Dynex Capital Reports Third Quarter 2020 Results


GLEN ALLEN, Va.--(BUSINESS WIRE)--Dynex Capital, Inc. (NYSE: DX) reported its third quarter 2020 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

"Our up-in credit and up-in-liquidity investment and hedging strategy led to a solid total economic return of 11.7% for the third quarter," commented Byron L. Boston, President and Chief Executive Officer. "Book value per common share increased as we were well positioned to benefit from improved asset valuations from tighter credit spreads. Our third quarter core earnings increased significantly as we added investments during the quarter and we continued to benefit from a low funding rate and favorable TBA dollar roll environment with our investment strategy."

Mr. Boston added, "Year-to-date, our total economic return is 8.4%, and our book value is now above where it was at December 31, 2019. Our outlook for the balance of 2020 looks favorable given the funding environment and central bank support of the economy and risk assets, notwithstanding the uncertainty of the trajectory of fiscal policy and the medium term economic outlook."

Financial Highlights

  • Comprehensive income of $1.92 per common share and net income of $1.62 per common share
  • Quarterly total economic return to common shareholders of 11.7%
  • Net interest spread and adjusted net interest spread of 1.96% and 2.00%, respectively, for the third quarter of 2020 compared to 1.96% and 1.96%, respectively, for the second quarter of 2020
  • Core net operating income, a non-GAAP measure, of $0.61 per common share
  • Book value per common share of $18.25 as of September 30, 2020 compared to $16.69 as of June 30, 2020
  • Dividends declared of $0.39 per common share
  • Leverage including TBA long positions of 6.2x shareholders' equity

Business Activity

  • Sold $382.3 million of Agency CMBS, realizing a gain of $20.8 million as spreads tightened substantially
  • Re-positioned hedge portfolio by terminating a notional amount of $425.0 million in interest rate swaps and shifting options to longer-dated tenors in order to maximize liquidity and to protect the portfolio under various rate scenarios
  • Asset allocation as of September 30, 2020 has shifted to 83% Agency RMBS including TBAs and 7% CMBS compared to 76% and 15%, respectively, as of the end of the second quarter
  • Effective October 27, 2020, Ms. Julia Coronado, former Federal Reserve economist and Ms. Joy Palmer, former deputy chief accountant of the Office of the Comptroller of the Currency, joined the Board of Directors concurrent with the resignation of Ms. Valerie Mosley

Results Discussion

The Company's book value per common share increased $1.56 during the third quarter of 2020 as credit spreads continued to tighten on MBS. This increase in fair value of MBS was the primary component of comprehensive income to common shareholders of $44.5 million for the third quarter of 2020, of which the Company monetized a portion of its Agency CMBS portfolio at a gain of $20.8 million. Though net interest spread remained flat at 1.96% for the third quarter versus the second quarter, net interest income increased $1.7 million for the third quarter of 2020 compared to the second quarter due primarily to lower financing costs offsetting declines in average earning asset yields, while a larger average balance of interest earning assets contributed to a modest increase in interest income. The Company's results also include a net gain on derivative instruments of $8.0 million, the majority of which is comprised of realized gains from TBA securities. The Company has increased its investments in TBA securities as implied funding costs remained lower for TBA dollar roll transactions versus repurchase agreement financing typically used for specified pools.

Core net operating income to common shareholders, a non-GAAP measure, was $14.2 million for the third quarter of 2020, which includes $6.1 million in TBA drop income. An increase in TBA drop income, together with lower repo funding costs and a larger average interest earning asset basis as noted above, were the primary drivers of the Company's core net operating income, which increased $5.8 million, or $0.25 per common share, to $0.61 per common share, compared to the second quarter of 2020.

Company Description

Dynex Capital, Inc. is an internally managed real estate investment trust, or REIT, which invests in mortgage assets on a leverage basis. The Company invests in Agency and non-Agency RMBS CMBS, and CMBS IO. Additional information about Dynex Capital, Inc., including its most recent Quarterly Report on Form 10-Q and Annual Report on Form 10-K, is available on the Company's website at www.dynexcapital.com.

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