Description

Dynex is a mortgage REIT which blew up in the late 1990's. It has not been making new loans since that time and has concentrated its efforts on cleaning up its portfolio. In May the company sold its portfolio of mobile home loans. I believe that, with this sale, the company will move forward or be bought out.

At March 31, 2005, the company had cash of $60 mil, $324 mil of single family mortgages, $621 mil of commercial mortgages, and $338 mil of manufactured housing loans and securities, and $82 mil of other loans, securities and investments for total assets of $1.34 bil. Against those assets were $1.13 bil of non-recourse financing and $59 mil of recourse financing. In addition, there are 5,628,737 shares of 9 1/2% convertible preferred stock outstanding. The preferred shares are convertible into common 1:1 at $10. The preferred is currently callable at $10. I expect the preferred to be called as it is high-cost money.

The manufactured housing portfolio was sold for a net of $9 mil. The sale will remove $372 mil of assets from the books and $369 mil of liabilities. The company will be left with $968 mil of assets, $826 mil of liabilities and $55 mil of preferred. Book equity will be $96.5 mil or $7.94 / share. In addition, the company has a $130+ mil NOL which can be used by either the company or an acquirer to convert ordinary income into capital gains. Valued at 5% of face, the NOL adds another $0.64 to book for a total of $8.58 / share.

Net interest income was $4.4 mil in the 1st qtr. and S G & A was $1.5 mil. Portfolio cash flow was $6.6 mil. The company recently used $25 mil of its cash to restructure a single-family securitization at a lower interest rate. With cash accumulating, the 9 1/2% preferred should be retired. At that point, the common will be the only beneficiary of the company's cash flow and earnings.

Dynex is not dissimilar to Criimmi MAE. Criimi MAE was also recently selling at book with a large NOL. It has received merger / takeover proposals. It now trades at a 25%+ premium to book. I believe that the same will happen with Dynex.

Catalyst

10-Q for 2nd qtr will show a cleaned-up balance sheet and earnings, including the gain on the mobile home portflio, of ~$1.00 per share. Either Mr. Market bids it up, or someone will take it over.