Dynex Capital, Inc. ("Dynex" or the "Company") (NYSE: DX)
reported its first quarter 2023 financial results today. Management
will host a call today at 10:00 a.m. Eastern Time to discuss the
results and business outlook. Details to access the call can be
found below under "Earnings Conference Call."
Financial Performance
Summary
- Book value per common share of $13.80 as of March 31, 2023
- Dividends declared of $0.39 per common share for the first
quarter of 2023
- Total economic loss of $(0.54) per common share, or (3.7)% of
beginning book value
- Comprehensive loss of $(0.54) per common share and net loss of
$(0.81) per common share
- Liquidity in excess of $554 million in cash and unencumbered
assets
- Leverage including to-be-announced ("TBA") securities at cost
was 7.8 times shareholders' equity
Management Remarks
“Our portfolio decisions are a testament to our unwavering
commitment to financial prudence and strategic planning, enabling
us to confidently navigate through the current market," said Byron
L. Boston, Chief Executive Officer. "Our strong liquidity position,
which is comprised mostly of cash - the most liquid asset, and
easily financeable Agency mortgage-backed securities, gives us the
flexibility to act swiftly on potential opportunities that may
arise. We remain diligent in managing our balance sheet,
maintaining resilience, and ensuring that we capitalize on the
great return opportunities available in this environment. We manage
our business for the long term, and we are leaning into our
collective experience and discipline to guide our shareholders
through an unprecedented macroeconomic environment."
Earnings Conference Call
As previously announced, the Company's conference call to
discuss these results is today at 10:00 a.m. Eastern Time and may
be accessed via telephone in the United States by dialing
1-888-330-2022 and providing the ID 1957092 or by live audio
webcast by clicking the "Webcast" button in the “Current Events”
section on the homepage of the Company's website
(www.dynexcapital.com), which includes a slide presentation. To
listen to the live conference call via telephone, please dial in at
least 10 minutes before the call begins. An archive of the webcast
will be available on the Company's website approximately two hours
after the live call ends.
Consolidated Balance Sheets
($s in thousands except per share
data)
March 31, 2023
December 31, 2022
ASSETS
(unaudited)
Cash and cash equivalents
$
279,028
$
332,035
Cash collateral posted to
counterparties
114,594
117,842
Mortgage-backed securities (including
pledged of $3,012,970 and $2,810,957, respectively)
3,296,784
3,112,705
Due from counterparties
115,323
10,348
Derivative assets
37,179
7,102
Accrued interest receivable
17,234
15,260
Other assets, net
9,716
9,942
Total assets
$
3,869,858
$
3,605,234
LIABILITIES AND SHAREHOLDERS’
EQUITY
Liabilities:
Repurchase agreements
$
2,937,124
$
2,644,405
Due to counterparties
24,918
4,159
Derivative liabilities
—
22,595
Cash collateral posted by
counterparties
27,125
435
Accrued interest payable
12,806
16,450
Accrued dividends payable
9,214
9,103
Other liabilities
3,843
6,759
Total liabilities
3,015,030
2,703,906
Shareholders’ equity:
Preferred stock
$
107,843
$
107,843
Common stock
539
536
Additional paid-in capital
1,361,000
1,357,514
Accumulated other comprehensive loss
(166,553
)
(181,346
)
Accumulated deficit
(448,001
)
(383,219
)
Total shareholders' equity
854,828
901,328
Total liabilities and shareholders’
equity
$
3,869,858
$
3,605,234
Preferred stock aggregate liquidation
preference
$
111,500
$
111,500
Book value per common share
$
13.80
$
14.73
Common shares outstanding
53,876,914
53,637,095
Consolidated
Comprehensive Statements of Income (Loss)
(unaudited)
Three Months Ended
($s in thousands except per share
data)
March 31, 2023
December 31, 2022
Interest income
$
30,846
$
30,528
Interest expense
(31,308
)
(24,320
)
Net interest (expense) income
(462
)
6,208
Realized (loss) gain on sale of
investments, net
(23,315
)
450
Unrealized gain on investments, net
57,120
32,529
(Loss) gain on derivative instruments,
net
(67,267
)
12,437
General and administrative expenses
(7,372
)
(7,898
)
Other operating expense, net
(426
)
(438
)
