Dynex Capital, Inc. Reports First Quarter 2019 Results

GLEN ALLEN, Va.–(BUSINESS WIRE)–Dynex Capital, Inc. (NYSE: DX) reported its first quarter 2019 results
today. As previously announced, the Company’s quarterly conference call
to discuss these results is today at 10:00 a.m. Eastern Time and may be
accessed via telephone in the U.S. at 1-844-840-0844 (internationally at
1-647-253-8795) using conference ID 2168666 or by live webcast, which
includes a slide presentation, under “Investor Center” on the Company’s
website (www.dynexcapital.com).

First Quarter 2019 Highlights

  • Comprehensive income of $0.46 per common share and net loss of $(0.81)
    per common share
  • Core net operating income, a non-GAAP measure, of $0.18 per common
    share
  • Book value per common share of $6.24 at March 31, 2019 compared to
    $6.02 at December 31, 2018
  • Raised $58.9 million in capital from secondary and ATM offerings of
    preferred and common stock
  • Purchased $1.1 billion of primarily Agency RMBS and CMBS, growing
    average balance of interest earnings assets by 25% compared to the
    prior quarter
  • Leverage including TBA dollar roll positions increased to 8.5x
    shareholders’ equity at March 31, 2019 compared to 8.0x at
    December 31, 2018
  • Net interest spread and adjusted net interest spread, a non-GAAP
    measure, of 0.84% and 1.19%, respectively, for the first quarter of
    2019 compared to 0.93% and 1.24%, respectively, for the fourth quarter
    of 2018

First Quarter 2019 Earnings Summary

Comprehensive income to common shareholders for the first quarter of
2019 of $31.2 million consisted of a net loss to common shareholders of
$(55.3) million and other comprehensive income of $86.5 million compared
to a comprehensive loss to common shareholders for the fourth quarter of
2018 of $(31.4) million, which consisted of a net loss to common
shareholders of $(81.5) million and other comprehensive income of $50.1
million. The Company’s net loss to common shareholders for the first
quarter of 2019 primarily consisted of:

  • net interest income of $13.7 million
  • net loss on derivative instruments of $(61.7) million
  • general and administrative expenses of $(4.0) million, and
  • preferred stock dividends of $(3.1) million.

Net interest income increased during the first quarter of 2019 compared
to the prior quarter due to a larger and higher yielding portfolio of
interest earning assets, which offset the Company’s increased interest
expense resulting from a higher average balance of repurchase agreement
borrowings and higher borrowing rates. Like the prior quarter, net loss
on derivative instruments for the first quarter of 2019 was primarily
the result of a net loss in fair value of the Company’s interest rate
swaps as interest rates on the 2-10 year portion of the swap curve
declined for the second consecutive quarter. Partially offsetting the
loss in fair value of interest rate swaps, the Company recorded other
comprehensive income of $86.5 million, which resulted primarily from the
increase in fair value of MBS due to tighter credit spreads and
declining longer-term interest rates during the first quarter of 2019.

Core net operating income to common shareholders, a non-GAAP measure,
increased to $12.1 million for the first quarter of 2019 versus $10.9
million for the fourth quarter of 2018 due to the larger and higher
yielding portfolio and higher net periodic interest benefit from the
Company’s interest rate swaps, which offset the higher interest expense
on repurchase agreement borrowings and lower TBA drop income. The
Company reduced its volume of TBA dollar roll transactions during the
first quarter of 2019 as TBA net interest spreads declined. On a per
share basis, core net operating income to common shareholders was
unchanged compared to the fourth quarter of 2018 as the Company’s
weighted average shares outstanding increased due to additional shares
issued during the first quarter of 2019. Please refer to “Use of
Non-GAAP Financial Measures” below for additional important information
about non-GAAP measures.

Book Value Per Common Share

Book value per common share increased to $6.24 at March 31, 2019 from
$6.02 at December 31, 2018. This increase of $0.22 per common share and
the first quarter dividend of $0.18 per common share resulted in a
quarterly total economic return on book value per common share of 6.6%,
The increase in book value was driven by the increase in fair value of
the Company’s MBS, net of the decline in fair value of its interest rate
hedges. The increase in the Company’s common shares outstanding, which
resulted primarily from its secondary offering that closed at the end of
January 2019, impacted book value per common share by $(0.05).

