GLEN ALLEN, Va.--(BUSINESS WIRE)--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.

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.