Dynex Capital, Inc. Reports Fourth Quarter and Full Year 2018 Results

GLEN ALLEN, Va.–(BUSINESS WIRE)–Dynex Capital, Inc. (NYSE: DX) reported its fourth quarter and full year
2018 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 1-866-393-4306
(internationally at 1-734-385-2616) using conference ID 3197606 or by
live webcast, which includes a slide presentation, under “Investor
Center” on the Company’s website (www.dynexcapital.com).

Fourth Quarter 2018 Highlights

  • Comprehensive loss of $(0.52) per common share and net loss of $(1.34)
    per common share
  • Core net operating income, a non-GAAP measure, of $0.18 per common
    share
  • Book value per common share of $6.02 at December 31, 2018 compared to
    $6.75 at September 30, 2018 and $7.34 at December 31, 2017
  • Announced payment of dividends on its common stock on a monthly,
    rather than quarterly, basis commencing in January, 2019
  • Leverage including TBA dollar roll positions increased to 8.0x
    shareholders’ equity at December 31, 2018 compared to 6.7x at
    September 30, 2018 and 6.4x at December 31, 2017
  • Net interest spread and adjusted net interest spread, a non-GAAP
    measure, of 0.93% and 1.24%, respectively, for the fourth quarter of
    2018 compared to 1.08% and 1.41%, respectively, for the prior quarter

Full Year 2018 Highlights

  • Comprehensive loss of $(0.55) per common share and net loss of $(0.08)
    per common share
  • Core net operating income, a non-GAAP measure, of $0.73 per common
    share
  • Dividends declared of $0.72 per common share

Fourth Quarter 2018 Earnings Summary

Comprehensive loss to common shareholders was $(31.4) million for the
fourth quarter of 2018 versus comprehensive income to common
shareholders of $0.7 million for the third quarter of 2018. The Company
recorded a net loss to common shareholders of $(81.5) million for the
fourth quarter of 2018 compared to net income to common shareholders of
$22.6 million for the third quarter of 2018 while core net operating
income to common shareholders, a non-GAAP measure, remained relatively
steady at $10.9 million for the fourth quarter of 2018 versus $10.8
million for the third quarter of 2018. The Company’s net interest income
increased during the fourth quarter primarily because of growth in
interest earning assets, which offset higher repurchase agreement
borrowing costs resulting from increasing short-term market interest
rates. The Company also recognized discount accretion of $0.9 million
due to an early prepayment on a non-Agency CMBS and lowered its general
and administrative expenses by $0.5 million. TBA drop income declined
during the fourth quarter as the Company reduced its volume of TBA
dollar roll transactions compared to the third quarter of 2018. While
short-term market interest rates increased, interest rates on the 2-10
year portion of the swap curve declined resulting in a significant loss
in fair value of the Company’s interest rate swaps, which is included in
net loss on derivative instruments of $(82.0) million. Partially
offsetting the decline in fair value of interest rate swaps, the Company
recorded other comprehensive income of $50.1 million resulting primarily
from the increase in fair value of MBS due to the overall decline in
interest rates during the quarter.

Book Value Per Common Share

Book value per common share declined $(0.73), or (10.8)% during the
fourth quarter of 2018 to $6.02 at December 31, 2018 from $6.75 at
September 30, 2018. Book value per common share declined as market
volatility at the end of 2018 led to widening of credit spreads on
Agency RMBS and CMBS. For the fourth quarter and full year, the Company
had total economic loss on book value per common share of (8.2)%.

On January 31, 2019, the Company closed an offering of 8,050,000 shares
of common stock for net proceeds of approximately $46.1 million after
deducting estimated expenses, impacting book value per common share by
approximately $(0.05). Market volatility in 2019 has modestly subsided
since the fourth quarter of 2018, resulting in tightening credit spreads
on Agency RMBS and CMBS and thereby improving the Company’s book value
per common share to approximately $6.20(1) at January 31,
2019.

(1) The approximate book value at January 31, 2019 is unaudited
and has not been verified or reviewed by any third party. The
Company undertakes no obligation to update or revise its estimate of
book value.

The following table provides details on the performance of our
investments and financing including hedging costs for the periods
indicated:

Three Months Ended
December 31, 2018   September 30, 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 $ 16,164 $ 1,866,378 3.46 % $ 11,561 $ 1,384,926 3.34 %
Agency CMBS-fixed rate 7,796 1,036,402 2.94 % 7,362 1,002,661 2.81 %
Agency RMBS-adjustable rate 267 33,821 3.27 % 283 37,634 3.12 %
CMBS IO (1) 6,101 543,204 3.89 % 6,646 581,770 3.98 %
Other non-Agency MBS 1,149 2,900 60.38 % 427 4,869 30.31 %
U.S. Treasuries % 45 6,302 2.83 %
Other investments 537   11,968   4.51 % 601   13,226   4.25 %
Total $ 32,014   $ 3,494,673 3.42 % $ 26,925   $ 3,031,388 3.33 %
 