Investments and Financing Details

The following table provides details on the performance of our
investments and financing including interest rate hedges for the periods
indicated:

 
Three Months Ended
March 31, 2019   December 31, 2018
($ in thousands)

Income/Expense

 

Average
Balance

 

Effective
Yield/Cost
of Funds

Income/Expense  

Average
Balance

 

Effective
Yield/Cost
of Funds

Interest-earning assets:
Agency RMBS-fixed rate $ 23,411 $ 2,605,294 3.59 % $ 16,164 $ 1,866,378 3.46 %
Agency CMBS-fixed rate 9,132 1,200,521 3.04 % 7,796 1,036,402 2.94 %
Agency RMBS-adjustable rate 223 31,497 3.38 % 267 33,821 3.27 %
CMBS IO (1) 6,395 517,868 4.04 % 6,101 543,204 3.89 %
Other non-Agency MBS 177 1,822 33.22 % 1,149 2,900 60.38 %
Other investments   619     11,238 4.87 %   537     11,968 4.51 %
Total $ 39,957   $ 4,368,240 3.51 % $ 32,014   $ 3,494,673 3.42 %
 
Interest-bearing liabilities:
Repurchase agreements 26,414 3,931,335 2.69 % 19,099 2,992,513 2.50 %
Non-recourse collateralized financing 27 3,397 3.31 % 29 3,613 2.88 %
De-designated cash flow hedge accretion   (165 )   n/a (0.02 )%   (75 )   n/a (0.01 )%
Total $ 26,276   $ 3,934,732 2.67 % $ 19,053   $ 2,996,126 2.49 %
       
Net interest income/net interest spread $ 13,681   0.84 % $ 12,961   0.93 %
Add: TBA drop income (2) 1,963 (0.03 )% 3,072 0.06 %
Add: net periodic interest benefit (3) 3,897 0.40 % 1,940 0.26 %
Less: de-designated cash flow hedge accretion   (165 ) (0.02 )%   (75 ) (0.01 )%
Adjusted net interest income/adjusted net interest spread (4) $ 19,376   1.19 % $ 17,898   1.24 %
 

(1)

 

CMBS IO includes Agency and non-Agency securities

(2)

The impact of TBA drop income on adjusted net interest spread
includes the implied average funding cost of TBA dollar roll
transactions during the periods indicated.

(3)

Amount represents net periodic interest benefit of effective
interest rate swaps outstanding during the period and excludes
realized and unrealized gains and losses from changes in fair
value of derivatives.

(4)

Represents a non-GAAP measure.

 

The Company’s net interest spread declined 9 basis points for the first
quarter of 2019 compared to the fourth quarter of 2018 as the favorable
impact from a larger and higher yielding MBS portfolio was insufficient
to offset the 18 basis point increase in the Company’s cost of financing
resulting from higher short-term interest rates during the first quarter
of 2019. This increase in cost of financing also contributed to the
decline of 5 basis points in adjusted net interest spread for the first
quarter of 2019 compared to the prior quarter. In addition, the
Company’s TBA contracts contributed to the decline in adjusted net
interest spread due to higher implied average funding costs for TBA
dollar roll transactions as higher expected prepayment speeds impacted
pricing of TBA contracts. Partially offsetting the higher financing
costs and lower TBA net spread, the Company’s net periodic interest
benefit from interest rate swaps increased 14 basis points for the first
quarter of 2019 compared to the prior quarter.

