Dynex Capital, Inc. Announces First Quarter 2024 Results

Rhea-AI Summary

Dynex Capital, Inc. reported its first quarter 2024 financial results with a total economic return of $0.28 per common share, book value per common share of $13.20, comprehensive income of $0.35 per common share, and net income of $0.65 per common share. The company declared dividends of $0.39 per common share for the first quarter of 2024, renewed its share repurchase program, raised equity capital of $86.8 million, and had liquidity of $577.1 million as of March 31, 2024. Dynex's leverage, including TBA securities at cost, was 8.1 times shareholders' equity. Management expressed confidence in the company's positioning and strategy for the future.

Positive

• Total economic return of $0.28 per common share
• Book value per common share of $13.20
• Comprehensive income of $0.35 per common share
• Net income of $0.65 per common share
• Dividends declared of $0.39 per common share
• Renewed share repurchase program
• Raised equity capital of $86.8 million
• Liquidity of $577.1 million as of March 31, 2024
• Leverage of 8.1 times shareholders' equity
• Management's positive outlook on the company's positioning and strategy

Negative

• None.

Insights

Financial Analyst

The recently reported first-quarter results from Dynex Capital, Inc. present a mixed picture highlighting both strengths and challenges within the company's operations. A key takeaway for shareholders is the total economic return of 2.1% for the quarter, driven by both the dividends paid out and modest capital appreciation. Despite some headwinds, the company declared dividends of $0.39 per common share, which indicates a commitment to returning value to shareholders, often a positive sign for investor confidence.

One concern, however, could be the net interest expense which has been negative due to interest income being surpassed by interest expenses. This dynamic warrants close attention as it may affect the company's net earnings and consequently, its ability to sustain dividend payouts or fund growth initiatives in the long term. Additionally, the announcement of a share repurchase program totaling $150 million could be seen as a bullish signal, often suggesting that the company perceives its stock to be undervalued. This move also serves to potentially reduce equity dilution and may support per-share metrics.

The capital raise through equity of $86.8 million indicates liquidity infusion but comes with the trade-off of diluting existing shareholders' stakes. From an investment perspective, the capital raise strategy should be evaluated in the context of its deployment; if it leads to accretive investments, it could benefit shareholders in the longer run despite the immediate dilutive effect.

Market Research Analyst

An analysis of Dynex Capital's portfolio composition reveals a significant allocation in Agency mortgage-backed securities (MBS), which are considered lower risk due to their government agency guarantee. The company's leverage strategy, indicated by a leverage ratio of 8.1 times shareholders' equity, demands careful scrutiny, especially as interest rates fluctuate. While leverage can amplify returns, it also increases risks, particularly in a rising rate environment where the cost of borrowing may climb.

The shift in the US Treasury rates, resulting in unrealized losses in the investment portfolio, demonstrates the sensitivity of fixed-income assets to interest rate changes. Investors should be mindful of these market dynamics as they could have profound implications on Dynex's asset valuations and overall financial health. Furthermore, the comprehensive income reported underscores the impact of market conditions on the company's holdings, a critical factor for shareholders to monitor.

GLEN ALLEN, Va.--(BUSINESS WIRE)-- Dynex Capital, Inc. ("Dynex" or the "Company") (NYSE: DX) reported its first quarter 2024 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 $0.28 per common share, or 2.1% of beginning book value
• Book value per common share of $13.20 as of March 31, 2024
• Comprehensive income of $0.35 per common share and net income of $0.65 per common share
• Dividends declared of $0.39 per common share for the first quarter of 2024
• Renewed the Company's share repurchase program authorizing the repurchase of up to $50 million of the Company's Series C Preferred Stock and $100 million of its common stock
• Raised equity capital of $86.8 million during the first quarter through at-the-market ("ATM") common stock issuances
• Liquidity of $577.1 million as of March 31, 2024
• Leverage including to-be-announced ("TBA") securities at cost was 8.1 times shareholders' equity as of March 31, 2024

Management Remarks

"We believe Dynex is uniquely positioned for this environment," said Byron L. Boston, Chairman and CEO. "We are generating income from highly liquid, Agency-guaranteed securities. We have an experienced team, with a stewardship mindset, a disciplined process, and a track record of performance. Our returns this quarter are a result of our preparation and execution of our long-term strategy."

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 ten 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, 2024				December 31, 2023
ASSETS	(unaudited)
Cash and cash equivalents	$	295,715			$	119,639
Cash collateral posted to counterparties		122,614				118,225
Mortgage-backed securities (including pledged of $5,570,076 and $5,880,747, respectively)		5,840,559				6,038,948
Derivative assets		8,386				54,361
Accrued interest receivable		27,899				28,727
Other assets, net		9,324				9,850
Total assets	$	6,304,497			$	6,369,750
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Repurchase agreements	$	5,284,708			$	5,381,104
Derivative liabilities		1,314				—
Cash collateral posted by counterparties		8,507				46,001
Accrued interest payable		35,672				53,194
Accrued dividends payable		10,990				10,320
Other liabilities		4,774				8,396
Total liabilities		5,345,965				5,499,015
Shareholders’ equity:
Preferred stock	$	107,843			$	107,843
Common stock		641				570
Additional paid-in capital		1,494,893				1,404,431
Accumulated other comprehensive loss		(175,770	)			(158,502	)
Accumulated deficit		(469,075	)			(483,607	)
Total shareholders' equity		958,532				870,735
Total liabilities and shareholders’ equity	$	6,304,497			$	6,369,750
Preferred stock aggregate liquidation preference	$	111,500			$	111,500
Book value per common share	$	13.20			$	13.31
Common shares outstanding		64,160,931				57,038,247

