Dynex Capital, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Dynex is an internally managed mortgage REIT investing primarily in Agency mortgage-backed securities (MBS), funded largely with repurchase agreements and using derivatives to hedge interest-rate exposure. Dollar amounts below are in millions unless otherwise noted.
Financial results and position
| Metric | Q1 2022 | Comparable period / change |
|---|---|---|
| Interest income / net interest income | $17.4 / $15.7 | Interest income $13.9 / NII $12.3 in Q1 2021 |
| Net income / net income to common shareholders | $117.2 / $115.3 | $117.9 / $112.4 in Q1 2021 |
| EPS, basic / diluted | $3.14 / $3.11 | $4.20 / $4.20 in Q1 2021 |
| Comprehensive income to common shareholders | $23.9 | $47.2 in Q1 2021 |
| Common dividend declared per share | $0.39 | $0.39 in Q1 2021 |
| Net interest spread | 1.86% | 1.87% in Q1 2021; 1.87% in Q4 2021 |
| Adjusted net interest spread (non-GAAP) | 2.08% | 1.87% in Q1 2021; 2.03% in Q4 2021 |
| Earnings available for distribution (EAD), per common share (non-GAAP) | $16.1 / $0.44 | $12.4 / $0.46 in Q1 2021 |
Net income reflected a $220.2 million gain on derivatives, partly offset by $111.3 million of unrealized investment losses. Investments and loans declined $202.6 million in fair value, while derivatives gained $220.2 million, for a net fair-value increase of $17.6 million. Available-for-sale investment losses also drove $91.3 million of other comprehensive loss. Management cautions that EAD and adjusted net interest measures exclude fair-value changes and should be considered alongside GAAP results.
- Balance sheet at March 31: Assets $3,849.2; liabilities $3,063.6; shareholders’ equity $785.6; MBS at fair value $3,215.0.
- Debt and leverage: Repurchase agreements were $2,952.8, up from $2,849.9 at year-end 2021. Period-end weighted-average repo rate was 0.31%, versus 0.23%. Company-defined leverage, including TBA long positions, was 6.1x equity, versus 5.7x at year-end.
- Liquidity: Cash was $457.0 and cash collateral posted to counterparties was $114.7. Company-defined most liquid assets were $549.4, versus $533.1 at year-end. Operating cash flow was $34.6; cash including cash posted to counterparties increased $150.4 during the quarter.
Material changes and management commentary
- Rapidly rising interest rates and widening MBS spreads pressured investment valuations. Management reported book value of $18.24 per common share, up $0.25 from $17.99 at year-end. Total economic return to common shareholders was $0.64 per share, or 3.5% of beginning book value, including the $0.39 dividend.
- Agency RMBS amortized cost, including TBAs, rose 11% from year-end. Dynex shifted TBA positions toward 3.0% and 3.5% coupons; approximately 40% of its Agency RMBS portfolio was in those coupons at quarter-end, compared with approximately 5% at year-end.
- Net interest income was nearly unchanged from Q4 2021: higher asset balances and yields were offset by rising financing costs and lower CMBS prepayment compensation. Compared with Q1 2021, NII increased $3.4 million, mainly due to a larger average Agency RMBS portfolio.
- Management said it was maintaining higher liquidity and a lower leverage range to manage volatility. It expects financing costs to rise during 2022 and believes MBS spreads could widen further as Federal Reserve quantitative tightening proceeds.
Outlook, risks, and contingencies
- No formal earnings or book-value guidance is provided. Management said it believed it could maintain the common dividend for the balance of 2022 by adding 2–3 turns of leverage, depending on market developments and rising funding costs; this is an expectation, not a commitment.
- Management expects further spread widening could pressure book value, while stating that attractive portfolio returns—and potentially double-digit returns if spreads widen as anticipated—could support recovery. Timing and market outcomes are uncertain.
- Key risks include interest-rate and spread volatility, Federal Reserve policy and quantitative tightening, repo funding renewal and margin calls, TBA settlement liquidity, prepayments, and credit or liquidity issues in CMBS IO holdings. Repo financing is principally uncommitted and generally short term; some agreements include cross-default provisions. Dynex reported covenant compliance at quarter-end.
- The company cited inflation, supply disruptions, and Russia’s war in Ukraine as sources of macroeconomic uncertainty. It also identified reliance on a third-party provider for critical trading, portfolio-management, risk-reporting, and accounting systems; it was implementing new systems, which contributed to higher G&A expense.
- Dynex reported no material changes to previously disclosed risk factors and no known pending or threatened legal proceedings expected to have a material adverse effect. It recorded no allowance for MBS credit losses, stating that unrealized losses were market-related rather than credit-related.
Important facts for investors to verify
- Whether post-quarter interest-rate and spread movements, including the subsequent impact of quantitative tightening, altered book value, liquidity, or hedge effectiveness.
- Whether repo lenders renew financing on acceptable terms and whether collateral haircuts, margin calls, or TBA settlement needs affect liquidity.
- Whether the stated dividend outlook remains supportable as financing costs rise and leverage changes; compare EAD with the declared dividend and GAAP results.
- Whether the large derivative gain and investment losses reflect effective hedging over time, and how fair-value changes affect book value and common equity.
- Whether the expected benefits and timely implementation of the new operating systems are achieved, given the company’s reliance on a third-party provider.