Dynex Capital, Inc. Reports Fourth Quarter and 2020 Full Year Results

Rhea-AI Summary

Dynex Capital reported impressive financial results for Q4 and the full year of 2020, achieving a 15.2% total economic return and a 17.0% total shareholder return. The book value per common share increased to $19.08, up from $18.01 in 2019, while comprehensive income stood at $2.88 per common share. The company's net interest spread rose to 1.77% for 2020, reflecting solid income growth. However, the company also faced challenges, including a $172.3 million net loss on derivatives, affecting overall performance.

Positive

• 15.2% total economic return and 17.0% total shareholder return in 2020.
• Book value per common share increased to $19.08 from $18.01 year-over-year.
• Net interest spread rose to 1.77% in 2020 from 0.98% in 2019.
• Core net operating income of $1.94 per common share for 2020.
• Realized $9.4 million gain from sales of higher coupon Agency RMBS.

Negative

• Net loss on derivative instruments of $172.3 million in 2020.
• General and administrative expenses increased by $5.1 million year-over-year.

Dynex Capital, Inc. (NYSE: DX) reported its fourth quarter and 2020 full year 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".

Management Remarks

"I am very proud to report that in 2020 we delivered a 15.2% total economic return and a 17.0% total shareholder return," commented Byron L. Boston, Chief Executive Officer. "I have been at Dynex for 13 years, and no other year has demanded as much active decision-making as 2020. We made money for our shareholders as our book value increased and we delivered a solid dividend. Our industry-leading performance stands in sharp contrast to many other investment alternatives for investors seeking income."

Mr. Boston continued, "At Dynex Capital, we have a distinct philosophy of how we manage for the long-term and that same philosophy is guiding our investment approach today. We believe in risk management first followed by disciplined capital allocation. This philosophy, combined with our experience, gave us the edge to actively manage our portfolio in order to provide our shareholders strong returns. Our 2020 performance reflects years of experience in thoughtful planning by a skilled team of people ready to act, particularly in volatile times. As we look towards the rest of 2021, we believe the broader investment environment remains favorable with financing costs anchored well into 2022 and beyond. We believe there is significant upside in our balance sheet earnings power with flexibility to generate solid economic returns."

2020 Financial Performance Highlights

• Total economic return to common shareholders, defined as dividends plus change in book value per common share, of 15.2% comprised of $1.66 in dividends declared and $1.07 increase in book value per common share during 2020
• Book value per common share of $19.08 as of December 31, 2020 compared to $18.01 as of December 31, 2019
• Comprehensive income of $2.88 per common share and net income of $6.93 per common share
• Core net operating income, a non-GAAP measure, of $1.94 per common share
• Net interest spread and adjusted net interest spread increased to 1.77% and 1.87%, respectively, for 2020 compared to 0.98% and 1.30% for 2019
• Leverage of 6.3x times shareholders' equity as of December 31, 2020

Fourth Quarter 2020 Financial Performance Highlights

• Total economic return to common shareholders of 6.7% comprised of $0.39 in common dividends declared and $0.83 increase in book value per common share for the fourth quarter
• Comprehensive income of $1.23 per common share and net income of $1.60 per common share
• Core net operating income of $0.45 per common share
• Net interest spread and adjusted net interest spread of 1.94% and 1.98%, respectively, for the fourth quarter of 2020 compared to 1.96% and 2.00%, respectively, for the third quarter of 2020

Other Highlights

• Maintained a diversified investment portfolio while continuing to shift to lower coupon Agency RMBS
• Realized a gain of $9.4 million primarily from sales of higher coupon Agency RMBS
• Added $750.0 million in interest rate swaptions to better mitigate interest rate volatility and convexity risk over a longer term to replace expiring or terminated U.S. Treasury options
• Subsequent to the end of 2020, issued 3.2 million shares of common stock through an underwritten public offering for gross proceeds of approximately $56.5 million before underwriting discounts and commissions and offering expenses, and announced the intent to redeem the remaining 2.8 shares of outstanding 7.625% Series B Preferred Stock on February 15, 2021

