Dynex Capital, Inc.
Q1 2013 Earnings Call Transcript

Published: 2 May 2013

[Operator:]

Good day and welcome to the Dynex Capital Incorporated First Quarter 2013 Earnings Conference Call and webcast. All participants will be in listen-only mode. (Operator Instructions). Please note this event is being recorded. I would now like to turn the conference over to Mr. Thomas Akin, Chairman and CEO. Mr. Akin, the floor is yours sir.

[Thomas Akin:]

Thank you Mike and thank you all for participating on the Dynex first quarter call this morning. We realized it’s a busy earnings season and we appreciate your time. With me today is Byron Boston, President and CIO. Steve Benedetti, COO and CFO of Dynex. Alison Griffon, our HR and IR Representative and then Todd Kuimjian, our Senior Vice President and Portfolio Manager in our CMBS Group. And with that I’d like to turn it over to Alison for the customary protection.

[Alison Griffin:]

Thank you Tom. Good morning, everyone and thank you for joining our call today. The press release associated with today’s call was issued and filed with the SEC today, May 2, 2013. You may view the press release on the company’s website at dynexcapital.com under Investor Relations and on the SEC’s website at www.sec.gov. Before we begin, 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 could differ considerably from those projected in or contemplated by the forward-looking statements as a result of unforeseen external factors or risks. For additional information on these factors or risks, we refer you to our Annual Report on Form 10-K for the period ended December 31, 2012 as filed with the SEC. The document may be found on our website under Investor Relations as well on SEC’s website. This call is being broadcast live over the internet with a streaming slide presentation and can be found through a webcast link on the Investor Relations page of our website under IR Highlights. The slide presentation may also be referenced by clicking on the first quarter 2013 Earnings Conference Call link, also on the same page of our website. I would now like to turn the call back over to Tom. Thank you.

[Thomas Akin:]

Great Alison and for those of you, who are following us online or have the presentation upfront. I’m going to turn to page three in our guiding principles. Dynex is a public mortgage REIT, but we are different and we have several distinguishing factors which I would like to outline. One; we are internally managed, we always have been. Two; we are one of the oldest mortgage REIT’s in existence commencing operations in 1988. We have an experienced leadership team, all of us have been in the business for a, at least 15 years. I have been around 25 years and Byron Boston is been around 25 years. We have a high insider ownership in the company. We consider ourselves owner-operators. Our compensation is heavily weighted in stock. So we have a vested interest in the outcomes of DX and we are vested into making smart decisions for the long-term. We have a diversified investment strategy. We believe a diversified portfolio will give us a higher probability of performance through a variety of market environments and we experienced quite a few over the last four years. We have a large net operating loss carried forward. Created in 1998, and beginning to expire in 2020 that gives us financial flexibility as we are not required to pay out all our earnings in terms of dividends. And with that, I’d like to go the first quarter highlights, which is on page four of the presentation. First of all, our diluted earnings per common share was $0.34 and our book value increased from $10.30 to $10.50 during the quarter and year-over-year went from $9.62 to $10.50. Our annualized ROE, during the quarter was 13% and our net interest spread narrowed modestly to 1.89%. Our average earning assets are now $4.1 billion and our CPR is 19.3% and that’s excluding our CMBS IOs. Our common dividend was $0.29 representing a 11.02% yield based on a $10.53 closing price yesterday and our overall leverage stays within 6% range that we publicly talk about it 6.3 times at the end of the March. We also want to talk about events that have happened after the quarter. We continue to look at raising capital, when that capital can be used accretively to book value both the dividend and the earnings. Last quarter, we issued or actually this quarter. We issued 2.25 million shares a preferred stock at 7.5% rate that met both of those accretive criteria. We have grown slowly and steadily over the last few years, but always accretively. And we expect to maintain that philosophy well into the future. Let’s go to the next page, and talk about the summary of results here. In the upper left-hand corner, you can see that we paid $0.29 dividend and we are about to earn that dividend consistently. Book value has steadily increased since 2008, and important trend here as you can see our net interest spread is trended down from 2.56% in the fourth quarter last year and the main reason there being that, we raised the equity in 2012 and a lot of that, good portion of that equity is invested in the agency mortgage-backed area and the CMBS. If you look in the bottom right-hand box. You can see that ROE has ranged between 13% and 16%. If you were to go back a couple years, you would see a similar ROE profile between 13% and 15%. And with that, I’d like to turn it over to Byron Boston who would like to talk specifically about the portfolio.