The following table compares details of our MBS including TBA dollar
roll positions as of March 31, 2019 versus December 31, 2018:

   
March 31, 2019 December 31, 2018
Type of Investment: Par  

Amortized
Cost Basis

 

Fair
Market
Value

Par  

Amortized
Cost Basis

 

Fair
Market
Value

($ in thousands)
30-year fixed-rate RMBS:
3.0% coupon $ 219,147 $ 220,678 $ 218,499 $ 223,573 $ 225,148 $ 218,286
4.0% coupon 1,820,059 1,871,185 1,886,576 1,651,854 1,699,012 1,687,390
4.5% coupon 614,587 638,747 645,451 211,429 218,557 219,134
TBA dollar roll positions (3.5% coupon) (1) (2) 250,000 250,703 253,359
TBA dollar roll positions (4.0% coupon) (1) (2) 325,000 331,786 334,012 110,000 111,175 112,101
TBA dollar roll positions (4.5% coupon) (1) (2)   140,000   144,723   145,759   750,000   771,055   776,368
Total 30-year fixed-rate RMBS 3,368,793 3,457,822 3,483,656 2,946,856 3,024,947 3,013,279
 
Adjustable-rate RMBS (3): 29,483 30,250 30,744 31,782 32,666 33,211
 
Agency CMBS 1,507,835 1,518,610 1,539,512 1,071,906 1,080,424 1,057,015
CMBS IO (4) n/a 510,504 519,196 n/a 527,743 532,154
Other non-Agency MBS   3,713   1,786   2,469   3,896   1,859   2,274
Total MBS portfolio including TBA dollar roll positions $ 4,909,824 $ 5,518,972 $ 5,575,577 $ 4,054,440 $ 4,667,639 $ 4,637,933
 

(1)

 

Amortized cost basis and fair market value for TBA dollar roll
positions represent implied cost basis and implied market value,
respectively, for the underlying Agency MBS as if settled.

(2)

The net carrying value of TBA dollar roll positions, which is
the difference between their implied market value and implied cost
basis, was $5.9 million and $6.2 million as of March 31, 2019 and
December 31, 2018, respectively, and is included within derivative
assets/liabilities on the consolidated balance sheet.

(3)

Weighted average coupon based on amortized cost was 4.6% as of
March 31, 2019 and 4.3% as of December 31, 2018.

(4)

Includes both Agency and non-Agency IO securities with a
combined notional balance of $23.3 billion at March 31, 2019 and
$23.3 billion at December 31, 2018.

 

The Company purchased $1.1 billion MBS during the first quarter of 2019,
which consisted primarily of higher coupon 30-year fixed-rate Agency
RMBS and newly issued Agency CMBS. The Company purchased these assets
using proceeds from its common and preferred equity issuances as well as
additional repurchase agreement borrowings, which increased leverage
including TBA dollar roll positions to 8.5x shareholder’s equity
compared to 8.0x at December 31, 2018.

Hedging Summary

During the first quarter of 2019, the Company terminated interest rate
swaps with a notional balance of $875.0 million, realizing a loss of
$(6.8) million, and added interest rate swaps with a notional balance of
$1.5 billion at a weighted average pay-fixed rate of 2.54%. The
following table provides information related to the Company’s average
borrowings outstanding and interest rate swaps effective for the periods
indicated:

 
Three Months Ended
($ in thousands)

March 31,
2019

 

December 31,
2018

Average repurchase agreement borrowings outstanding $ 3,931,335 $ 2,992,513
Average net TBAs outstanding – at cost (1)   722,264     814,478  
Average borrowings and net TBAs outstanding $ 4,653,599 $ 3,806,991
Average notional amount of interest rate swaps outstanding
(excluding forward starting swaps)
$ 4,154,778   $ 2,961,957  
Ratio of average interest rate swaps to average borrowings and net
TBAs outstanding (1)
0.9 0.8
 
Average interest rate swap pay-fixed rate (excluding forward
starting swaps)
2.37 % 2.24 %
Average interest rate swap receive-floating rate   2.75 %   2.44 %
Average interest rate swap net receive rate   (0.38 )%   (0.20 )%
 

(1)

 

Because the Company executes TBA dollar roll transactions,
which economically represent the purchase and financing of
fixed-rate Agency RMBS, the average TBAs outstanding are included
in the ratio calculation.

