Dynex Capital, Inc. ("Dynex" or the "Company") (NYSE: DX)
reported its third 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 loss of $(1.56) per common share, or (11.0)% of
beginning book value, which declined $1.95 to $12.25 as of
September 30, 2023
- Dividends declared of $0.39 per common share for the third
quarter of 2023
- Comprehensive loss of $(1.59) per common share and net loss of
$(0.82) per common share
- Purchased $865.3 million of higher coupon Agency residential
mortgage-backed securities ("RMBS") during the third quarter
- Average balance of interest-earning assets increased 34%
compared to the second quarter
- Leverage including to-be-announced ("TBA") securities at cost
was 8.5 times shareholders' equity as of September 30, 2023
Management Remarks
"The global economy and markets are undergoing a major
transition as we move from government balance sheets supporting
assets to private capital. We have positioned our shareholders in
the most liquid assets which have already experienced a steep price
correction. Forward returns are compelling, and we continue to
maintain a balanced, liquid and flexible approach to our
portfolio," said Byron L. Boston, Chief Executive Officer. "We are
managing for the long term during this cycle and are prepared for
various scenarios so that we are positioned to capitalize on the
return opportunities available in this environment."
Earnings Conference Call
As previously announced, the Company's conference call to
discuss these results is today at 10:00 a.m. Eastern Time and may
be accessed via telephone in the United States by dialing
1-888-330-2022 and providing the ID 1957092 or by live audio
webcast by clicking the "Webcast" button in the “Current Events”
section on the homepage of the Company's website
(www.dynexcapital.com), which includes a slide presentation. To
listen to the live conference call via telephone, please dial in at
least 10 minutes before the call begins. An archive of the webcast
will be available on the Company's website approximately two hours
after the live call ends.
Consolidated Balance Sheets
($s in thousands except per share
data)
September 30, 2023
June 30, 2023
December 31, 2022
ASSETS
(unaudited)
(unaudited)
Cash and cash equivalents
$
271,168
$
300,108
$
332,035
Cash collateral posted to
counterparties
145,268
132,646
117,842
Mortgage-backed securities (including
pledged of $5,279,554, $4,441,105, and $2,810,957,
respectively)
5,583,758
5,059,308
3,112,705
Due from counterparties
—
1,364
10,348
Derivative assets
4,594
174
7,102
Accrued interest receivable
26,756
22,988
15,260
Other assets, net
9,238
9,367
9,942
Total assets
$
6,040,782
$
5,525,955
$
3,605,234
LIABILITIES AND SHAREHOLDERS’
EQUITY
Liabilities:
Repurchase agreements
$
5,002,230
$
4,201,901
$
2,644,405
Due to counterparties
152,955
371,576
4,159
Derivative liabilities
22,029
23,621
22,595
Cash collateral posted by
counterparties
—
—
435
Accrued interest payable
43,168
33,794
16,450
Accrued dividends payable
9,972
9,440
9,103
Other liabilities
6,082
4,661
6,759
Total liabilities
5,236,436
4,644,993
2,703,906
Shareholders’ equity:
Preferred stock
$
107,843
$
107,843
$
107,843
Common stock
566
542
536
Additional paid-in capital
1,397,268
1,365,484
1,357,514
Accumulated other comprehensive loss
(217,770
)
(175,996
)
(181,346
)
Accumulated deficit
(483,561
)
(416,911
)
(383,219
)
Total shareholders' equity
804,346
880,962
901,328
Total liabilities and shareholders’
equity
$
6,040,782
$
5,525,955
$
3,605,234
Preferred stock aggregate liquidation
preference
$
111,500
$
111,500
$
111,500
Book value per common share
$
12.25
$
14.20
$
14.73
Common shares outstanding
56,555,574
54,204,319
53,637,095
Consolidated Comprehensive Statements
of Income (Loss) (unaudited)
Nine Months Ended
Three Months Ended
($s in thousands except per share
data)
September 30, 2023
June 30, 2023
September 30, 2023
Interest income
$
63,271
$
42,212
$
136,329
Interest expense
(65,533
)
(45,142
)
(141,983
)
Net interest expense
(2,262
)
(2,930
)
(5,654
)
Realized loss on sales of investments,
net
—
(51,601
)
(74,916
)
Unrealized gain on investments, net
(179,100
)
488
(121,491
)
Gain (loss) on derivative instruments,
net
146,953
116,012
195,698
General and administrative expenses
(7,841
)
(7,197
)
(22,410
)
Other operating expense, net
(801
)
(435
)
(1,662
)
Net (loss) income
(43,051
)
54,337
(30,435
)
Preferred stock dividends
(1,923
)
(1,923
)
(5,770
)
Net (loss) income to common
shareholders
$
(44,974
)
$
52,414
$
(36,205
)
Other comprehensive income:
Unrealized loss on available-for-sale
investments, net
(41,774
)
(9,443
)
$
(36,424
)
Total other comprehensive loss
(41,774
)
(9,443
)
(36,424
)
Comprehensive (loss) income to common
shareholders
$
(86,748
)
$
42,971
$
(72,629
)
Net (loss) income per common
share-basic
$
(0.82
)
$
0.97
$
(0.67
)
Net (loss) income per common
share-diluted
$
(0.82
)
$
0.96
$
(0.67
)
Weighted average common shares-basic
54,557
54,137
54,175
Weighted average common shares-diluted
54,557
54,585
54,175
Dividends declared per common share
$
0.39
$
0.39
$
1.17
Results Discussion
The Company's total economic loss of $(1.56) per common share
was driven by declines in the fair value of its investments as
longer-term bond yields rose in the third quarter of 2023 in
response to the Federal Reserve's additional increase of 25 basis
points in the Federal Funds Target Rate, which is now 5.50%, and
the Federal Reserve's signal that interest rates will stay higher
for longer. The fair value of the Company's investments were also
impacted by wider spreads. Though the derivatives instruments used
by the Company to hedge interest rate risk ("interest rate hedges")
mitigated some of the impact, losses on assets exceeded the gains
on hedging portfolio by $73.9 million.
