Dynex Capital, Inc. ("Dynex" or the "Company") (NYSE: DX)
reported its second 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
- Total economic return of $0.79 per common share, or 5.7% of
beginning book value
- Book value per common share increased $0.40 to $14.20 as of
June 30, 2023
- Dividends declared of $0.39 per common share for the second
quarter of 2023
- Comprehensive income of $0.79 per common share and net income
of $0.97 per common share
- Purchased $2.2 billion of higher coupon Agency residential
mortgage-backed securities ("RMBS") during the second quarter
- Average balance of interest-earning assets increased 20% and
average balance of to-be-announced ("TBA") securities declined 28%
compared to the first quarter
- Liquidity in excess of $561.5 million in cash and unencumbered
assets as of June 30, 2023
- Leverage including TBA securities at cost was 7.7 times
shareholders' equity as of June 30, 2023
Management Remarks
“In today's financial markets, knowing and trusting who is
managing your money is critically important,” said Byron L. Boston,
Chief Executive Officer. “We manage our business for the long term,
and we are leaning into our experience and discipline to guide
Dynex Capital through an unprecedented global environment. Our
strong liquidity position gives us the flexibility to act swiftly
on potential opportunities as they arise. We remain diligent in
managing our balance sheet, and we are positioned to capitalize on
the great return opportunities available in this environment.”
Earnings Conference Call
As previously announced, the Company's conference call to
discuss these results is today at 10:00 a.m. Eastern Time and may
be accessed via telephone in the United States by dialing
1-888-330-2022 and providing the ID 1957092 or by live audio
webcast by clicking the "Webcast" button in the “Current Events”
section on the homepage of the Company's website
(www.dynexcapital.com), which includes a slide presentation. To
listen to the live conference call via telephone, please dial in at
least 10 minutes before the call begins. An archive of the webcast
will be available on the Company's website approximately two hours
after the live call ends.
Consolidated
Balance Sheets
($s in thousands except per share
data)
June 30, 2023
March 31, 2023
December 31, 2022
ASSETS
(unaudited)
(unaudited)
Cash and cash equivalents
$
300,108
$
279,028
$
332,035
Cash collateral posted to
counterparties
132,646
114,594
117,842
Mortgage-backed securities (including
pledged of $4,441,105, $3,012,970, and $2,810,957,
respectively)
5,059,308
3,296,784
3,112,705
Due from counterparties
1,364
115,323
10,348
Derivative assets
174
37,179
7,102
Accrued interest receivable
22,988
17,234
15,260
Other assets, net
9,367
9,716
9,942
Total assets
$
5,525,955
$
3,869,858
$
3,605,234
LIABILITIES AND SHAREHOLDERS’
EQUITY
Liabilities:
Repurchase agreements
$
4,201,901
$
2,937,124
$
2,644,405
Due to counterparties
371,576
24,918
4,159
Derivative liabilities
23,621
—
22,595
Cash collateral posted by
counterparties
—
27,125
435
Accrued interest payable
33,794
12,806
16,450
Accrued dividends payable
9,440
9,214
9,103
Other liabilities
4,661
3,843
6,759
Total liabilities
4,644,993
3,015,030
2,703,906
Shareholders’ equity:
Preferred stock
$
107,843
$
107,843
$
107,843
Common stock
542
539
536
Additional paid-in capital
1,365,484
1,361,000
1,357,514
Accumulated other comprehensive loss
(175,996
)
(166,553
)
(181,346
)
Accumulated deficit
(416,911
)
(448,001
)
(383,219
)
Total shareholders' equity
880,962
854,828
901,328
Total liabilities and shareholders’
equity
$
5,525,955
$
3,869,858
$
3,605,234
Preferred stock aggregate liquidation
preference
$
111,500
$
111,500
$
111,500
Book value per common share
$
14.20
$
13.80
$
14.73
Common shares outstanding
54,204,319
53,876,914
53,637,095
Consolidated
Comprehensive Statements of Income (Loss)
(unaudited)
Six Months Ended
Three Months Ended
($s in thousands except per share
data)
June 30, 2023
March 31, 2023
June 30, 2023
Interest income
$
42,212
$
30,846
$
73,058
Interest expense
(45,142
)
(31,308
)
(76,450
)
Net interest expense
(2,930
)
(462
)
(3,392
)
Realized loss on sales of investments,
net
(51,601
)
(23,315
)
(74,916
)
Unrealized gain on investments, net
488
57,120
57,609
Gain (loss) on derivative instruments,
net
116,012
(67,267
)
48,745
General and administrative expenses
(7,197
)
(7,372
)
(14,569
)
Other operating expense, net
(435
)
(426
)
(861
)
Net income (loss)
54,337
(41,722
)
12,616
Preferred stock dividends
(1,923
)
(1,923
)
(3,847
)
Net income (loss) to common
shareholders
$
52,414
$
(43,645
)
$
8,769
Other comprehensive income:
Unrealized (loss) gain on
available-for-sale investments, net
(9,443
)
14,793
$
5,350
Total other comprehensive (loss)
income
(9,443
)
14,793
5,350
Comprehensive income (loss) to common
shareholders
$
42,971
$
(28,852
)
$
14,119
Net income (loss) per common
share-basic
$
0.97
$
(0.81
)
$
0.16
Net income (loss) per common
share-diluted
$
0.96
$
(0.81
)
$
0.16
Weighted average common shares-basic
54,137
53,824
53,981
Weighted average common shares-diluted
54,585
53,824
54,327
Dividends declared per common share
$
0.39
$
0.39
$
0.78
Results Discussion
The Company's book value per common share increased $0.40 during
the second quarter to $14.20 as of June 30, 2023. Higher interest
rates resulted in gains of $170.0 million from the Company's
interest rate hedges, primarily its 5-year U.S. Treasury futures,
which offset the impact of higher interest rates on the fair value
of the Company's investment portfolio. Though spreads on higher
coupon assets widened considerably during the second quarter, the
impact on the fair value of the Company's investment portfolio was
muted by tighter spreads on its lower coupon assets. The increase
in the fair value of the Company's interest rate hedges, net of its
investments, was $55.5 million, making it the primary component of
the Company's comprehensive income to common shareholders of $43.0
million. The Company continues to maintain its focus on protecting
book value through disciplined risk management while its net
interest earnings continue to be impacted by increasing borrowing
costs as the Federal Reserve continues efforts to tame inflation by
raising the U.S. Federal Funds Rate.