Net (loss) income
(41,722
)
43,288
Preferred stock dividends
(1,923
)
(1,923
)
Net (loss) income to common
shareholders
$
(43,645
)
$
41,365
Other comprehensive income:
Unrealized gain on available-for-sale
investments, net
14,793
15,320
Reclassification of realized gain on
available-for-sale investments
—
(37
)
Total other comprehensive income
14,793
15,283
Comprehensive (loss) income to common
shareholders
$
(28,852
)
$
56,648
Net (loss) income per common
share-basic
$
(0.81
)
$
0.85
Net (loss) income per common
share-diluted
$
(0.81
)
$
0.85
Weighted average common shares-basic
53,824
48,541
Weighted average common shares-diluted
53,824
48,541
Dividends declared per common share
$
0.39
$
0.39
Results Discussion
The Company's book value per common share of $13.80 as of March
31, 2023 declined $(0.93) from December 31, 2022 primarily due to
spread widening on MBS as a result of turmoil in the banking sector
during the first quarter of 2023. The impact of spread widening on
the fair value of the Company's investment portfolio muted the
benefit gained from the decline in the 10-year U.S. Treasury rate
during March 2023. The decline in the 10-year U.S. Treasury rate
also resulted in unrealized losses in the fair value of the
Company's interest rate hedges. The resulting decline in fair value
of the Company's interest rate hedges, net of its investment
portfolio, of $(18.7) million comprised the majority of the
Company's comprehensive loss to common shareholders of $(28.9)
million, or $(0.54) per common share, for the first quarter of
2023. The Company realized gains of $89.0 million from its interest
rate hedges in February 2023, which are included in its GAAP
earnings but will not become distributable until amortized into
taxable income over time. Further discussion of the interest rate
hedge gains is provided below under "Hedging Portfolio." In
addition to spread widening, the Company's earnings continue to be
impacted by increasing borrowing costs as the Federal Reserve
continues raising the U.S. Federal Funds Rate in its efforts to
tame inflation. The Company's interest expense exceeded its
interest income by $(0.5) million for the first quarter of
2023.
The following table summarizes the changes in the Company's
financial position during the first quarter of 2023:
($s in thousands except per share
data)
Net Changes in Fair
Value
Comprehensive Income
(Loss)
Common Book Value
Rollforward
Per Common Share (1)
Balance as of December 31, 2022
(1)
$
789,828
$
14.73
Net interest income
$
(462
)
TBA drop income
1,457
General & administrative and other
operating expenses
(7,798
)
Preferred stock dividends
(1,923
)
Changes in fair value:
MBS and loans
$
48,599
TBAs
41,906
U.S. Treasury futures
(106,373
)
Options on U.S. Treasury futures
(4,258
)
Total net change in fair value
(20,126
)
Total comprehensive income to common
shareholders
(28,852
)
(0.54
)
Capital transactions:
Net proceeds from stock issuance (2)
3,489
—
Common dividends declared
(21,137
)
(0.39
)
Balance as of March 31, 2023
(1)
$
743,328
$
13.80
(1)
Amounts represent total shareholders'
equity less the aggregate liquidation preference of the Company's
preferred stock of $111,500.
(2)
Net proceeds from common stock issuances
include $2.8 million from at-the-market (:ATM") issuances and $0.7
million from amortization of share-based compensation.
The following table provides detail on the Company's MBS
investments, including TBA securities as of March 31, 2023:
($ in millions)
Par Value
Total Par Value
Total Estimated Fair
Value
% of Portfolio
Pools
TBA
Agency RMBS:
2.0% coupon
$
1,051,974
$
—
$
1,051,974
$
875,432
12.5
%
2.5% coupon
649,246
—
649,246
564,171
8.0
%
4.0% coupon
319,350
547,000
866,350
831,648
11.9
%
4.5% coupon
909,477
460,000
1,369,477
1,347,149
19.2
%
5.0% coupon
321,515
2,345,000
2,666,515
2,659,406
37.9
%
5.5% coupon
—
400,000
400,000
404,000
5.8
%
Total Agency RMBS
$
3,251,563
$
3,752,000
$
7,003,562
$
6,681,806
95.3
%
Agency CMBS
$
125,220
$
—
$
125,220
$
119,474
1.7
%
Agency CMBS IO
(1
)
—
(1
)
161,446
2.3
%
Non-Agency CMBS IO
(1
)
—
(1
)
48,838
0.7
%
Non-Agency RMBS
191
—
191
136
—
%
Total
$
3,376,974
$
3,752,000
$
7,128,973
$
7,011,700
100.0
%
(1)
CMBS IO do not have underlying par
values.