Interest-bearing liabilities:
Repurchase agreements 19,099 2,992,513 2.50 % $ 14,780 $ 2,564,863 2.25 %
Non-recourse collateralized financing 29 3,613 2.88 % 37 4,260 3.01 %
De-designated cash flow hedge accretion (75 ) n/a (0.01)% (66 ) n/a (0.01)%
Total $ 19,053 $ 2,996,126 2.49% $ 14,751 $ 2,569,123 2.25%
       
Net interest income/net interest spread $ 12,961   0.93 % $ 12,174   1.08 %
Add: TBA drop income 3,072 0.06 % 4,262 0.06 %
Add: net periodic interest benefit (2) 1,940 0.26 % 1,777 0.28 %
Less: de-designated cash flow hedge accretion (75 ) (0.01)% (66 ) (0.01)%
Adjusted net interest income/adjusted net interest spread (3) $ 17,898   1.24 % $ 18,147   1.41 %
(1) CMBS IO includes Agency and non-Agency securities.
(2) 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.
(3) Represents a non-GAAP measure.

The Company’s net interest spread and adjusted net interest spread
declined 15 and 17 basis points, respectively, during the fourth quarter
of 2018 compared to the prior quarter as the impact on interest income
from a higher yielding MBS portfolio was insufficient to offset the 24
basis point increase in the Company’s cost of financing from higher
market interest rates during the quarter.

Investments and Financing

The following table compares details of our MBS including TBA dollar
roll positions as of December 31, 2018 versus September 30, 2018:

  December 31, 2018   September 30, 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 $ 223,573 $ 225,148 $ 218,286 $ 228,116 $ 229,734 $ 218,671
4.0% coupon 1,651,854 1,699,012 1,687,390 1,339,668 1,386,905 1,356,169
4.5% coupon 211,429 218,557 219,134 158,111 163,388 163,244
TBA dollar roll positions (4.0% coupon) (1) (2) 110,000 111,175 112,101 211,000 214,365 213,060
TBA dollar roll positions (4.5% coupon) (1) (2) 750,000   771,055   776,368   550,000   566,500   566,637
Total 30-year fixed-rate RMBS 2,946,856 3,024,947 3,013,279 2,486,895 2,560,892 2,517,781
 
Adjustable-rate RMBS:
4.1% coupon (3) 31,782 32,666 33,211 35,379 36,339 37,068
 
Agency CMBS 1,071,906 1,080,424 1,057,015 987,266 997,058 948,296
CMBS IO (4) n/a 527,743 532,154 n/a 562,327 564,826
Other non-Agency MBS 3,896   1,859   2,274   7,936   4,833   6,236

Total MBS portfolio including TBA dollar roll

positions

$ 4,054,440   $ 4,667,639   $ 4,637,933   $ 3,517,476   $ 4,161,449   $ 4,074,207
(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 $6.2 million and $(1.2) million as of December 31, 2018
and September 30, 2018, respectively, and is included within
derivative assets/liabilities on the consolidated balance sheet.
(3) Represents the weighted average coupon based on amortized cost.
(4) Includes both Agency and non-Agency IO securities with a combined
notional balance of $23.3 billion at December 31, 2018 and $23.6
billion at September 30, 2018.

During the fourth quarter of 2018, we purchased $489.2 million MBS, net
of sales, which consisted primarily of higher coupon 30-year fixed-rate
Agency RMBS and newly issued Agency CMBS. The Company’s repurchase
agreement borrowings including payables for unsettled securities as of
December 31, 2018 increased 16% to $3.3 billion compared to $2.9 billion
at September 30, 2018 commensurate with the growth in investments, which
resulted in leverage including TBA dollar roll positions of 8.0x
shareholder’s equity compared to 6.7x at September 30, 2018.

Hedging Summary

During the fourth quarter of 2018, the Company terminated interest rate
swaps with a notional balance of $370.0 million resulting in a net
realized gain of $5.1 million. The Company also added interest rate
swaps with a notional balance of $815.0 million at a weighted average
pay-fixed rate of 3.11% during the fourth quarter. 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) December 31, 2018     September 30, 2018  
Average repurchase agreement borrowings outstanding $ 2,992,513 $ 2,564,863
Average net TBAs outstanding – at cost (1) 814,478   982,665  
Average borrowings and net TBAs outstanding $ 3,806,991 $ 3,547,528
Average notional amount of interest rate swaps outstanding
(excluding forward starting swaps)
$ 2,961,957   $ 2,502,609  
Ratio of average interest rate swaps to average borrowings and net
TBAs outstanding (1)
0.8 0.7
 
Average interest rate swap pay-fixed rate (excluding forward
starting swaps)
2.24 % 2.09 %
Average interest rate swap receive-floating rate 2.44 % 2.32 %
Average interest rate swap net receive rate (0.20 )% (0.23 )%
(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 aggregate notional amount of currently effective and
forward-starting interest rate swaps as of December 31, 2018 was $3.7
billion and $0.8 billion, respectively. The following table summarizes
the weighted average notional amount and rate of interest rate hedges
held as of December 31, 2018:

  December 31, 2018
($ in thousands)

Weighted Average

Notional

  Weighted Average

Pay-Fixed Rate

2019 3,599,027 2.33 %
2020 2,989,495 2.45 %
2021 2,722,397 2.50 %
2022 2,688,521 2.59 %
2023 1,971,932 2.77 %
2024 1,751,503 2.79 %
2025 1,524,384 2.79 %
2026 and thereafter 237,972 2.86 %

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
positions, 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, 2017, 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)

December 31, 2018   September 30, 2018   December 31, 2017
ASSETS (unaudited) (unaudited)
Available-for-sale investments, at fair value:
Mortgage-backed securities $ 3,749,464 $ 3,294,510 $ 3,026,989
U.S. Treasuries 146,530
Mortgage loans held for investment, net 11,527 12,342 15,738
Cash and cash equivalents 34,598 55,251 40,867
Restricted cash 54,106 58,334 46,333
Derivative assets 6,563 2,612 2,940
Accrued interest receivable 21,019 19,575 19,819
Other assets, net 8,812   5,555   6,562  
Total assets $ 3,886,089   $ 3,448,179   $ 3,305,778  
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Repurchase agreements $ 3,267,984 $ 2,690,858 $ 2,565,902
Payable for unsettled securities 58,915 182,922 156,899
Non-recourse collateralized financing 3,458 3,709 5,520
Derivative liabilities 1,218 2,039 269
Accrued interest payable 10,308 5,676 3,734
Accrued dividends payable 13,810 13,121 12,526
Other liabilities 3,243   3,101   3,870  
Total liabilities 3,358,936 2,901,426 2,748,720
 
Shareholders’ equity:

Preferred stock – aggregate liquidation preference of $148,865;

$148,541; and $147,217, respectively

$ 142,883 $ 142,574 $ 141,294

Common stock, par value $.01 per share: 62,817,218; 59,016,554;

and 55,831,549 shares issued and outstanding, respectively

628 590 558
Additional paid-in capital 818,442 795,630 775,873
Accumulated other comprehensive loss (35,779 ) (85,833 ) (8,697 )
Accumulated deficit (399,021 ) (306,208 ) (351,970 )
Total shareholders’ equity 527,153   546,753   557,058  
Total liabilities and shareholders’ equity $ 3,886,089   $ 3,448,179   $ 3,305,778  
 
Book value per common share $ 6.02 $ 6.75 $ 7.34

DYNEX CAPITAL, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

(amounts in thousands except per share data)

Three Months Ended   Year Ended
December 31, 2018   September 30, 2018   June 30, 2018   March 31, 2018 December 31, 2018
Interest income $ 32,014 $ 26,925 $ 25,922 $ 25,190 $ 110,051
Interest expense 19,053   14,751   14,175   11,595   59,574  
Net interest income 12,961 12,174 11,747 13,595 50,477
 
(Loss) gain on derivative instruments, net (81,981 ) 19,499 20,667 38,354 (3,461 )
Loss on sale of investments, net (5,428 ) (1,726 ) (12,444 ) (3,775 ) (23,373 )
Fair value adjustments, net (16 ) 12 27 29 52
Other operating expense, net (566 ) (409 ) (339 ) (253 ) (1,567 )
General and administrative expenses:
Compensation and benefits (1,180 ) (1,712 ) (1,751 ) (1,962 ) (6,605 )
Other general and administrative (2,312 ) (2,252 ) (2,255 ) (1,681 ) (8,500 )
Net (loss) income (78,522 ) 25,586 15,652 44,307 7,023
Preferred stock dividends (2,963 ) (2,956 ) (2,942 ) (2,940 ) (11,801 )
Net (loss) income to common shareholders $ (81,485 ) $ 22,630   $ 12,710   $ 41,367   $ (4,778 )
 
Other comprehensive income:

Unrealized gain (loss) on available-

for-sale investments, net

$ 44,701 $ (23,574 ) $ (22,156 ) $ (49,189 ) $ (50,218 )

Reclassification adjustment for loss

on sale of investments, net

5,428 1,726 12,444 3,775 23,373

Reclassification adjustment for

de-designated cash flow hedges

(75 ) (66 ) (48 ) (48 ) (237 )
Total other comprehensive income (loss) 50,054   (21,914 ) (9,760 ) (45,462 ) (27,082 )
Comprehensive (loss) income to common shareholders $ (31,431 ) $ 716   $ 2,950   $ (4,095 ) $ (31,860 )
 
Net (loss) income per common share-basic and diluted $ (1.34 ) $ 0.39 $ 0.23 $ 0.74 $ (0.08 )
Weighted average common shares 60,870 57,727 56,295 55,871 57,705

Contacts

For Dynex Capital, Inc.
Alison Griffin
(804)
217-5897

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