Dynex Capital, Inc. — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. This is an annual filing; the supplied text does not provide a complete standalone fourth-quarter income statement. Dynex is an internally managed mortgage REIT investing primarily in Agency mortgage-backed securities (MBS), financed principally with repurchase agreements.
Financial performance and position
| Metric | 2023 | 2022 |
|---|---|---|
| Interest income | $207.5 million | $86.7 million |
| Interest expense | $215.4 million | $43.6 million |
| Net interest income (expense) | $(7.9) million | $43.1 million |
| Net income (loss) to common shareholders | $(13.8) million; $(0.25) per share | $135.5 million; $3.19 per share |
| Comprehensive income (loss) to common shareholders | $9.0 million | $(52.6) million |
| Net cash provided by operating activities | $62.2 million | $126.4 million |
- Net interest spread fell to negative 1.41% from positive 0.84%. Average asset yield increased to 3.86% from 2.49%, but average repo funding cost rose to 5.27% from 1.65%, reflecting higher short-term rates.
- Management’s non-GAAP earnings available for distribution (EAD) was a loss of $52.6 million, or $(0.96) per common share, versus $44.2 million, or $1.04 per share, in 2022. EAD is not GAAP earnings or a direct measure of REIT taxable income.
- Common book value per share declined to $13.31 from $14.73. Comprehensive income was positive, but the decline in book value was more than offset in the reported total economic return calculation by $1.56 per share of declared dividends, resulting in a $0.14 per-share return (1.0% of beginning book value).
- At year-end, total assets were $6.37 billion, shareholders’ equity was $870.7 million, and repo borrowings were $5.38 billion. MBS fair value was $6.04 billion, versus $3.11 billion a year earlier; the investment portfolio, including TBAs, grew 27%.
- Year-end liquidity, as defined by the company, was $453.6 million, down from $632.3 million: $119.6 million cash, $157.6 million unencumbered Agency MBS, and $176.3 million of noncash collateral received. Repo-based leverage was 6.2 times equity; leverage including the cost basis of long TBA positions was 7.8 times equity.
- Cash dividends declared were $1.56 per common share and $1.725 per Series C preferred share. The common dividend’s 2023 tax characterization included $0.74112 ordinary income and $0.81888 return of capital per share.
Changes from 2022
- Higher financing costs drove net interest income from positive to negative and contributed to lower GAAP and non-GAAP per-share results.
- Investment purchases expanded the portfolio: Dynex purchased $3.6 billion of Agency RMBS during 2023. MBS fair value gains, including TBA positions, were $68.4 million, while interest-rate hedges recorded net losses of $10.8 million. In 2022, investment and hedge fair-value changes together produced a $54.2 million net loss.
- Operating cash flow declined by $64.2 million. Year-end cash and cash equivalents fell to $119.6 million from $332.0 million; management attributed the liquidity decline in part to financing purchases and dividends exceeding operating cash flow.
- Common shares outstanding increased to 57.0 million from 53.6 million. The 2023 ATM program issued 3.33 million shares for $42.6 million net of commissions. A further 1.51 million shares were issued after year-end for approximately $18.9 million net.
Outlook, risks and unusual items
- Outlook: Management described its 2024 outlook as positive, expecting less restrictive monetary policy, lower interest-rate volatility, and tactical investment opportunities. It cited potential opportunities in Agency MBS, CMBS, and other RMBS. These are expectations, not quantitative company guidance; timing and extent of rate cuts remain uncertain.
- Key sensitivities: Interest rates, yield-curve movements, MBS spread widening, prepayments, reinvestment yields, and short-term financing availability and cost can materially affect earnings, book value, liquidity, and dividends. The company does not hedge spread risk. Repo agreements are generally uncommitted and subject to renewal and margin calls.
- Tax and distributions: Dynex estimated 2023 REIT taxable income of $40.5 million, including $80.5 million from amortization of deferred tax hedge gains. It estimated approximately $102.9 million of such amortization in 2024, while noting uncertainty about taxable income and future dividends. Deferred tax hedge gains were $861.8 million at year-end; capital loss carryforwards were $590.8 million and NOL carryforwards were $8.1 million.
- Other risks: GSE support and conservatorship, counterparty and collateral risks, TBA settlement and margin requirements, cybersecurity and reliance on third-party operational systems, REIT and Investment Company Act compliance, and geopolitical and macroeconomic volatility. No material pending legal proceedings or contingencies were reported; the company reported no material cybersecurity breaches in the three years ended 2023.
- Management reported compliance with debt covenants at year-end and no difficulty securing repo financing. The auditor issued unqualified opinions on the financial statements and internal controls. Valuation of MBS was identified as a critical audit matter, given the judgment involved in market-rate, spread, and prepayment assumptions.
Important facts for investors to verify
- Whether ongoing asset yields can exceed funding costs as repo rates and portfolio composition change.
- How leverage, hedge positioning, MBS spreads, and margin requirements could affect book value and the stated $453.6 million liquidity measure under stress.
- Whether cash generation and REIT taxable income support the common dividend, particularly as deferred tax hedge gains amortize.
- The impact of ATM share issuance and any further capital raising on per-share book value and returns.
- The assumptions behind MBS fair values and management’s rate, spread, and prepayment outlook; the filing’s modeled sensitivities are not forecasts.