Consolidated Comprehensive Statements of Income (unaudited)
	Three Months Ended
($s in thousands except per share data)	March 31, 2024				December 31, 2023
INTEREST INCOME (EXPENSE)
Interest income	$	71,525			$	71,188
Interest expense		(74,717	)			(73,465	)
Net interest expense		(3,192	)			(2,277	)
OTHER GAINS (LOSSES)
Unrealized (loss) gain on investments, net		(70,024	)			263,992
Gain (loss) on derivative instruments, net		124,635				(228,603	)
Total other gains, net		54,611				35,389
EXPENSES
General and administrative expenses		(10,880	)			(8,318	)
Other operating expense, net		(421	)			(490	)
Total operating expenses		(11,301	)			(8,808	)
Net income		40,118				24,304
Preferred stock dividends		(1,923	)			(1,923	)
Net income to common shareholders	$	38,195			$	22,381
Other comprehensive income:
Unrealized (loss) gain on available-for-sale investments, net		(17,268	)			59,267
Total other comprehensive (loss) income		(17,268	)			59,267
Comprehensive income to common shareholders	$	20,927			$	81,648
Weighted average common shares-basic		59,008				56,691
Weighted average common shares-diluted		59,717				57,304
Net income per common share-basic	$	0.65			$	0.39
Net income per common share-diluted	$	0.64			$	0.39
Dividends declared per common share	$	0.39			$	0.39

Discussion of First Quarter Results

The Company's total economic return of $0.28 per common share for the first quarter of 2024 consisted of a decline in book value of $(0.11) per common share and dividends declared of $0.39 per common share. Operating expenses for the first quarter of 2024 included a $0.05 increase in share-based compensation expense due to accelerated vesting conditions for certain March 2024 grants.

Net gains on the Company's hedging portfolio exceeded net losses on its investment portfolio by $37.3 million. Though the 10-year U.S. Treasury rate increased over 30 basis points during the first quarter, which negatively impacted the fair value of the Company's investment portfolio, losses were offset by modest spread tightening on some of the Company's investments and gains on U.S. Treasury futures used as interest rate hedging instruments.

Book value was also impacted by approximately $(0.07) per common share from equity issued during the first quarter. The following table summarizes the changes in the Company's financial position during the first quarter of 2024:

($s in thousands except per share data)	Net Changes in Fair Value				Components of Comprehensive Income				Common Book Value Rollforward				Per Common Share (1)
Balance as of December 31, 2023 (1)									$	759,235			$	13.31
Net interest expense					$	(3,192	)
Operating expenses						(11,301	)
Preferred stock dividends						(1,923	)
Changes in fair value:
MBS and loans	$	(87,292	)
TBAs		(15,175	)
U.S. Treasury futures		139,810
Total net change in fair value						37,343
Comprehensive income to common shareholders										20,927				0.35
Capital transactions:
Net proceeds from stock issuance (2)										90,533				(0.07	)
Common dividends declared										(23,663	)			(0.39	)
Balance as of March 31, 2024 (1)									$	847,032			$	13.20

(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 includes $86.8 million from at-the-market ("ATM") issuances and $3.7 million from amortization of share-based compensation.

During the first quarter of 2024, the Company added over $1.0 billion of Agency mortgage TBA securities when spreads widened. The following table provides detail on the Company's MBS investments, including TBA securities as of March 31, 2024:

	March 31, 2024										December 31, 2023
($ in millions)	Par Value				Fair Value			% of Portfolio			Par Value				Fair Value			% of Portfolio
30-year fixed rate RMBS:
2.0% coupon	$	696,233			$	559,217		6.8	%		$	708,528			$	586,361		7.9	%
2.5% coupon		598,717				502,714		6.1	%			608,580				525,018		7.1	%
4.0% coupon		347,937				326,119		4.0	%			354,382				339,212		4.6	%
4.5% coupon		1,363,175				1,307,279		15.8	%			1,383,019				1,348,108		18.2	%
5.0% coupon		2,037,775				2,000,866		24.3	%			2,070,473				2,057,309		27.7	%
5.5% coupon		885,118				887,012		10.8	%			897,520				907,524		12.2	%
TBA 4.0%		262,000				242,974		2.9	%			262,000				248,040		3.3	%
TBA 4.5%		223,000				212,529		2.6	%			223,000				216,415		2.9	%
TBA 5.0%		518,000				505,940		6.1	%			518,000				512,982		6.9	%
TBA 5.5%		1,250,000				1,244,695		15.1	%			200,000				201,047		2.7	%
TBA 6.0%		200,000				201,961		2.4	%			200,000				203,219		2.7	%
Total Agency RMBS	$	8,381,955			$	7,991,308		96.9	%		$	7,425,502			$	7,145,235		96.2	%
Agency CMBS	$	117,984			$	111,762		1.4	%		$	121,293			$	115,595		1.6	%
Agency CMBS IO		(1	)			124,484		1.5	%			(1	)			133,302		1.8	%
Non-Agency CMBS IO		(1	)			21,105		0.2	%			(1	)			26,416		0.4	%
Non-Agency RMBS		—				—		—	%			150				103		—	%
Total	$	8,499,939			$	8,248,659		100.0	%		$	7,546,945			$	7,420,651		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, 2024								December 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		$	2,440,188		5.48	%		58		$	2,855,917		5.61	%		92
30 to 90 days			2,305,208		5.46	%		71			2,525,187		5.58	%		86
91 to 180 days			539,312		5.42	%		182			—		—	%		—
Total		$	5,284,708		5.46	%		76		$	5,381,104		5.59	%		89