The following table summarizes the changes in the Company's
financial position during the third quarter of 2023:
($s in thousands except per share
data)
Net Changes in Fair
Value
Components of Comprehensive
Loss
Common Book Value
Rollforward
Per Common Share (1)
Balance as of June 30, 2023 (1)
$
769,462
$
14.20
Net interest expense
$
(2,262
)
Operating expenses
(8,642
)
Preferred stock dividends
(1,923
)
Changes in fair value:
MBS and loans
$
(220,874
)
TBAs
(69,797
)
U.S. Treasury futures
210,227
Options on U.S. Treasury futures
6,523
Total net change in fair value
(73,921
)
Comprehensive loss to common
shareholders
(86,748
)
(1.59
)
Capital transactions:
Net proceeds from stock issuance (2)
31,808
0.03
Common dividends declared
(21,676
)
(0.39
)
Balance as of September 30, 2023
(1)
$
692,846
$
12.25
(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 $30.4 million from at-the-market ("ATM") issuances and $1.4
million from amortization of share-based compensation.
The following table provides detail on the Company's MBS
investments, including TBA securities as of September 30, 2023:
September 30, 2023
June 30, 2023
($ in millions)
Par Value
Fair Value
% of Portfolio
Par Value
Fair Value
% of Portfolio
30-year fixed rate RMBS:
2.0% coupon
$
721,068
$
555,260
7.8
%
$
738,366
$
607,450
8.5
%
2.5% coupon
619,348
498,213
7.0
%
634,256
542,554
7.6
%
4.0% coupon
361,219
325,009
4.5
%
368,367
348,785
4.9
%
4.5% coupon
1,356,558
1,252,437
17.5
%
1,117,339
1,078,938
15.0
%
5.0% coupon
1,883,657
1,782,628
24.9
%
1,554,427
1,528,286
21.3
%
5.5% coupon
911,842
884,725
12.4
%
647,735
647,024
9.0
%
TBA 4.0%
262,000
233,446
3.3
%
—
—
—
%
TBA 4.5%
273,000
250,797
3.5
%
357,000
337,357
4.7
%
TBA 5.0%
735,000
693,939
9.7
%
440,000
422,881
5.9
%
TBA 5.5%
200,000
193,359
2.7
%
1,102,000
1,079,702
15.0
%
TBA 6.0%
200,000
197,469
2.8
%
277,000
275,701
3.8
%
Total Agency RMBS
$
7,523,692
$
6,867,282
96.0
%
$
7,236,490
$
6,868,678
95.7
%
Agency CMBS
$
121,617
$
112,396
1.6
%
$
121,931
$
115,136
1.6
%
Agency CMBS IO
(1
)
139,781
1.9
%
(1
)
150,328
2.1
%
Non-Agency CMBS IO
(1
)
33,206
0.5
%
(1
)
40,689
0.6
%
Non-Agency RMBS
159
103
—
%
173
118
—
%
Total
$
7,645,468
$
7,152,769
100.0
%
$
7,358,593
$
7,174,949
100.0
%
(1)
CMBS IO do not have underlying par
values.
As of September 30, 2023, 96% of the Company's investments were
comprised of Agency RMBS, including TBA securities and 4% are
Agency CMBS, Agency CMBS IO, and non-Agency CMBS IO. During the
third quarter of 2023, the Company purchased $865.3 million of
higher coupon Agency RMBS and reduced its holdings of TBA
securities by 23%.