The following table provides detail on the Company's repurchase
agreement borrowings outstanding as of the dates indicated:
March 31, 2023
December 31, 2022
Remaining Term to Maturity
Balance
Weighted Average
Rate
WAVG Original Term to
Maturity
Balance
Weighted Average
Rate
WAVG Original Term to
Maturity
($s in thousands)
Less than 30 days
$
1,288,034
4.96
%
35
$
858,161
4.44
%
42
30 to 90 days
1,254,958
4.88
%
78
1,786,244
4.06
%
104
91 to 180 days
394,132
4.95
%
183
—
—
%
—
Total
$
2,937,124
4.92
%
73
$
2,644,405
4.18
%
84
Leverage based on repurchase agreement amounts outstanding was
3.4 times total shareholders' equity as of March 31, 2023 compared
to 2.9 times as of December 31, 2022. Total leverage including the
cost basis of TBAs was 7.8 times shareholders' equity as of March
31, 2023 compared to 6.1 times as of December 31, 2022.
The following table provides information about the performance
of the Company's MBS (including TBA securities) and repurchase
agreement financing for the first quarter of 2023 compared to the
prior quarter:
Three Months Ended
March 31, 2023
December 31, 2022
($s in thousands)
Interest
Income/Expense
Average Balance (1)(2)
Effective Yield/ Cost
of Funds (3)(4)
Interest
Income/Expense
Average Balance (1)(2)
Effective Yield/ Cost
of Funds (3)(4)
Agency RMBS
$
23,526
$
3,204,610
2.94
%
$
22,777
$
3,226,876
2.82
%
Agency CMBS
884
128,625
2.80
%
943
136,303
2.93
%
CMBS IO(5)
2,542
230,033
4.04
%
3,869
247,071
5.71
%
Non-Agency MBS and other
40
2,700
4.98
%
31
3,140
4.18
%
26,992
3,565,968
3.00
%
27,620
3,613,390
3.03
%
Cash equivalents
3,854
2,908
Total interest income
$
30,846
$
30,528
Repurchase agreement financing
(31,308
)
2,713,481
(4.62
%
(24,320
)
2,727,274
(3.49
)%
Net interest (expense) income/net interest
spread
$
(462
)
(1.62
)%
$
6,208
(0.46
)%
TBA securities (6)
1,457
3,291,617
0.18
%
5,522
2,532,584
0.85
%
Adjusted net interest income/adjusted net
interest spread (7)
$
995
(0.75
)%
$
11,730
0.07
%
(1)
Average balance for assets is calculated
as a simple average of the daily amortized cost and excludes
securities pending settlement if applicable.
(2)
Average balance for liabilities is
calculated as a simple average of the daily borrowings outstanding
during the period.
(3)
Effective yield is calculated by dividing
interest income by the average balance of asset type outstanding
during the reporting period. Unscheduled adjustments to
premium/discount amortization/accretion, such as for prepayment
compensation, are not annualized in this calculation.
(4)
Cost of funds is calculated by dividing
annualized interest expense by the total average balance of
borrowings outstanding during the period with an assumption of 360
days in a year.
(5)
CMBS IO ("Interest only") includes Agency
and non-Agency issued securities.
(6)
Drop income from TBA securities is
calculated by multiplying the notional amount of the TBA dollar
roll positions by the difference in price between two TBA
securities with the same terms but different settlement dates.
(7)
See "Use of Non-GAAP Financial Measures"
below. Adjusted net interest spread includes the impact from TBA
drop income of 87 basis points for the first quarter of 2023
compared to 53 basis points for the fourth quarter of 2022.
Hedging Portfolio
The Company's realized gains and losses on its interest rate
hedges are recognized in its GAAP earnings upon maturity or
termination of the derivative instrument, but are not included in
the Company's earnings available for distribution ("EAD"), a
non-GAAP measure, and are not recognized in taxable income during
the same period. Because these derivative instruments are
designated for tax purposes as interest rate hedges, the realized
gains and losses are instead amortized into the Company's REIT
taxable income over the original periods hedged by those
derivatives. On a tax basis, the benefit expected to be recognized
in taxable income for the first quarter of 2023 is estimated to be
$18.2 million, or $0.34 per average common share outstanding, which
is not included in the Company's EAD of $(8.7) million, or $(0.16)
per common share. The Company's remaining estimated net deferred
tax hedge gains from its interest rate hedging portfolio was $766.0
million as of March 31, 2023. These hedge gains will be part of the
Company's future distribution requirements along with net interest
income and other ordinary gains and losses in future periods. The
table below provides the projected amortization of the Company's
net deferred tax hedge gains that may be recognized as taxable
income over the periods indicated given conditions known as of
March 31, 2023; however, uncertainty inherent in the forward
interest rate curve makes future realized gains and losses
difficult to estimate, and as such, these projections are subject
to change for any given period.