[Byron Boston:]

Good morning. Let me take a second or two to discuss some of the specifics about our portfolio and our investment strategy of the last two years. As you can see on the next slide six, we’ve got picture of treasury 10 year rates in the overall book value of the company. As Tom mentioned, we’ve structured our portfolio to perform in a variety of market environments. We referenced the 10 year here on the right. They’re much concerned in the market spot rising rate. So despite the volatility with the rates, we’ve been able to deliver consisting increase in book value over the years, since we’ve been building this portfolio in 2008. Note that in July 2011, yield actually broke new lower range and stayed in this range, but approximately about 1.50 to 2.50 on the 10 year for the last year and a half. We are not concerned it’ll breakthrough 2.50 on the upper band given the current conditions and the extraordinary amount of cash, and liquidity is being pumped into the global financial system and in the future we believe, we will see a steeper yield curve and the range will normalize in some point in future, but anyone guess is to when that date actually occurs. And in that period of a steeper yield curve, we do believe that we will have some interesting investment opportunities. Nonetheless, the main point of this slide is nearly to show you that, our book value has increased a huge driver behind that is been our diversification and our allocation of capital over the years to the CMBS sector. We go through the next slide. Let’s look at our portfolio mix because Dynex provides some unique values, and one of our goals here this morning on this call, is trying to make sure that you understand the unique value that Dynex provides. Dynex has managed a diversified asset strategy for the past 25 years. As you can see in this diagram, Dynex has always had a broad opportunity set. Throughout our time as a public company, we’ve managed every business model that’s been seen in the mortgage REIT sector. Our current size has allowed us to be very nimble, which we best manifested in our steady allocation of capital to the CMBS sector, when spread were extremely wide especially in 2011. Our experience through the 1998, 2003 and 2008 financial debacles has allowed us to recognize the value of a short-duration, high credit quality portfolio. Our internal ownership structure with management having a material stake in the company, keeps our focus on building book value as well as paying an attractive dividend yield. Hence, we’ve always recognized that we would like to have a diversified string of net interest income, not only from more variable cash flow such as agency securities, but also from the more well-defined cash flow sector such as CMBS. As of the first quarter, we had 60% of our equity allocation in CMBS sector, with a substantial portion being in the agency CMBS sector and 40% to the short duration RMBS sector. So this begs the question, how should we value Dynex Capital? If we move to the next slide, we’ve got some comparisons that we found interesting and you’d want to thank the guys at Wells Fargo for helping us by creating this slide for us for our presentation. As you can see Dynex is sitting. It is the only individual company as you look across, you can see the various sectors within the yield universe as we call it. To the far left, you’ll see agency mortgage REITs and to the far right, you’ll see non-agency mortgage REIT’s, that’s on the first line when we compare dividend yields. So again back to, how do you value Dynex Capital? Well first, with 60% of our equity allocated to the CMBS sector. We could say DX, is more of a commercial REIT, if that is the case then we’re the highest yielding and lowest price to book commercial REIT in the market place. Alternatively, with 75% of our equity allocated to the agency sector. We could say, DX has the highest credit quality and liquidity of the agency REITs, but with a wider net spread. A substantial portion of equity allocated to securities with explicit prepayment protection that basically being the CMBS sector and a lower average – leverage ratio versus others within the sector. DX or Dynex is unique in the sense, now we’ve built this diversified portfolio that is currently anchored by the CMBS sector. We’ve also remained focus on shorter duration agency securities, but more importantly we’ve been very nimble throughout the years and have allocated our capital widely, to focus on increase in our book value, while paying an attractive dividend yield. If you look at our next slide, since 2008. You’ve seen this slide before, we show it every quarter, we’ve been consistent. There’s not a lot of style