at a situation with rating agencies being a little harder to pin down in terms of how they behave over a period of time, how do you go about entering into the non-agency space, either in the resi or in the commercial side? Is it just really having to re-underwrite the deals from your own perspective?

Yes, absolutely, Ken. In fact, if you had met me 10 years ago, that's the process I would have had in place.

So, I've never really trusted the rating agencies and I think it is absolutely necessary to re-underwrite these deals. And when we talk about -- I'll throw around ratings like AAA or AA, but in reality, we look first beyond the ratings to establish our own thought process around the quality of the loans.

And do you feel that the market is going to be moving in that direction? I guess what I'm trying to gauge here is it sounds like it's going to take a little bit more time and energy and effort on the part of Dynex to invest capital in that particular space. In terms of just turnaround, do you feel like you have the ability to kind of meet the market where it is, or how does that work?

Yes, we do. I think we do, and I think we're going to -- if it's a sector that we are not -- we don't believe we've got any type of competitive edge in terms of investing, you won't see us adding that security to the portfolio.

But we've got enough tools here within our shop to dig deeply on the assets that we might find attractive to do the necessary work to make that type of decision.

What you won't see is, again, back to spreads have widened 100 basis points. And so, okay, therefore we just immediately run out and grab $100 million worth of non-agency bonds. I think it takes more work than that, from our perspective.

And so, it's -- Steve DeLaney asked a second ago what happened with that $30 million. We said, oh, $30 million, we buy $30 million non-agencies. And we are -- it's kind of a slower step-by-step process.

The great thing about this environment, Ken, is that I can put money in agencies, earn a very solid return, while I am making these deeper credit decisions on the non-agency side of the balance sheet.

Great. Thank you very much for your comments, and another good quarter. Thanks.

(Operator Instructions). This concludes our question-and-answer session. I would like to turn the conference back over to Thomas Akin for any closing remarks.

Thank you, operator.

It's been said that where one stands is many times dependent on where has one has been sitting. Our core portfolio investment strategy is always centered on protecting shareholder book value. We have constructed a very defensive portfolio of high-quality and short-duration assets. The Dynex portfolio should stand well in this uncertain environment.

I want to thank all our investors and I look forward to discussing our results for the third quarter.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your line.