Dynex Capital, Inc. — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual report, not a standalone fourth-quarter filing; the text does not provide a complete Q4-only income statement.
Business context
Dynex is an internally managed mortgage REIT investing primarily in Agency residential and commercial mortgage-backed securities (MBS), CMBS interest-only securities, and TBA securities. It funds investments mainly through repurchase agreements and uses derivatives to hedge interest-rate exposure. Its stated objective is long-term risk-adjusted returns, with capital preservation, dividends, and appreciation as return sources.
Financial and operating metrics
| Metric | 2021 | 2020 |
|---|---|---|
| Net interest income | $54.4 million | $63.9 million |
| Net income | $102.3 million | $177.5 million |
| Net income attributable to common shareholders | $90.9 million; $2.79 per diluted share | $160.0 million; $6.93 per diluted share |
| Comprehensive income to common shareholders | $17.4 million; $0.53 per share | $66.5 million; $2.88 per share |
| Earnings available for distribution (EAD), non-GAAP | $64.1 million; $1.97 per share | $44.8 million; $1.94 per share |
| Adjusted net interest income and spread, non-GAAP | $97.9 million; 2.10% | $80.5 million; 1.87% |
| Net interest spread | 2.00% | 1.77% |
| Operating cash flow | $147.0 million | $174.0 million |
Net interest income fell by $9.5 million as the average investment balance and portfolio yields declined. Lower repo funding costs helped lift the net interest spread, while higher TBA dollar-roll income contributed to the increase in adjusted net interest income. EAD is a non-GAAP measure and excludes investment and hedge fair-value movements; it should not be treated as a substitute for GAAP results.
Investment fair-value changes totaled a loss of $88.3 million in 2021, including $73.5 million of other comprehensive loss. Derivative instruments recorded a net gain of $81.4 million. Realized investment-sale gains were $6.7 million, versus $308.1 million in 2020. The company reported a $0.47-per-share total economic return to common shareholders, or 2.5% of beginning book value, based on $1.56 in declared common dividends and a $1.09 decline in book value per share.
Balance sheet, debt, and liquidity
| At December 31 | 2021 | 2020 |
|---|---|---|
| Total assets | $3.64 billion | $3.09 billion |
| Shareholders’ equity | $771.3 million | $633.5 million |
| Repo borrowings | $2.85 billion | $2.44 billion |
| Cash and cash equivalents | $366.0 million | $295.6 million |
| Most liquid assets, including unencumbered securities | $533.1 million | $415.3 million |
| Leverage, including TBA securities at cost | 5.7x equity | 6.3x equity |
Repo borrowings had a 0.23% weighted-average rate at year-end, and most facilities were uncommitted and renewable at lenders’ discretion. The company reported compliance with debt covenants at December 31, 2021. It had $55.3 million of cash collateral posted to derivatives counterparties. Financing is collateralized, subject to haircuts and potential same-day margin calls; the most restrictive disclosed covenant liquidity minimum was $30 million.
Financing cash flows were a net inflow of $520.0 million and investing cash flows were a net outflow of $555.4 million. Year-end cash, including cash posted to counterparties, was $421.3 million.
Material changes versus 2020
- Net income and comprehensive income declined, while EAD per share was broadly stable and adjusted net interest income increased.
- Investment fair-value losses were partly offset by derivative gains. In 2020, the company had substantially larger realized investment-sale gains and derivative losses.
- Management raised nearly $237 million of net common equity during 2021; 5.8 million shares were issued through its ATM program for $109.0 million net of commissions. Common shares outstanding rose to 36.7 million from 23.7 million.
- Liquidity increased and reported leverage declined to 5.7x from 6.3x, although repo borrowings increased to $2.85 billion.
- The company redeemed its remaining Series B preferred stock in early 2021 and recorded a $3.0 million redemption charge. Preferred stock outstanding at year-end was Series C.
- Beginning in 2021, newly purchased MBS were measured using the fair-value option, with fair-value changes recorded in net income; pre-2021 holdings generally continued to report changes in other comprehensive income.
Outlook, risks, and unusual items
Management expected Federal Reserve tapering and rate increases to raise financing costs in 2022, while potentially creating opportunities to acquire higher-yielding assets. It anticipated further spread widening, significant yield-curve moves, and lower TBA dollar-roll specialness, which could reduce TBA drop income. Management said low leverage, hedges, lower-coupon Agency RMBS, and available capital positioned the company to pursue opportunities, while emphasizing uncertainty over the pace of monetary tightening and market conditions. No quantified earnings or dividend guidance is provided.
Key risks include rising rates and spread widening reducing asset values and book value; mismatch between asset yields and short-term financing costs; repo renewal, haircut, and margin-call risk; TBA settlement and liquidity risk; prepayments and reinvestment risk; hedge ineffectiveness; and credit or property-market exposure in non-Agency CMBS IO. Other disclosed risks include Federal Reserve policy, GSE conservatorship and support, the LIBOR transition, REIT and Investment Company Act qualification, COVID-19 effects, and reliance on a third-party provider for critical trading, financing, and operational systems. The company said it had not detected a material cybersecurity breach.
The prior litigation-cost-sharing claim was dismissed in November 2021, no appeal was filed, and the company considers the matter closed. Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls. The audit identified MBS valuation as a critical audit matter because of the portfolio’s size and estimation uncertainty.
Important facts for investors to verify
- Reconcile GAAP net income, comprehensive income, and non-GAAP EAD, including how fair-value and hedge movements affect each measure.
- Review book value per share and the effect of 2021 equity issuance, preferred-stock redemption, and dividends; the supplied text gives the annual per-share change but not beginning and ending book value per share.
- Assess the sustainability of TBA drop income and the impact of higher repo rates and Federal Reserve policy changes on net interest income.
- Check liquidity, unencumbered collateral, repo maturities, counterparty concentration, haircuts, and margin requirements as markets change.
- Evaluate exposure to non-Agency CMBS IO property types and the assumptions used to value less-liquid Level 3 assets.
- Confirm future common-dividend coverage and tax characterization. The 2021 declared common dividend was $1.56 per share, of which $1.48494 was characterized as return of capital.