Griffin [ph] to current time your Dynex Capital, despite the fact that we have a broad opportunity set, we’ve been very consistent with our strategy. We’ve structured a diversified portfolio and it’s been expected to perform in a variety of market environments. As Tom mentioned earlier, ROE is between 13% and 16%. We’ve believed in reverse [ph] through our strategies since inception. We have identified the risk and return potential of a long-term low rate environment. Our overall goal in our diversity is again, it’s not to take too much prepayment exposures, with strategically exploring opportunity to add cheap premium securities over the years. We were early to recognize the return potential from the multifamily sector of the CMBS market. We started increasing our CMBS exposure in 2009. And understand, we have maintained a very liquid balance sheet characterized by high quality assets and low leverage. If we move through next slide, I’m not going to spend much time there. It’s simply gives you a quick snapshot at overall risk that we are managing. I’d like to move to the next slide, which will be slide 11 portfolio equity allocation. What you can see here, is that we have allocated an increasing amount of capital to the agency CMBS sector since 2009. You can see that, we move from a 40% CMBS allocation in 2009 to a 61% allocation as of the first quarter of 2013 and then if you look to the right graph. You’ll see that we have 39% agency in 2009 increasing to 76% as of the first quarter. Our next slide, we really love here at Dynex which looks at our overall investment premium allocation. As you can see in 2009, really then was a war ship moment for us, when we saw value in premium, securities and we started to look forward of the cheap opportunities that existed in that sector, but as you can see into the first quarter 2013. We increased our overall premium exposure with a bulk of our premium exposure is covered by the CMBS sector, which has explicit prepayment protection. We then move on to the next slide. Let’s talk about CMBS and why we invest. One of the key reasons, is explicit call protection. Now what we put on this graph is really some real specifics of how the call protections works within the commercial sector. Personal loan is historical, they’ve always been written and structured legally with call protection for the lender. As such, we like to well define cash flows of the CMBS sector. In a little later on, in this presentation we will give you some ideas of that CMBS – the CMBS position anchors us in both the upgrade, and downgrade scenario. Next slide, if you look at CMBS IO. We highlighted this sector, simply from – and just the feedback we’ve gotten as we’ve been on the road talking to investors. Slightly help you to understand better the CMBS IO bonds, very different than RMBS IO. We like the CMBS IO because they’re short duration, predictable "bond like" cash flows. We don’t expect them to shorten as interest rates drop. We are not expecting them to extend as interest rates have move up. We have explicit call protection versus RMBS implicit call protection. This bond predictably rolls down yield curve. They have complimentary cash flow profiles to our RMBS investments and as we’ve seen – increase our overall book value there’s been a fantastic opportunity for credit spread tightening over the last two to three years. From the CMBS IO, ideal cash flow for CMBS for REIT such as Dynex. We are always looking for, how can we earn credit spread off, the short end of the yield curve. Move to our next slide and we want to just hammer a point here. Explicit versus implicit call protection. Again some of the buzz words throughout the market place happen to be specified pools, all call protected pools. There is only explicitly call protected security. Did I add, it only happens to be in the CMBS sector? The equity [ph] you don’t find may explicitly call protective RMBS bonds today. RMBS basically for the most part, Dynex uses a similar strategy of trying to select specified pools, focusing on loan balance, what’s the percentage of third-party originated loans, looking at high LTV loans, investor loans and trying to pick pools that will be correlated with slower prepayment speeds, but I can’t emphasize enough that implicit call protection is not explicit call protection. We do use that strategy, we like the CMBS strategy. We believe the CMBS strategy is a superior strategy and has proven as such within our portfolio. On the next slide, we will give you snapshot on one of our prepayments speeds event, with a macro factor. As you can see if you look at the MBA refinance index on the right, couple of key points. I’ve made in the past, we’re not having