The following table summarizes the changes in the Company's
financial position during the second quarter of 2023:
($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 March 31, 2023
(1)
$
743,328
$
13.80
Net interest expense
$
(2,930
)
General & administrative and other
operating expenses
(7,632
)
Preferred stock dividends
(1,923
)
Changes in fair value:
MBS and loans
$
(60,556
)
TBAs
(53,996
)
U.S. Treasury futures
171,219
Options on U.S. Treasury futures
(1,211
)
Total net change in fair value
55,456
Total comprehensive income to common
shareholders
42,971
0.79
Capital transactions:
Net proceeds from stock issuance (2)
4,487
—
Common dividends declared
(21,324
)
(0.39
)
Balance as of June 30, 2023 (1)
$
769,462
$
14.20
(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 $3.5 million from at-the-market (:ATM") issuances and $0.9
million from amortization of share-based compensation.
The following table provides detail on the Company's MBS
investments, including TBA securities as of June 30, 2023:
June 30, 2023
March 31, 2023
($ in millions)
Par Value
Fair Value
% of
Portfolio
Par Value
Fair Value
% of
Portfolio
30-year fixed rate RMBS:
2.0% coupon
$
738,366
$
607,450
8.5
%
$
1,051,974
$
875,432
12.5
%
2.5% coupon
634,256
542,554
7.6
%
649,246
564,171
8.0
%
4.0% coupon
368,367
348,785
4.9
%
319,350
308,733
4.4
%
4.5% coupon
1,117,339
1,078,938
15.0
%
909,477
896,708
12.8
%
5.0% coupon
1,554,427
1,528,286
21.3
%
321,515
321,846
4.6
%
5.5% coupon
647,735
647,024
9.0
%
—
—
—
%
TBA 4.0%
357,000
337,357
4.7
%
547,000
522,915
7.5
%
TBA 4.5%
440,000
422,881
5.9
%
460,000
450,441
6.4
%
TBA 5.0%
1,102,000
1,079,702
15.0
%
2,345,000
2,337,560
33.3
%
TBA 5.5%
277,000
275,701
3.8
%
400,000
404,000
5.8
%
Total Agency RMBS
$
7,236,490
$
6,868,678
95.7
%
$
7,003,562
$
6,681,806
95.3
%
Agency CMBS
$
121,931
$
115,136
1.6
%
$
125,220
$
119,474
1.7
%
Agency CMBS IO
(1)
150,328
2.1
%
(1)
161,446
2.3
%
Non-Agency CMBS IO
(1)
40,689
0.6
%
(1)
48,838
0.7
%
Non-Agency RMBS
173
118
—
%
191
136
—
%
Total
$
7,358,593
$
7,174,949
100.0
%
$
7,128,973
$
7,011,700
100.0
%
(1) CMBS IO do not have underlying par values.
As of June 30, 2023, over 95% of the Company's investments were
comprised of Agency RMBS, including TBA securities and less than 5%
are Agency CMBS, Agency CMBS IO, and non-Agency CMBS IO. During the
second quarter of 2023, the Company purchased $2.2 billion of
higher coupon Agency RMBS and reduced its holdings of TBA
securities and lower coupon Agency RMBS.