2020 Results Discussion

The Company's increase of $1.07 in book value per common share during 2020 was largely the result of a $214.5 million increase in the fair value of its MBS, which was driven primarily by credit spread tightening across all asset classes, but particularly in lower coupon RMBS. The Company was positioned to benefit from this spread tightening due to active portfolio and risk management, which became especially important during the difficult market conditions experienced in the first quarter of 2020. The increase in fair value of the Company's MBS, which comprised the majority of comprehensive income to common shareholders of $66.5 million for 2020, was partially offset by a net loss on derivative instruments of $(172.3) million during 2020, which consisted mainly of losses incurred in the first quarter of 2020 when the Company terminated the majority of its interest rate swaps. These terminations were due to the Company's significant MBS sales during the first quarter, increased margin requirements by derivative counterparties, and the transition to options and futures to hedge impact of interest rate risk on book value. Losses incurred from hedging instruments were partially offset by the Company's increased investment in TBA securities, which generated net gains of $51.2 million during 2020. The Company increased its investment in TBAs as implied funding costs were lower for TBA dollar roll transactions for most of 2020 versus repurchase agreements the Company typically uses for financing the purchase of specified pools.

For 2020, net interest income increased $7.8 million and net interest spread increased 79 basis points compared to 2019 despite the Company's smaller average balance of investments held during 2020. The increase was driven by lower financing costs as a result of the reduction in the Federal Funds Rate coupled with active management of the terms of the Company's repurchase agreement borrowings. Partially offsetting this increase, general and administrative expenses for 2020 increased $5.1 million compared to the prior year due primarily to changes made in 2020 to the payment structure of the executive compensation program that impact the timing of recognition of expenses and higher overall performance-based bonus compensation from management meeting its corporate goals and expenses. for the year.

Fourth Quarter 2020 Results Discussion

Book value per common share increased $0.83 during the fourth quarter due in part to realized gains on the Company's TBA securities and short positions in U.S. Treasury futures. For the fourth quarter of 2020, the Company's net gain on derivative instruments of $23.9 million comprised the majority of comprehensive income to the common shareholders of $28.7 million, a decline of $(15.7) million from the third quarter of 2020 due primarily to a smaller increase in the fair value of MBS during the fourth quarter of 2020. Asset credit spreads continued to tighten during the fourth quarter, offsetting rising longer-term interest rates. The increase in fair value of MBS was also smaller for the fourth quarter because the Company had sold Agency CMBS with an amortized cost of $382.3 million during the third quarter. As a result of the smaller portfolio, core net operating income declined to $10.5 million for the fourth quarter of 2020 compared to $14.2 million for the prior quarter due to the smaller average balance of assets and modestly declining asset yields, reducing net interest income by $2.3 million. Fourth quarter earnings were also impacted by an increase of $2.1 million in general and administrative expenses resulting primarily from year-end incentive compensation reflecting a catch-up adjustment for accrued performance-based bonuses for management's achievement of its corporate goals and objectives based on final results of the Company for the year.

Earnings Conference Call

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. or by live audio webcast through the “Current Events” section on the homepage of the Company's website (www.dynexcapital.com), which includes a slide presentation. An archive of the webcast will be available on the Company's website approximately two hours after the live call ends. To listen to the live conference call via telephone, please register in advance using the following link: http://www.directeventreg.com/registration/event/6326989. After registering, a confirmation will be sent through email, including dial-in details and unique conference call codes for entry. Registration may be completed at any time, including after the call start time. However, to ensure you are connected for the full call, the Company suggests registering a day in advance.