a 2003 type prepayment experience, even with the policy risk, we are still not expecting the 2003 type experience. However, over the last few years, the MBA refinancing index has increased. The government has put forward more programs such as the HARP program trying to increase the borrower’s ability to refinance, but how well we’ve done over the last couple of years. As you can see to the left, that ARM looks relatively flat. We do expect Hybrid ARMs to pay faster than the 30-year fixed rate securities. We do expect CMBS to pay slowly 30-year fixed rate securities and when we combine the two together. We have a relatively well behaved prepayment curve since the first quarter of 2011. With the higher curve being really on average of the last three months 24.8 CPR for the hybrids, 22 CPR for the whole agency portfolio and then when you consider the entire portfolio together, that’s agency plus non-agency with CPR of approximately 19.3%. That number is understated in the sense that, we are not reporting CPR for our CMBS IO positions, that’s really more technical in the sense, we can’t absolutely report that number with absolute confidence. What we do know is, that if we did report that number overall CPR numbers, levels would be lower. And just another example of the value of the way we structure the portfolio. We’ve been only be getting back between $40 million to $80 million per month in cash. Which limits our overall reinvestment risk? In terms of our portfolio details, you’re seeing this graph before, you’ve been following Dynex Capital to the left. We just want to reemphasize of the high credit quality of Dynex 91% AAA and then only approximately 8% in the A and AA area and then emphasize in the A area. Most of that paper [ph] was brought Freddie Mac K program again with the value of M [ph] at very disciplined agency program. We’ve found value in those securities, if you look to the right. You’ll see one of our key investments things. Which as how can we earn a solid double-digit return without taking too much extension risk? We continue to believe in it, as the majority of our portfolio will either mature or reset within 120 months or 10 years. Macro economic factors, we found it to be everyone’s mind. I’m not going to linger on this sheet too long, some of the key issues that you’ve seen before QE3, from our perspective global risk remains high, interest rates are low and range bound, volatility is low. Here’s the key with the overall macro environment. Government policy will drive returns. We started to say that in 2009, we still believe that today and as such, we try to operate within this environment to find value when appropriately. Let’s compare, how we allocate a capital in the fourth quarter 2012 versus 2013. And to fourth quarter 2012, we found no agency security to value. Our actual agency portfolio went down. In first quarter 2013, securities actually cheapened as rates moved up to 2%. We were able to find value, we increased our portfolio. We were ultimately able to issue a preferred security here in April, as a result of having found some attractive investment opportunities. So if you go the next slide, macro environment factors. What happens when QE3 ends? I’ve only identified the QE3 ends and that’s a certainty event. Some point I need you to fail and stop, I can’t predict the exact date when that will take place. However, one of the key parts of our portfolio is that, we expect CMBS should outperform because we expected that environment should be very supportive of the overall credit environment, which bolster commercial loans and commercial property values. We believe our short-duration assets should outperform as they grant in favor. We believe our premium seasoned assets should outperform and we believe overall prepayments will slow, which will lead to an ultimate widening in our net interest spread. What happens if we got to $1.25 in 10-year. We think it’s important to think through that scenario. We won’t predict the reasons why. We get there, with this amount of global liquidity being pumped in the system. One exogenous shot to actually take 50 basis points off of the current treasury curve. Again, CMBS having very well-defined cash flows, we expect being anchored with the CMBS sector to outperform. We do expect to see our short-duration assets to underperform, would expect prepayments beat the increase, but as we mentioned earlier. We’ve been very selective in terms of the pools that we’ve added to our portfolio, expecting relatively slower prepayment speeds and still not expecting the 2003 scenario. With that, I’m going to turn it back over to Tom and he’ll reemphasize the fact that we do believe Dynex offers unique value.