 

The following table summarizes the weighted average notional amount and
rate of interest rate hedges held as of March 31, 2019:

 
March 31, 2019
($ in thousands)

Weighted Average
Notional

 

Weighted Average
Pay-Fixed Rate

Remainder of 2019 4,983,491 2.39%
2020 4,193,934 2.46%
2021 3,731,096 2.49%
2022 3,412,699 2.57%
2023 2,596,932 2.69%
2024 1,831,148 2.79%
2025 and thereafter 341,581 2.85%
 

Company Description

Dynex Capital, Inc. is an internally managed real estate investment
trust, or REIT, which invests in mortgage assets on a leveraged
basis. The Company invests in Agency and non-Agency RMBS, CMBS, and CMBS
IO. Additional information about Dynex Capital, Inc. is available at www.dynexcapital.com.

Use of Non-GAAP Financial Measures

In addition to the Company’s operating results presented in accordance
with GAAP, this release includes certain non-GAAP financial measures
including core net operating income to common shareholders (including
per common share), adjusted interest expense, adjusted net interest
income and the related metrics adjusted cost of funds and adjusted net
interest spread. Because these measures are used in the Company’s
internal analysis of financial and operating performance, management
believes that they provide greater transparency to our investors of
management’s view of our economic performance. Management also believes
the presentation of these measures, when analyzed in conjunction with
the Company’s GAAP operating results, allows investors to more
effectively evaluate and compare the performance of the Company to that
of its peers, although the Company’s presentation of its non-GAAP
measures may not be comparable to other similarly-titled measures of
other companies. Schedules reconciling core net operating income to
common shareholders, adjusted interest expense, and adjusted net
interest income to GAAP financial measures are provided as a supplement
to this release.

Management views core net operating income to common shareholders as an
estimate of the Company’s financial performance excluding changes in
fair value of its investments and derivatives. In addition to the
non-GAAP reconciliation set forth in the supplement to this release,
which derives core net operating income to common shareholders from GAAP
net income to common shareholders as the nearest GAAP equivalent
measure, core net operating income to common shareholders can also be
determined by adjusting net interest income to include interest rate
swap periodic interest benefit (cost), drop income on TBA dollar roll
transactions, general and administrative expenses, and preferred
dividends. Management includes drop income, which is included in “gain
(loss) on derivatives instruments, net” on the Company’s consolidated
statements of comprehensive income, in core net operating income and in
adjusted net interest income because TBA dollar roll positions are
viewed by management as economically equivalent to holding and financing
Agency RMBS using short-term repurchase agreements. Management also
includes periodic interest benefit (cost) from its interest rate swaps,
which are also included in “gain (loss) on derivatives instruments,
net”, in adjusted net interest expense, and in adjusted net interest
income because interest rate swaps are used by the Company to
economically hedge the impact of changing interest rates on its
borrowing costs from repurchase agreements, and including periodic
interest benefit (cost) from interest rate swaps is a helpful indicator
of the Company’s total cost of financing in addition to GAAP interest
expense. However, these non-GAAP measures do not provide a full
perspective on our results of operations, and therefore, their
usefulness is limited. For example, these non-GAAP measures do not
include gains or losses from available-for-sale investments, changes in
fair value of and costs of terminating interest rate swaps, as well as
realized and unrealized gains or losses from any instrument used by
management to economically hedge the impact of changing interest rates
on its portfolio and book value per common share, such as Eurodollar
futures. As a result, these non-GAAP measures should be considered as
a supplement to, and not as a substitute for, the Company’s GAAP results
as reported on its consolidated statements of comprehensive income.

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,” 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 may include, without limitation, statements regarding
the Company’s financial performance in future periods, future interest
rates, future market credit spreads, our views on expected
characteristics of future investment environments, prepayment rates and
investment risks, future investment strategies, our 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 our
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, the Company’s ability
to find suitable investment opportunities; changes in economic
conditions; 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 the Federal Reserve’s balance
sheet normalization process through the reduction in its holdings of
Agency residential 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; 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;
ownership shifts under Section 382 of the Internal Revenue Code of 1986,
as amended, that further limit the use of the Company’s tax net
operating loss carryforward; 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, 2018, 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.