Consolidated Balance Sheets
($s in '000s except per share data)	December 31, 2020					September 30, 2020					December 31, 2019
ASSETS	(unaudited)					(unaudited)
Cash and cash equivalents	$	295,602				$	158,897				$	62,582
Restricted cash	7,077					26,006					71,648
Mortgage-backed securities	2,596,255					2,995,660					5,188,163
Mortgage loans held for investment	6,264					6,921					9,405
Receivable for securities sold	150,432					1,145					—
Derivative assets	11,342					4,266					4,290
Accrued interest receivable	14,388					15,340					26,209
Other assets, net	6,394					6,804					8,307
Total assets	$	3,087,754				$	3,215,039				$	5,370,604
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Repurchase agreements	$	2,437,163				$	2,594,683				$	4,752,348
Payable for unsettled securities purchased	5					190					6,180
Non-recourse collateralized financing	111					645					2,733
Derivative liabilities	1,634					5,164					974
Accrued interest payable	1,410					1,059					15,585
Accrued dividends payable	5,814					5,755					6,280
Other liabilities	8,164					3,990					3,516
Total liabilities	$	2,454,301				$	2,611,486				$	4,787,616
Shareholders’ equity:
Preferred stock - aggregate liquidation preference of $181,208, $181,208, and $169,708, respectively	$	174,564				$	174,709				$	162,807
Common stock, par value $.01 per share: 23,697,970, 23,145,238, and 22,945,993 shares issued and outstanding, respectively	237					231					229
Additional paid-in capital	869,495					859,089					858,347
Accumulated other comprehensive income	80,261					88,729					173,806
Accumulated deficit	(491,104		)			(519,205		)			(612,201		)
Total shareholders' equity	633,453					603,553					582,988
Total liabilities and shareholders’ equity	$	3,087,754				$	3,215,039				$	5,370,604
Book value per common share	$	19.08			$	$	18.25				$	18.01

Consolidated Comprehensive Statements of Income											Year Ended
(unaudited)	Three Months Ended
($s in '000s except per share data)	December 31, 2020					September 30, 2020					December 31, 2020
Interest income	$	16,705				$	20,088				$	96,468
Interest expense	2,289					3,375					32,615
Net interest income	14,416					16,713					63,853
Gain on sale of investments, net	9,356					20,846					308,084
Gain (loss) on derivative instruments, net	23,866					7,974					(172,290		)
(Loss) gain on investments, net	(134		)			194					20
Other operating expense, net	(205		)			(207		)			(1,057		)
General and administrative expenses	(6,853		)			(4,795		)			(21,080		)
Net income	40,446					40,725					177,530
Preferred stock dividends	(3,253		)			(3,252		)			(13,599		)
Preferred stock redemption charge	—					—					(3,914		)
Net income to common shareholders	$	37,193				$	37,473				$	160,017
Other comprehensive income:
Unrealized gain on available-for-sale investments, net	$	888				$	27,844				$	214,539
Reclassification of net gain realized on sale of investments	(9,356		)			(20,846		)			(308,084		)
Total other comprehensive (loss) income	(8,468		)			6,998					(93,545		)
Comprehensive income to common shareholders	$	28,725				$	44,471				$	66,472
Net income per common share-basic and diluted	$	1.60				$	1.62				$	6.93
Weighted average common shares	23,262					23,141					23,106

Investment Portfolio and Financing Data	As of and For the Quarter Ended
($s in '000s)	December 31, 2020				September 30, 2020
Agency RMBS:
Fair value	$	1,946,391			$	2,281,805
Amortized cost	1,897,043				2,224,877

FAQ

What was Dynex Capital's total economic return for 2020?

Dynex Capital reported a total economic return of 15.2% for 2020.

What is the book value per share for Dynex Capital as of December 31, 2020?

The book value per common share for Dynex Capital increased to $19.08 as of December 31, 2020.

What was the comprehensive income per share for Dynex Capital in 2020?

Dynex Capital reported a comprehensive income of $2.88 per common share for 2020.

How much did Dynex Capital earn in net interest spread in 2020?

Dynex Capital's net interest spread increased to 1.77% for the year 2020.

What loss did Dynex Capital report on derivative instruments for 2020?

Dynex Capital reported a net loss of $172.3 million on derivative instruments during 2020.