The following table provides detail on the Company's repurchase
agreement borrowings outstanding as of the dates indicated:
September 30, 2023
June 30, 2023
Remaining Term to Maturity
Balance
Weighted Average
Rate
WAVG Original Term to
Maturity
Balance
Weighted Average
Rate
WAVG Original Term to
Maturity
($s in thousands)
Less than 30 days
$
2,096,037
5.46
%
77
$
1,069,565
5.27
%
50
30 to 90 days
2,374,991
5.44
%
102
2,039,943
5.24
%
130
91 to 180 days
531,202
5.64
%
113
1,092,393
5.30
%
175
Total
$
5,002,230
5.47
%
93
$
4,201,901
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 third quarter of 2023 compared to the
prior quarter:
Three Months Ended
September 30, 2023
June 30, 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
$
55,654
$
5,393,642
4.13
%
$
34,699
$
3,931,617
3.53
%
Agency CMBS
946
122,315
3.03
%
960
123,843
3.06
%
CMBS IO(5)
2,258
192,797
4.66
%
2,241
211,398
4.41
%
Non-Agency MBS and other
29
2,272
4.91
%
32
2,479
4.93
%
58,887
5,711,026
4.12
%
37,932
4,269,337
3.56
%
Cash equivalents
4,384
4,280
Total interest income
$
63,271
$
42,212
Repurchase agreement financing
(65,533
)
4,773,435
(5.37
)%
(45,142
)
3,447,406
(5.18
)%
Net interest expense/net interest
spread
$
(2,262
)
(1.25
)%
$
(2,930
)
(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
The Company uses derivative instruments to hedge exposure to
interest rate risk arising from its investment and financing
portfolio, and some of these derivatives are designated as hedges
for tax purposes. The table below discloses details on the
Company's interest rate hedges as of September 30, 2023, which all
have a contractual maturity date in December 2023:
Interest Rate Hedges as of September
30, 2023
Notional Amount Long
(Short)
($s in thousands)
30-year U.S. Treasury futures
$
(420,000
)
10-year U.S. Treasury futures
(4,180,000
)
5-year U.S. Treasury futures
(900,000
)
Put options on 10-year U.S. Treasury
futures
150,000
Comprehensive loss for the third quarter of 2023 included gains
of $216.8 million from interest rate hedges, net of realized gains
of $203.9 million. 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 as hedges for tax purposes 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 nine months ended September
30, 2023 is estimated to be $56.8 million, or $1.05 per average
common share outstanding. The Company's remaining estimated net
deferred tax hedge gains from its interest rate hedging portfolio
was $830.5 million as of September 30, 2023. These hedge gains will
be part of the Company's future distribution requirements along
with net interest income and other ordinary gains and losses in
future periods.
The table below provides the projected amortization of the
Company's net deferred tax hedge gains that may be recognized as
taxable income over the periods indicated given conditions known as
of September 30, 2023; however, uncertainty inherent in the forward
interest rate curve makes future realized gains and losses
difficult to estimate, and as such, these projections are subject
to change for any given period.
Projected Period of Recognition for
Remaining Hedge Gains, Net
September 30, 2023
($ in thousands)
Fourth quarter 2023
$
23,745
Fiscal year 2024
97,205
Fiscal year 2025
98,915
Fiscal year 2026 and thereafter
610,599
$
830,464
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)
September 30, 2023
June 30, 2023
Comprehensive (loss) income to common
shareholders
$
(86,748
)
$
42,971
Less:
Change in fair value of investments, net
(1)
220,874
60,556
Change in fair value of derivative
instruments, net (2)
(149,512
)
(118,164
)
EAD to common shareholders
$
(15,386
)
$
(14,637
)
Weighted average common shares
54,557
54,137
EAD per common share
$
(0.28
)
$
(0.27
)
Net interest expense
$
(2,262
)
$
(2,930
)
TBA drop loss (3)
(2,559
)
(2,152
)
Adjusted net interest expense
$
(4,821
)
$
(5,082
)
General and administrative expenses
(7,841
)
(7,197
)
Other operating expense, net
(801
)
(435
)
Preferred stock dividends
(1,923
)
(1,923
)
EAD to common shareholders
$
(15,386
)
$
(14,637
)
Net interest spread
(1.25
)%
(1.62
)%
Impact from TBA drop income (4)
0.16
%
0.45
%
Adjusted net interest spread
(1.09
)%
(1.17
)%
(1)
Amount includes realized and unrealized
gains and losses from the Company's MBS.
(2)
Amount includes unrealized gains and
losses from changes in fair value of derivatives (including TBAs
accounted for as derivative instruments) 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 (0.56)% and (0.36)% for the three months
ended September 30, 2023 and June 30, 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/20231023038360/en/
Alison Griffin (804) 217-5897
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