Projected Period of Recognition for
Remaining Hedge Gains, Net
March 31, 2023
($ in thousands)
Second quarter 2023
$
20,624
Third quarter 2023
20,658
Fourth quarter 2023
20,749
Fiscal year 2024
85,219
Fiscal year 2025 and thereafter
618,778
$
766,028
As of March 31, 2023, the Company held short positions of $4.4
billion in 10-year U.S. Treasury futures, $900.0 million in 5-year
U.S. Treasury futures, and held put options on 10-year U.S.
Treasury futures of $250.0 million.
Use of Non-GAAP Financial
Measures
In evaluating the Company’s financial and operating performance,
management considers book value per common share, total economic
return to common shareholders, and other operating results
presented in accordance with GAAP as well as certain non-GAAP
financial measures, which include the following: EAD to common
shareholders, adjusted net interest income and the related metric
adjusted net interest spread. Management believes these non-GAAP
financial measures may be useful to investors because they are
viewed by management as a measure of the investment portfolio’s
return based on the effective yield of its investments, net of
financing costs and, with respect to EAD, net of other normal
recurring operating income and expenses. Drop income generated by
TBA dollar roll positions, which is included in "gain (loss) on
derivatives instruments, net" on the Company's consolidated
statements of comprehensive income, is included in these non-GAAP
financial measures because management views drop income as the
economic equivalent of net interest income (interest income less
implied financing cost) on the underlying Agency security from
trade date to settlement date.
However, these non-GAAP financial measures are not a substitute
for GAAP earnings and may not be comparable to similarly titled
measures of other REITs because they may not be calculated in the
same manner. Furthermore, though EAD is one of several factors
management considers in determining the appropriate level of
distributions to common shareholders, it should not be utilized in
isolation, and it is not an accurate indication of the Company’s
REIT taxable income nor its distribution requirements in accordance
with the Internal Revenue Code of 1986, as amended.
Reconciliations of the non-GAAP financial measures used in this
earnings release to the most directly comparable GAAP financial
measures are presented below.
Three Months Ended
($s in thousands except per share
data)
March 31, 2023
December 31, 2022
Comprehensive (loss) income to common
shareholders
$
(28,852
)
$
56,648
Less:
Change in fair value of investments, net
(1)
(48,599
)
(48,262
)
Change in fair value of derivative
instruments, net (2)
68,725
(6,915
)
EAD to common shareholders
$
(8,726
)
$
1,471
Weighted average common shares
53,824
48,541
EAD per common share
$
(0.16
)
$
0.03
Net interest (expense) income
$
(462
)
$
6,208
TBA drop income (3)
1,457
5,522
Adjusted net interest income
$
995
$
11,730
General and administrative expenses
(7,372
)
(7,898
)
Other operating expense, net
(426
)
(438
)
Preferred stock dividends
(1,923
)
(1,923
)
EAD to common shareholders
$
(8,726
)
$
1,471
Net interest spread
(1.62
)%
(0.46
)%
Impact from TBA drop income (4)
0.87
%
0.53
%
Adjusted net interest spread
(0.75
)%
0.07
%
(1)
Amount includes realized and unrealized
gains and losses from the Company's MBS and other investments.
(2)
Amount includes unrealized gains and
losses from changes in fair value of derivatives and realized gains
and losses on terminated derivatives and excludes TBA drop
income.
(3)
TBA drop income is calculated by
multiplying the notional amount of the TBA dollar roll positions by
the difference in price between two TBA securities with the same
terms but different settlement dates.
(4)
The Company estimates TBA implied net
interest spread to be 0.18% and 0.85% for the three months ended
March 31, 2023 and December 31, 2022, respectively.
Forward Looking
Statements
This release contains “forward-looking statements” within the
meaning of the Private Securities Litigation Reform Act of 1995.