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 2024 compared to the prior quarter:

	Three Months Ended
	March 31, 2024										December 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	$	64,281			$	5,938,131		4.33	%		$	63,816			$	5,917,053		4.31	%
Agency CMBS		925				119,286		3.04	%			923				121,939		2.97	%
CMBS IO(5)		2,654				160,261		6.28	%			2,625				175,518		5.36	%
Non-Agency MBS and other		22				1,773		4.86	%			27				2,064		4.99	%
		67,882				6,219,451		4.36	%			67,391				6,216,574		4.32	%
Cash equivalents		3,643										3,797
Total interest income	$	71,525									$	71,188
Repurchase agreement financing		(74,717	)			5,365,575		(5.51	)%			(73,465	)			5,168,821		(5.56	)%
Net interest expense/net interest spread	$	(3,192	)					(1.15	)%		$	(2,277	)					(1.24	)%

(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. As of March 31, 2024, the Company held short positions in 10-year U.S. Treasury futures with a notional amount of $4.5 billion and short positions in 30-year U.S. Treasury futures with a notional amount of $0.7 billion.

Comprehensive income included unrealized gains of $165.5 million and realized losses of $(25.7) million from interest rate hedges for the first quarter of 2024. 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 is estimated to be $25.7 million, or $0.44 per average common share outstanding, for the first quarter of 2024. The Company's remaining estimated net deferred tax hedge gains from its interest rate hedging portfolio was $830.2 million as of March 31, 2024. 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, 2024; 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, 2024
		($ in thousands)
Second quarter 2024		$	25,509
Third quarter 2024			25,583
Fourth quarter 2024			25,680
Fiscal year 2025			103,523
Fiscal year 2026 and thereafter			649,895
		$	830,190

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, 2024				December 31, 2023
Comprehensive income to common shareholders	$	20,927			$	81,648
Less:
Change in fair value of investments, net (1)		87,292				(323,259	)
Change in fair value of derivative instruments, net (2)		(125,903	)			227,759
EAD to common shareholders	$	(17,684	)		$	(13,852	)
Weighted average common shares		59,008				56,691
EAD per common share	$	(0.30	)		$	(0.24	)
Net interest expense	$	(3,192	)		$	(2,277	)
TBA drop loss (3)		(1,268	)			(844	)
Adjusted net interest expense	$	(4,460	)		$	(3,121	)
Operating expenses		(11,301	)			(8,808	)
Preferred stock dividends		(1,923	)			(1,923	)
EAD to common shareholders	$	(17,684	)		$	(13,852	)
Net interest spread		(1.15	)%			(1.24	)%
Impact from TBA dollar roll transactions (4)		0.14	%			0.18	%
Adjusted net interest spread		(1.01	)%			(1.06	)%

(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/loss 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 (0.35)% and (0.23)% for the three months ended March 31, 2024 and December 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 the wars between Russia and the Ukraine and between Israel and Hamas and the related impact on macroeconomic conditions as a result of such conflicts; 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, 2023, 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.

View source version on businesswire.com: https://www.businesswire.com/news/home/20240422758139/en/

Alison Griffin

(804) 217-5897

Source: Dynex Capital, Inc.

FAQ

What was Dynex Capital's total economic return per common share for the first quarter of 2024?

Dynex Capital reported a total economic return of $0.28 per common share for the first quarter of 2024.

What was Dynex Capital's book value per common share as of March 31, 2024?

Dynex Capital's book value per common share was $13.20 as of March 31, 2024.

How much was Dynex Capital's comprehensive income per common share for the first quarter of 2024?

Dynex Capital's comprehensive income was $0.35 per common share for the first quarter of 2024.

What were Dynex Capital's net income and dividends declared per common share for the first quarter of 2024?

Dynex Capital reported net income of $0.65 per common share and declared dividends of $0.39 per common share for the first quarter of 2024.

What is the leverage ratio of Dynex Capital including TBA securities at cost as of March 31, 2024?

Dynex Capital's leverage, including TBA securities at cost, was 8.1 times shareholders' equity as of March 31, 2024.