 
DYNEX CAPITAL, INC.
CONSOLIDATED BALANCE SHEETS

($ in thousands except per share data)

 
 

March 31,
2019

 

December 31,
2018

ASSETS (unaudited)
Mortgage-backed securities $ 4,842,447 $ 3,749,464
Mortgage loans held for investment, net 10,862 11,527
Cash and cash equivalents 55,902 34,598
Restricted cash 86,761 54,106
Derivative assets 6,030 6,563
Accrued interest receivable 26,075 21,019
Other assets, net   7,056     8,812  
Total assets $ 5,035,133   $ 3,886,089  
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Repurchase agreements $ 4,252,893 $ 3,267,984
Payable for unsettled securities 151,075 58,915
Non-recourse collateralized financing 3,219 3,458
Derivative liabilities 1,218
Accrued interest payable 12,939 10,308
Accrued dividends payable 6,927 13,810
Other liabilities   3,406     3,243  
Total liabilities 4,430,459 3,358,936
 
Shareholders’ equity:
Preferred stock – aggregate liquidation preference of $154,202 and
$148,865, respectively
$ 147,898 $ 142,883
Common stock, par value $.01 per share: 72,248,126 and 62,817,218
shares issued and outstanding, respectively
722 628
Additional paid-in capital 872,010 818,442
Accumulated other comprehensive loss 50,688 (35,779 )
Accumulated deficit   (466,644 )   (399,021 )
Total shareholders’ equity   604,674     527,153  
Total liabilities and shareholders’ equity $ 5,035,133   $ 3,886,089  
 
Book value per common share $ 6.24 $ 6.02
 
 
DYNEX CAPITAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)

(amounts in thousands except per share data)

 
  Three Months Ended

March 31,
2019

 

December 31,
2018

 

September 30,
2018

 

June 30,
2018

 

March 31,
2018

Interest income $ 39,957 $ 32,014 $ 26,925 $ 25,922 $ 25,190
Interest expense   26,276     19,053     14,751     14,175     11,595  
Net interest income 13,681 12,961 12,174 11,747 13,595
 
(Loss) gain on derivative instruments, net (61,697 ) (81,981 ) 19,499 20,667 38,354
Loss on sale of investments, net (5,428 ) (1,726 ) (12,444 ) (3,775 )
Fair value adjustments, net (13 ) (16 ) 12 27 29
Other operating expense, net (231 ) (566 ) (409 ) (339 ) (253 )
General and administrative expenses:
Compensation and benefits (1,898 ) (1,180 ) (1,712 ) (1,751 ) (1,962 )
Other general and administrative   (2,056 )   (2,312 )   (2,252 )   (2,255 )   (1,681 )
Net (loss) income (52,214 ) (78,522 ) 25,586 15,652 44,307
Preferred stock dividends   (3,059 )   (2,963 )   (2,956 )   (2,942 )   (2,940 )
Net (loss) income to common shareholders $ (55,273 ) $ (81,485 ) $ 22,630   $ 12,710   $ 41,367  
 
Other comprehensive income:
Unrealized gain (loss) on available-for-sale investments, net $ 86,632 $ 44,701 $ (23,574 ) $ (22,156 ) $ (49,189 )
Reclassification adjustment for loss on sale of investments, net 5,428 1,726 12,444 3,775
Reclassification adjustment for de-designated cash flow hedges   (165 )   (75 )   (66 )   (48 )   (48 )
Total other comprehensive income (loss)   86,467     50,054     (21,914 )   (9,760 )   (45,462 )
Comprehensive income (loss) to common shareholders $ 31,194   $ (31,431 ) $ 716   $ 2,950   $ (4,095 )
 
Net (loss) income per common share-basic and diluted $ (0.81 ) $ (1.34 ) $ 0.39 $ 0.23 $ 0.74
Weighted average common shares 68,435 60,870 57,727 56,295 55,871
 

Contacts

Alison Griffin
(804) 217-5897

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