The following table provides detail on the Company's repurchase
agreement borrowings outstanding as of the dates indicated:
June 30, 2023
March 31, 2023
Remaining Term to Maturity
Balance
Weighted Average
Rate
WAVG Original Term to
Maturity
Balance
Weighted Average
Rate
WAVG Original Term to
Maturity
($s in thousands)
Less than 30 days
$
1,069,565
5.27
%
50
$
1,288,034
4.96
%
35
30 to 90 days
2,039,943
5.24
%
130
1,254,958
4.88
%
78
91 to 180 days
1,092,393
5.30
%
175
394,132
4.95
%
183
Total
$
4,201,901
5.26
%
122
$
2,937,124
4.92
%
73
The following table provides information about the performance
of the Company's MBS (including TBA securities) and repurchase
agreement financing for the second quarter of 2023 compared to the
prior quarter:
Three Months Ended
June 30, 2023
March 31, 2023
($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
$
34,699
$
3,931,617
3.53
%
$
23,526
$
3,204,610
2.94
%
Agency CMBS
960
123,843
3.06
%
884
128,625
2.80
%
CMBS IO(5)
2,241
211,398
4.41
%
2,542
230,033
4.04
%
Non-Agency MBS and other
32
2,479
4.93
%
40
2,700
4.98
%
37,932
4,269,337
3.56
%
26,992
3,565,968
3.00
%
Cash equivalents
4,280
3,854
Total interest income
$
42,212
$
30,846
Repurchase agreement financing
(45,142
)
3,447,406
(5.18
)%
(31,308
)
2,713,481
(4.62
)%
Net interest expense/net interest
spread
$
(2,930
)
(1.62
)%
$
(462
)
(1.62
)%
(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.
Hedging Portfolio
As of June 30, 2023, the Company held short positions of $4.0
billion notional in 10-year U.S. Treasury futures and $0.9 billion
notional in 5-year U.S. Treasury futures. Comprehensive income for
the second quarter of 2023 included gains of $170.0 million, net of
realized losses of $(95.7) million from interest rate hedges.
Realized gains and losses on interest rate hedges are recognized in
GAAP net income in the same reporting period in which the
derivative instrument matures or is terminated by the Company, but
are not included in the Company's earnings available for
distribution ("EAD"), a non-GAAP measure, during any reporting
period. On a tax basis, realized gains and losses on derivative
instruments designated for tax purposes as interest rate hedges are
amortized into the Company's REIT taxable income over the original
periods hedged by those derivatives. The benefit expected to be
recognized in taxable income for the six months ended June 30, 2023
is estimated to be $38.8 million, or $0.72 per average common share
outstanding. The Company's remaining estimated net deferred tax
hedge gains from its interest rate hedging portfolio was $649.7
million as of June 30, 2023. These hedge gains will be part of the
Company's future distribution requirements along with net interest
income and other ordinary gains and losses in future periods.
The table below provides the projected amortization of the
Company's net deferred tax hedge gains that may be recognized as
taxable income over the periods indicated given conditions known as
of June 30, 2023; however, uncertainty inherent in the forward
interest rate curve makes future realized gains and losses
difficult to estimate, and as such, these projections are subject
to change for any given period.
Projected Period of Recognition for
Remaining Hedge Gains, Net
June 30, 2023
($ in thousands)
Third quarter 2023
$
17,970
Fourth quarter 2023
18,096
Fiscal year 2024
74,607
Fiscal year 2025 and thereafter
539,070
$
649,743
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)
June 30, 2023
March 31, 2023
Comprehensive income (loss) to common
shareholders
$
42,971
$
(28,852
)
Less:
Change in fair value of investments, net
(1)
60,556
(48,599
)
Change in fair value of derivative
instruments, net (2)
(118,164
)
68,725
EAD to common shareholders
$
(14,637
)
$
(8,726
)
Weighted average common shares
54,137
53,824
EAD per common share
$
(0.27
)
$
(0.16
)
Net interest expense
$
(2,930
)
$
(462
)
TBA drop income (3)
(2,152
)
1,457
Adjusted net interest (expense) income
$
(5,082
)
$
995
General and administrative expenses
(7,197
)
(7,372
)
Other operating expense, net
(435
)
(426
)
Preferred stock dividends
(1,923
)
(1,923
)
EAD to common shareholders
$
(14,637
)
$
(8,726
)
Net interest spread
(1.62
)%
(1.62
)%
Impact from TBA drop income (4)
0.45
%
0.87
%
Adjusted net interest spread
(1.17
)%
(0.75
)%
(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 (0.36)% and 0.18% for the three months ended
June 30, 2023 and March 31, 2023, 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, ability to find suitable investment
opportunities; changes in domestic economic conditions;
geopolitical events, such as terrorism, war or other military
conflict, including increased uncertainty regarding the war between
Russia and the Ukraine and the related impact on macroeconomic
conditions as a result of such conflict; changes in interest rates
and credit 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 RMBS, Agency CMBS, 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, including the Company's sole
third-party service provider for our critical operations and trade
functions; the loss or unavailability of the Company’s third-party
service provider’s service and technology that supports critical
functions of the Company’s business related to the Company’s
trading and borrowing activities due to outages, interruptions, or
other failures; the level of defaults by borrowers on loans
underlying MBS; changes in the Company’s industry; increased
competition; changes in government regulations affecting the
Company’s business; 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 to reform the U.S. housing finance system including the
resolution of the conservatorship of Fannie Mae and Freddie Mac;
the composition of the Board of Governors of the Federal Reserve;
the political environment in the U.S.; systems failures or
cybersecurity incidents; 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/20230724376954/en/
Alison Griffin (804) 217-5897
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