Dynex Capital, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Dynex is an internally managed mortgage REIT that invests primarily in mortgage-backed securities using repurchase-agreement financing.
Financial performance and position
| Metric | Q3 2021 | Comparison |
|---|---|---|
| Net interest income | $14.4 million | $16.7 million in Q3 2020; $12.1 million in Q2 2021 |
| Net income to common shareholders | $12.1 million; $0.35 per diluted share | $37.5 million; $1.62 per diluted share in Q3 2020 |
| Comprehensive income to common shareholders | $3.0 million; $0.09 per share | Loss of $31.4 million; loss of $0.98 per share in Q2 2021 |
| Earnings available for distribution (non-GAAP) | $18.9 million; $0.54 per share | $16.3 million; $0.51 per share in Q2 2021 |
| Net interest spread | 1.93% | 1.87% in Q2 2021 |
| Common dividend declared | $0.39 per share | Unchanged from Q3 2020; $1.17 per share for the first nine months versus $1.27 in 2020 |
For the first nine months, net income was $88.2 million, versus $137.1 million in 2020; net income to common shareholders was $78.8 million, or $2.52 per diluted share, versus $122.8 million, or $5.33. Net interest income fell to $38.8 million from $49.4 million, while net interest spread rose to 1.95% from 1.69%. The 2020 comparison included $298.7 million of realized investment gains and large derivative losses; 2021 recorded $6.7 million of realized investment gains and $64.5 million of derivative gains.
Nine-month operating cash flow was $108.7 million, compared with $130.0 million in 2020. Investing activities used $220.1 million and financing activities provided $200.4 million. Cash was $382.8 million at quarter-end; cash plus posted collateral was $399.4 million.
At September 30, total assets were $3.35 billion, including $2.86 billion of MBS. Repurchase-agreement borrowings were $2.53 billion, up from $2.44 billion at year-end 2020; shareholders’ equity was $773.5 million, up from $633.5 million. Management-reported leverage was 5.9x equity, down from 6.3x at year-end 2020 and 6.7x at Q2 end. Available liquidity, defined by the company as unrestricted cash and unencumbered securities, was $559.7 million.
Material changes and management commentary
- Q3 net interest income increased $2.3 million from Q2, mainly because late-Q2 Agency RMBS purchases contributed a full quarter of income. Adjusted net interest income, a non-GAAP measure including TBA drop income, was $27.7 million versus $24.3 million in Q2.
- Q3 comprehensive results improved substantially from Q2 as longer-term rates rose and the company’s interest-rate hedges gained value. Investment losses, net of hedges, were $2.7 million in Q3 versus $35.6 million in Q2.
- Book value per common share was $18.42 at quarter-end. Total economic return was $0.06 per share, or 0.3%, including the $0.39 dividend and a $0.33 decline in book value. Management attributed the decline mainly to asset losses exceeding hedge gains.
- The company raised $224.4 million through common-stock issuance during the first nine months, including $27.9 million through its ATM program in Q3. It redeemed its remaining Series B preferred stock in Q1 for $69.7 million, including the redemption charge. Common shares outstanding rose to 35.9 million from 23.7 million at year-end 2020.
- Effective January 1, 2021, newly purchased MBS are carried at fair value through net income; previously held MBS remain available-for-sale, with fair-value changes generally recorded in other comprehensive income. This affects the location and timing of reported gains and losses.
Outlook, risks, and contingencies
- Management reported that, after September 30, the yield curve had steepened and estimated book value at $18.80–$19.00 per share. This is an estimate, not a formal earnings or dividend forecast.
- Management expected short-term rates to remain low through at least the first half of 2022, but highlighted uncertainty around inflation, growth, Federal Reserve policy and tapering, mortgage spreads, and COVID-19. It intended to maintain lower leverage and allocate capital to highly liquid investments.
- The filing identifies interest-rate, spread, prepayment, credit, liquidity, and reinvestment risks. Most repurchase facilities are uncommitted and may not renew; falling collateral values can trigger margin calls. Failure to roll TBA positions could require cash settlement or physical delivery.
- COVID-related delinquencies in underlying non-Agency CMBS IO collateral, particularly retail and hotel loans, had so far nominally affected cash flows; management said future effects remained uncertain. Agency RMBS spreads could widen as the Fed tapers purchases.
- A court ruling on November 1, 2021 dismissed the Receiver’s litigation claim and awarded the company $14.2 million on its offsetting claim. The Receiver could appeal; management expected no material adverse effect, but the outcome was not certain.
- The company reported compliance with repurchase-agreement covenants and no material change to previously disclosed risk factors. No material contractual obligations beyond short-term repos or material capital-expenditure commitments were reported.
Most important facts for investors to verify
- Reconcile GAAP net income, comprehensive income, book-value changes, and non-GAAP EAD; EAD excludes fair-value movements and is not a substitute for GAAP results.
- Track leverage, available liquidity, repo maturities and renewal terms, collateral haircuts, and margin-call exposure.
- Assess the sensitivity of book value and net interest income to rate moves and curve changes; the filing’s modeled sensitivities assume specified market shocks and an unchanged portfolio.
- Monitor Federal Reserve tapering, Agency MBS spreads, prepayment speeds, and performance of non-Agency CMBS IO collateral.
- Review the impact of common-stock issuance and preferred-stock redemption on per-share earnings, book value, and dividend coverage, and follow any appeal in the Receiver litigation.