[Thomas Akin:]

Mind you, [ph] following slide is our Dynex value proposition, which hasn’t changed since Byron and I assumed, the CEO and President’s job or CIO job in 2008. We continue to believe that internally managed structure, align shareholders with the management team. We continue to believe that our diversified investment strategy, allowing us to choose the assets or have the greatest returns with the least amount of risk holds true today, as it did back then. Our low leverage, we have 6.0, our target leverage. We are slightly above that right now, but that remains consistent and we haven’t had any strategy drift over the last five years. We continue to have NOL, which allows us to pay little bit smaller dividend at this quarter, we earned $0.34, our dividend is $0.29 that allows us to put in the bank approximately $0.05 on a quarterly basis, that we look at as a long-term capital gain for our shareholders, that continues until 2020 and we plan and we work hard to utilize that. We continue to have a significant insider ownership as mentioned previously, we are owner operators. We care about the long-term and I think our performance over the last five years. Our consistency and our reliability has been shown after those results. And with that operator, I’d love to open it up for questions.

[Operator:]

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions). The first question we have comes from Douglas Harter of Credit Suisse. Please go ahead.

[Douglas Harter:]

Thanks. Byron I was hoping, you could talk to us about the types of returns you’re seeing on CMBS IO today, that would be helpful? Thanks.

[Byron Boston:]

Sure, return range is about 10% to 13% and there are ebbs and flows with this, just as I try to give that example, the agencies our last fall. It was really nothing to do in that sector, but then summed into first quarter there was plenty to do. As yield back up toward 2% obviously our financing holds that become. They’re up for more of an opportunity for return as the curve flattens. We’ve tended to find some of those returns decline, but we’re still in that 10% to 13% range. This is side, that you didn’t asked us but something we ponder all the time, what should be, what theoretically should be the return on an asset, such as this with the cash flow is so well-defined, such a short duration. And even though, we were able to go back to 2001 and earn ROE’s in some situations as high 20%. We still find, the 10% level even on the low end of that range still relatively attract to well-defined cash flow.

[Douglas Harter:]

Great and then Byron, you guys were relatively early on the K-series. Can you tell me, how you guys are thinking about the potential risk sharing on RMBS, side from the GSE’s?

[Byron Boston:]

So I’ll throw in a couple of points here, Doug and then we’ve got Todd Kuimjian on the phone also, which should be great to have you guys, get to know. Who’s been managing our CMBS book since that time and we still, when we start again back to an example again, a second ago. We started Freddie K program with ROE’s well over 20% and believer in this trend toward the strength of multifamily where you’re seeing, vacancies really come down and overall occupancy increasing and still at increasing demand. And even when people talk about household formation. Everyone understands now that household formation does not necessarily mean to buy a house, but also potentially to move out and rent an apartment. So the trend is still there, we believe there is more risk. we’ve said that in past conference calls, though we closer at it now simply because it’s been a long run, a ton over people are involved, as you can see we look and think housing starts at the multifamily sector, has continued to increase in terms of how these start, but we are sticking with our belief that this underline trend is and continues to still be there. Todd, do you want to chime in at all?

[Todd Kuimjian:]

Byron, I think you guys covered, but Doug is your question about RMBS or CMBS?

[Douglas Harter:]

Yes, I was thinking just drawing the parallels from your K-series investments. Would the new RMBS, what the risk sharing as that ultimately comes out be something that you guys would be interested in K-series?

[Byron Boston:]

I got it. Thanks Doug. I apologize to that, absolutely we are interested. So we (inaudible) when did you say this? I asked some you guys to pretend we’re going through our strategic planning process. I asked some of you guys, what are your opinions, so I might as well give you some ideas what do we think. Doug, we have a very positive outlook for the future, which includes what you asked about Doug. We are looking at the business opportunity, but what we see is, we see the federal government, not really at some point in the future, not wanting to own agency mortgage-backed securities. So that means, we give them the GSE’s portfolios and in some point it fits, stop selling them, that’s very simplistic. We believe that’s the business opportunity that includes all of agency sector fixed and public. Secondarily to that, is I think what you’re asking Doug is around residential credit. The agencies also, would like to lay off that residential credit. Some of which we’ve done in the K-program. We have been part of the private capital to providing credit support to Freddie Mac, in their Freddie Mac K-program. We’d like to do the same thing on the residential side, as the government comes for and starts to develop a program of laying off that credit. We do expect them to do something this year. I do expect whatever they do, probably be some form of derivative that may not be good REIT asset, but we do have room to add some of those assets on our portfolio and we’d hope to find, is that as that program evolves. The value of ensuring that they create, something that’s a good REIT asset will become a top priority. I know they’ve recognize it, they talked about it, they may not be able to create a perfect REIT asset this year, but I do expect that ultimately to happen. So do I think, there’ll be great returns as Freddie Mac goes to lay off this credit this year, no I don’t. And the reason is because there’s so much cash in system. So many people chasing assets, I believe there’ll be a food fight. I think every REIT will be involved. I think hedge funds will be involved. I think there’ll be multiple financial entities looking to invest in this, but I think you do want to be involved. So you can be prepared for as the world evolves in front of us, over the next coming two to five years. Other business opportunities, we’ll continue to see in the CMBS sector. MSRs will be great opportunity for some REITs. I’m not sure that its’ a great opportunity for Dynex Capital yet, but we do believe that residential IOs may be a great opportunity for Dynex sometime in the future.

