Dynex Capital, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; unaudited. Dynex is an internally managed mortgage REIT that primarily invests on a leveraged basis in Agency mortgage-backed securities (MBS) and TBA securities.
Financial and operating highlights
| Metric | Q1 2024 / March 31, 2024 | Comparison |
|---|---|---|
| GAAP net income (loss) | $40.1 million; $0.65 basic EPS and $0.64 diluted EPS | Q1 2023: loss of $41.7 million; loss of $0.81 per share |
| Net interest income (expense) | Expense of $3.2 million; net interest spread was negative 1.15% | Q1 2023: expense of $0.5 million; spread was negative 1.62% |
| Interest income / expense | $71.5 million / $74.7 million | Q1 2023: $30.8 million / $31.3 million |
| Comprehensive income (loss) to common shareholders | $20.9 million | Q1 2023: loss of $28.9 million |
| Economic return and book value | Total economic return: $0.28 per common share, including $0.39 in dividends and a $0.11 book-value decline. Book value: $13.20 per share. | Book value was $13.31 per share at December 31, 2023. |
| Assets, equity and debt | Total assets $6.30 billion; shareholders’ equity $958.5 million; repurchase agreements $5.28 billion; MBS at fair value $5.84 billion. | At December 31, 2023: assets $6.37 billion; equity $870.7 million; repurchase agreements $5.38 billion. |
| Liquidity and leverage | Reported liquidity $577.1 million, including $295.7 million unrestricted cash, $269.9 million unencumbered Agency MBS and $11.5 million noncash collateral. Leverage was 8.1x equity including TBA cost basis, or 5.5x based on repurchase borrowings. | Liquidity was $453.6 million at December 31, 2023. |
| Cash flow | Operating cash used: $17.1 million; investing cash provided: $232.6 million; financing cash used: $35.0 million. Cash including posted collateral increased $180.5 million. | Q1 2023: operating cash provided $3.7 million; investing cash used $332.3 million; financing cash provided $272.3 million. |
Material changes and unusual items
- GAAP earnings benefited from $124.6 million of net derivative gains, principally gains on U.S. Treasury futures, despite $70.0 million of unrealized investment losses and $17.3 million of other comprehensive losses. This volatility makes quarterly net income an imperfect indicator of recurring portfolio earnings.
- Management’s non-GAAP earnings available for distribution (EAD) were a loss of $17.7 million, or $0.30 per common share, compared with an EAD loss of $13.9 million, or $0.24 per share, in Q4 2023.
- Interest income from MBS and loans rose substantially year over year as the portfolio grew and shifted toward higher-coupon Agency RMBS. Higher financing costs nevertheless kept net interest expense negative.
- The portfolio, including TBAs, increased 11% from year-end. Dynex added approximately $1.0 billion of TBA notional during the quarter. The 10-year U.S. Treasury yield rose about 32 basis points to 4.20% by March 31.
- Dynex issued 7.0 million common shares through its at-the-market program for $86.8 million net of fees. Management estimated that equity issuance reduced book value by about $0.07 per share. No common shares were issued from March 31 through the filing date.
- Operating expenses rose year over year to $11.3 million, including $4.3 million of share-based compensation versus $1.0 million a year earlier. The increase included accelerated expense recognition for certain awards to retirement-eligible employees.
Outlook, risks and contingencies
- Management outlook: Dynex expects market volatility to become less persistent over time and believes the portfolio can generate attractive returns over the medium and long term. Management views short-term widening in Agency MBS spreads as potential investment opportunities absent severe disruptions. These are expectations, not quantified earnings or dividend guidance.
- Funding and liquidity: Repurchase agreements are recourse, generally uncommitted and renewable at lenders’ discretion. Declining collateral values can trigger same-day margin needs; inability to roll TBA positions could also require cash settlement or asset sales. The company reported no financing access difficulties, no more than 10% of equity at risk with any counterparty or related group, and compliance with its debt covenants at quarter-end.
- Market exposure: Interest-rate, spread, prepayment, credit, liquidity and reinvestment risks can affect book value, cash flows and financing costs. Modelled sensitivity to a parallel 100-basis-point rate increase showed a 4.9% decline in common equity; a 10-basis-point spread widening was modelled to reduce common equity by 5.3%. Actual outcomes may differ.
- Dividends and tax: The company is a REIT and generally must distribute at least 90% of REIT taxable income. Management said it could not reasonably estimate how projected deferred tax hedge gains would affect dividend declarations. The filing reports $830.2 million of projected net deferred hedge gains to be recognized as taxable income over future periods, subject to possible acceleration.
- Capital allocation: On April 18, 2024, the board authorized a replacement repurchase program for up to $100 million of common stock and $50 million of preferred stock through April 30, 2026; repurchases are discretionary.
- Contingencies and controls: The company reported no pending lawsuits, claims or other contingencies as of March 31, 2024, and no material changes to previously disclosed risk factors. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Reconcile GAAP profit and positive economic return with the $0.30-per-share EAD loss; assess how much reported earnings came from hedge valuation changes.
- Track book value, portfolio and TBA exposure, leverage, repo renewal terms, collateral haircuts and margin requirements under changing interest-rate and spread conditions.
- Evaluate whether portfolio yields can outpace short-term funding costs and whether liquidity remains adequate if lenders tighten financing or TBA rolls become uneconomic.
- Monitor share issuance and repurchases, dividend coverage and the uncertain timing and tax treatment of deferred hedge gains.
- Consider that management’s outlook and market-risk sensitivities are forward-looking and model-dependent, not guarantees of returns or liquidity.