Dynex Capital, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Dynex is an internally managed mortgage REIT investing primarily in Agency mortgage-backed securities (MBS), with financing and hedging strategies that expose results to interest rates, spreads, prepayments, and funding-market conditions. Financial amounts below are in U.S. dollars; “m” and “bn” denote millions and billions.
Financial performance and position
| Metric | Q2 2022 / June 30, 2022 | Comparison |
|---|---|---|
| Interest income / net interest income | $18.3m / $14.1m | Q2 2021: $13.4m / $12.1m |
| Net income / income to common shareholders | $29.3m / $27.4m; basic EPS $0.70 | Q2 2021: net loss $43.8m; common loss $45.7m; EPS $(1.43) |
| Comprehensive income (loss) to common shareholders | $(33.5)m; $(0.85) per share | Q2 2021: $(31.4)m |
| Common dividend declared | $0.39 per share | Unchanged from Q2 2021 |
| Net interest spread / adjusted net interest spread | 1.50% / 1.84% | Q1 2022: 1.86% / 2.08% |
| Total assets / shareholders’ equity | $3.20bn / $842.4m | December 31, 2021: $3.64bn / $771.3m |
| Repurchase agreement borrowings | $2.20bn | March 31, 2022: $2.95bn; December 31, 2021: $2.85bn |
| Cash / most liquid assets | $325.7m / $608.9m | Cash includes neither posted collateral nor all liquid securities; most liquid assets were $533.1m at year-end 2021 |
For the six months, net interest income was $29.8m versus $24.4m in 2021, and net income was $146.5m versus $74.2m. Common-shareholder income was $142.7m versus $66.7m; diluted EPS was $3.72 versus $2.26. Six-month comprehensive loss to common shareholders was $9.6m versus income of $15.8m in 2021. Operating cash flow was $70.7m; investing activities provided $516.3m and financing activities used $571.3m. Cash including cash posted to counterparties ended at $437.1m, versus $653.2m a year earlier.
Material changes and unusual items
- Q2 book value per common share fell $1.45 to $16.79. Total economic return to common shareholders was negative 5.8%, including the $0.39 dividend. Management attributed the decline mainly to spread widening and market volatility.
- Investment fair-value losses exceeded gains on hedges by $49.2m in Q2. For the six months, investment fair-value changes were a loss of $347.2m, partly offset by $326.6m of derivative gains. Q2 also included an $18.6m realized loss on investment sales.
- Management reported Q2 earnings available for distribution (EAD) of $0.40 per common share in its discussion; the non-GAAP reconciliation reports $0.41. EAD was $0.44 in Q1. Management cited higher repo financing costs for the sequential decline. The filing cautions that EAD excludes portfolio and hedge fair-value changes and is not a substitute for GAAP results.
- Q2 repurchase-agreement financing cost rose: the reported quarterly cost of funds was 0.68%, versus 0.25% in Q1. Management expects financing costs to continue increasing during 2022 as Federal Reserve rate hikes are reflected in funding markets.
- The company issued 6.54m common shares through its ATM program in Q2 for $105.2m net of broker commissions and fees, at an average net issue price of $16.09. Management said the issuance reduced book value per share by $0.21 and that proceeds were being invested. Common shares outstanding increased to 43.52m from 36.67m at year-end 2021.
- Leverage, defined by the company to include liabilities and the cost basis of long TBA positions, was 6.6x equity at quarter-end, up from 5.7x at year-end. The investment portfolio’s amortized cost including TBAs grew 18% during Q2; management shifted exposure toward higher coupons.
Outlook, risks, and contingencies
Management expects elevated volatility and potentially wider mortgage spreads amid inflation, Federal Reserve quantitative tightening, geopolitical uncertainty, and possible yield-curve flattening or inversion. It described the portfolio as positioned for multiple rate and spread scenarios, with a more neutral duration gap and a bias toward lower rates. Management reported more than $600m of liquidity to deploy and capacity to increase leverage, while emphasizing downside protection and balance-sheet flexibility. These are expectations, not formal earnings guidance; the filing provides no specific full-year earnings forecast.
Key risks include uncommitted, generally short-term repo funding and lender renewal discretion; margin calls from declines in collateral values; spread and interest-rate movements; prepayment and reinvestment risk; and the possibility that TBA positions cannot be rolled, requiring cash settlement or physical delivery. The company reported compliance with financing covenants and no counterparty exposure above 5% of equity at risk. It reported no material pending or threatened legal proceedings and no material changes to the risk factors in its 2021 Form 10-K. Management said disclosure controls were effective and there were no material quarterly changes to internal control over financial reporting.
Important facts for investors to verify
- Reconcile the reported Q2 EAD per share of $0.40 in management’s discussion with $0.41 in the non-GAAP reconciliation.
- Track book value, spread widening, hedge effectiveness, and the extent to which ATM proceeds earn returns sufficient to offset issuance-related dilution.
- Monitor repo borrowing costs, lender renewals, collateral and margin requirements, and leverage including TBA commitments.
- Assess the sustainability of dividends against taxable income, EAD, cash flows, and REIT distribution requirements; the filing notes $363.3m of net deferred tax hedge gains and tax-loss carryforwards.
- Review the stated market-risk sensitivities with their assumptions: the models assume static portfolio composition and do not capture spread changes, so actual results may differ materially.