[Douglas Harter:]

Great, thanks.

[Byron Boston:]

Is that enough or did I give you too much, I apologize for that.

[Douglas Harter:]

No, that’s perfect Byron. Thank you.

[Operator:]

Next we have, Trevor Cranston of JMP Securities.

[Trevor Cranston:]

Hi, thanks. I guess I was a little bit surprised to see, the improvement in book value this quarter given the moving rates. So can you maybe just talk a little bit about, what the primary driver of that was and how it’s progressed in quarter end given the reality in rates, we’ve seen?

[Byron Boston:]

Steve, why don’t you answer to that question? You have the specifics.

[Steve Benedetti:]

Sure, hi Trevor.

[Trevor Cranston:]

Hi.

[Steve Benedetti:]

Most of the gain, the change in book value would’ve come from two sources today or for the quarter. It’d have come first from, the CMBS IOs and spread tightening in that product and then it would have come as the curve steepened a little bit and rates sold off, it would have come out in swap book. Typically those move in opposite directions, but this quarter they moved in the same direction.

[Trevor Cranston:]

Okay and have you guys seen any material changes in the CMBS IOs spreads since quarter end?

[Todd Kuimjian:]

Maybe – this is Todd. Maybe 10 basis points tighter on top of the (inaudible).

[Trevor Cranston:]

Okay, that’s helpful. And then on the agency RMBS portfolio. The premium amortization went down a little bit this quarter. It looks like the CPR was fairly flat, was that driven by kind of slower lifetime assumptions as rates went higher?

[Steve Benedetti:]

Yes, I’m sorry Trevor. It’s couple things there, one is that the change in the forecast. So it’s little slower assumption given what the yield curve did during the quarter, but also with hybrid’s everyone has to remember that. You’re amortizing premium based on our model speeds. So if you extend your model speeds, your actual forecasted speeds are less than your model speeds, you’ll have positive EIR, there as well. So even though, CPRs might have been flat. If they’re less than modeled, we will have positive yield adjustments or reduce premium amortization as a result.

[Trevor Cranston:]

Got it, that makes sense. Okay and then last thing, it looks like you have about $300 million of swaps that have mature over the next 12 months or so, is there any of that matures in the second quarter and can you also just talk about kind of your general thoughts on replacing that run off in the thought book?

[Thomas Akin:]

That’s good question Trevor, what we’ve been doing. We’ve been taking the opportunity to in effect add swaps, based on that both swaps running off and an important point, that you should note about our portfolio, is we have been choosing to add swaps in the 10-year sector, so why the 10-year sector and the reason is, at some point again. I mentioned earlier, we expect the QE3 will mend, when it does I’ll expect the steeper yield curve. So I’ll expect more activity and more flow and more volatility on 10-year sector and that starts, we’ve been moving our hedges on in that sector. So I know, some of you guys look at what’s the percentage of swaps versus repo. I don’t really look at that much in the sense, unless I’m concerned about earnings percent and I think that’s way out in the future. Right now, I’m more concerned about book value and we’ve using two-year swaps which means that you’ll see that’s adding probably a lower total amount of swaps, but the actual duration in fact is, will be a more substantial.

[Trevor Cranston:]

Okay, thanks for the color.

[Operator:]

Next we have Mike Widner of KBW.

[Mike Widner:]

Hi, good morning, guys. Let me just ask you, one of things that we hear number of other REITs talking about today, on the non-agency side with changes with Fannie and Freddie is, getting into securitization business and basically buying whole loan pools and securitizing them and things along those lines. You guys really haven’t talked much about that, at least I don’t think you have and seemed to be much more on the will be bond buyers rather than, whole loan buyers and securitizers, I’m just wondering, if you can talk a little bit about that?