The words “believe,” “expect,” “forecast,” “anticipate,”
“estimate,” “project,” “plan,” "may," "could," "will," "continue"
and similar expressions identify forward-looking statements that
are inherently subject to risks and uncertainties, some of which
cannot be predicted or quantified. Forward-looking statements in
this release, including statements made in Mr. Boston's quotes, may
include, without limitation, statements regarding the Company's
financial performance in future periods, future interest rates,
future market credit spreads, management's views on expected
characteristics of future investment and macroeconomic
environments, central bank strategies, prepayment rates and
investment risks, future investment strategies, future leverage
levels and financing strategies, the use of specific financing and
hedging instruments and the future impacts of these strategies,
future actions by the Federal Reserve, and the expected performance
of the Company's investments. The Company's actual results and
timing of certain events could differ materially from those
projected in or contemplated by the forward-looking statements as a
result of unforeseen external factors. These factors may include,
but are not limited to, volatility and disruption in national and
international financial markets; ability to find suitable
investment opportunities; changes in economic conditions, including
an increased rate of inflation; changes in interest rates and
interest rate spreads, including the repricing of interest-earning
assets and interest-bearing liabilities; the Company’s investment
portfolio performance particularly as it relates to cash flow,
prepayment rates and credit performance; the impact on markets and
asset prices from changes in the Federal Reserve’s policies
regarding purchases of Agency residential and Agency commercial
mortgage-backed securities and U.S. Treasuries; actual or
anticipated changes in Federal Reserve monetary policy or the
monetary policy of other central banks; adverse reactions in U.S.
financial markets related to actions of foreign central banks or
the economic performance of foreign economies including in
particular China, Japan, the European Union, and the United
Kingdom; uncertainty concerning the long-term fiscal health and
stability of the United States; the cost and availability of
financing, including the future availability of financing due to
changes to regulation of, and capital requirements imposed upon,
financial institutions; the cost and availability of new equity
capital; changes in the Company’s use of leverage; changes to the
Company’s investment strategy, operating policies, dividend policy
or asset allocations; the quality of performance of third-party
servicer providers of the Company’s loans and loans underlying
securities owned by the Company; the level of defaults by borrowers
on loans the Company has securitized or otherwise is invested
through its ownership of MBS; changes in the Company’s industry;
increased competition; changes in government regulations affecting
the Company’s business and/or status as a real estate investment
trust; changes or volatility in the repurchase agreement financing
markets and other credit markets; changes to the market for
interest rate swaps and other derivative instruments, including
changes to margin requirements on derivative instruments;
uncertainty regarding continued government support of the U.S.
financial system and U.S. housing and real estate markets or reform
of the U.S. housing finance system, including the resolution of the
conservatorship of Fannie Mae and Freddie Mac; the composition of
the Federal Reserve; systems failures or cybersecurity incidents;
catastrophes affecting global markets; and exposure to current and
future claims and litigation. For additional information on risk
factors that could affect the Company's forward-looking statements,
see the Company's Annual Report on Form 10-K for the year ended
December 31, 2022, and other reports filed with and furnished to
the Securities and Exchange Commission.
All forward-looking statements are qualified in their entirety
by these and other cautionary statements that the Company makes
from time to time in its filings with the Securities and Exchange
Commission and other public communications. The Company cannot
assure the reader that it will realize the results or developments
the Company anticipates or, even if substantially realized, that
they will result in the consequences or affect the Company or its
operations in the way the Company expects. Forward-looking
statements speak only as of the date made. The Company undertakes
no obligation to update or revise any forward-looking statements to
reflect events or circumstances arising after the date on which
they were made, except as otherwise required by law. As a result of
these risks and uncertainties, readers are cautioned not to place
undue reliance on any forward-looking statements included herein or
that may be made elsewhere from time to time by, or on behalf of,
the Company.
Company Description
Dynex Capital, Inc. is a financial services company committed to
ethical stewardship of stakeholders' capital, employing
comprehensive risk management and disciplined capital allocation to
generate dividend income and long-term total returns through the
diversified financing of real estate assets in the United States.
Dynex operates as a REIT and is internally managed to maximize
stakeholder alignment. Additional information about Dynex Capital,
Inc. is available at www.dynexcapital.com.
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version on businesswire.com: https://www.businesswire.com/news/home/20230424005516/en/
Alison Griffin (804) 217-5897
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