[Byron Boston:]

Sure, we have Mike one of the points that I was – wanted to dive in my first time, as with Dynex Capital is been in this business for 25 years, for the first 10 years of our existence. We originated loans or we purchased loans and we finance them via the securitization market and I’ve got personal here with long-term histories in that sector. We’re also well aware of how unwell that strategy became in the liquidity squeeze, not only in 1998, but also in 2000. We also understand that, it takes away tad bit of nimbleness, when you enter that realm and so we haven’t talked about it publicly, but we talked about it internally quite often, and so when you look at that chart and you see that, we crossed the multiple sectors. We actually look across at a broad sector of assets to invest. And so we think, there is a premium on liquidity right now. Why, because this is very unusual environment for this generation of bond investors. We haven’t seen anything like this and I’ve been at it since 1981. And so we think there is premium on liquidity, so I’m able to build a very liquid balance sheet with agency securities combining of CMBS and RMBS and generate a solid double-digit return that’s where we’ll be, until when I look at more yield liquid strategies. I’m expecting some pick up in ROE and I’ve been continually looking at this trend and I’m not seeing enough pick in ROE yet, for us to say let’s take on operational risk, plowing into a whole loan strategy, but it is not that we are not looking at it. When (inaudible) mentioned it publicly and you were involved I think, from interviews, since we did our strategic planning process, but at the moment we place a huge premium on a liquid balance sheet, which is what we have here at Dynex.

[Thomas Akin:]

And at the same time, Michael. We believe that you ought to have a long-term investment thought process and any decision we make, will be something we’ll make over the long-term. I think there are, minor amounts of short-term opportunity out there. I think it’s primarily driven by some people who pardon the analogy, but you’ve got a bunch of people that are carpenters and to them, everything is a nail and so almost by definition. You’re going to see that securitization talk, we’ve seen it previously. I don’t think it’s a good long-term opportunity quite yet, it may be in the future but it isn’t right now and we have plenty of alternatives opportunities in our investment set.

[Mike Widner:]

That certainly makes sense and I guess from the standpoint looking at alternatives, if you were different mortgage REIT that was focused on one particular asset class, then the decision probably makes a lot more sense, since that’s how you diversify is if you’re, you don’t have a lot of choices. You either add talent on the CMBS side or something or talent on originations and it sounds like you guys are more on the side of, would rather be diversified across assets, then being diversified against different sort of segments of the product chain, if you will?

[Thomas Akin:]

Correct. I think that’s our core expertise and again I just want to reemphasize, we are finding plenty of things to do in our core investment set. So we are not running out of ideas.

[Mike Widner:]

And just to be clear that, I mean it sounds like what you guys are communicating is that from historical experience and from the talent you have on staff, that if the opportunity there suddenly becomes a whole lot better and suddenly you can get, 22% ROEs on non-agency, subprime mortgage originations, if Bernanke keeps pushing people into credit risk, just throwing it out there. You might take advantage of opportunities, if the ROE threshold is good enough and dealt between what you’re currently doing is high enough, you’re just not seeing it today.

[Thomas Akin:]

We’ve done it previously, we have people that are reverse engineering all of these deals. We are looking at them, it’s not anything that is something we’re afraid to do or can’t do and quite frankly, when the opportunity rises I’m looking forward to it, but it just appears that we’re like Byron commented, this is a uncertain environment massively uncertain environment and anything could happen over the next day, month, year and what I think you want to do is maintain, what we describe is nimbleness, the flexibility and that’s been the byword of our investment strategy for the last five years. I think it’s going to stay that way for a while.

[Mike Widner:]

Makes good sense to me. Thanks for the comments and color and congrats on excellent quarter.

[Thomas Akin:]

Thanks Michael.

[Operator:]

(Operator Instructions). But appears that we have no further questions at this. We will conclude our question-and-answer session. I’d now like to turn the conference back over to management for any closing remarks. Gentlemen?

[Thomas Akin:]

Great, I want to thank everybody for attending our call this morning. We realize, this is very busy morning, very busy week. There is a lot going on in the space and we appreciate your time. What we try to deliver today, was a discussion of the long-term nature of the Dynex value proposition. The fact that we have developed, what we think a consistent portfolio that will hold up over the long-term. I think our results indicate that, we feel very confident and very positive about our future and we look forward to seeing all of you, at our annual meeting coming up in June in New York at our next conference call. Thanks much for everyone.

[Operator:]

And we thank you sir and to the rest of management for your time. The conference has now concluded. We thank you all for attending today’s presentation. At this time, you may disconnect your line. Thank you and take care everyone.