DX

Business Context and Reporting Period

Company: Dynex Capital, Inc. (DX)
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended December 31, 2025
Business Overview: Dynex is an internally managed Real Estate Investment Trust (REIT) investing primarily in Agency residential and commercial mortgage-backed securities (RMBS and CMBS). The company utilizes leverage via repurchase agreements and employs derivative instruments to hedge interest rate risk. As of December 31, 2025, the company had 28 employees and maintained its REIT qualification.

Key Financial Metrics

Material Changes vs. Prior Period

• Portfolio Expansion: The investment portfolio (including TBAs) increased 98% year-over-year, driven by the addition of $8.2 billion in Agency RMBS and $1.2 billion in Agency CMBS.
• Capital Raising: The company raised approximately $1.2 billion through its At-The-Market (ATM) program, issuing over 90 million shares of common stock. This more than doubled total equity and market capitalization compared to 2024.
• Profitability Surge: Net income to common shareholders nearly tripled to $308.9 million, driven by asset appreciation from tightening mortgage spreads and higher net interest income due to lower financing costs (average financing rate declined 95 basis points).
• Derivative Performance: While the investment portfolio generated $510.9 million in total gains, the hedging portfolio incurred a net loss of $207.7 million due to declining interest rates. However, the net result was a $303 million gain on investments over hedges.
• Leverage: Repurchase agreement borrowings doubled to $13.9 billion. Leverage based on repurchase agreements was 5.6x shareholders' equity, while total leverage (including TBA cost basis) was 7.3x.

Guidance, Outlook, and Risks

Outlook for 2026: Management anticipates a continued favorable macro environment for Agency MBS, supported by a directive for GSEs to purchase $200 billion in Agency MBS and potential modest rate cuts. The company expects sustained demand for high-quality, liquid assets.

Key Risks and Contingencies:

• Interest Rate Risk: Rising rates could increase financing costs faster than asset yields and reduce the market value of fixed-rate investments. A 100 basis point parallel increase in rates could decrease common equity by 6.5%.
• Liquidity and Financing: The company relies on uncommitted repurchase agreements. Market stress could lead to margin calls, increased haircuts, or inability to roll financing, potentially forcing asset sales at a loss.
• REIT Compliance: The company must distribute at least 90% of taxable income. It holds $558 million in deferred tax hedge gains that will be amortized into taxable income over future years, potentially requiring significant cash distributions.
• Counterparty Risk: Reliance on third-party service providers for critical trading and borrowing functions exposes the company to operational and cybersecurity risks.

Investor Verification Checklist

• Deferred Tax Hedge Gains: Verify the impact of the $558 million in deferred tax hedge gains on future dividend requirements and cash flow needs.
• Liquidity Coverage: Confirm the adequacy of the $1.4 billion liquidity position against potential margin calls in a rising rate or spread-widening scenario.
• Financing Terms: Monitor the weighted average financing rate (4.10% as of year-end) and any changes in lender haircuts or covenant restrictions.
• Capital Loss Carryforwards: Note the $505 million in capital loss carryforwards expiring in 2027 and 2028 and their potential utilization against future taxable gains.
• ATM Program Usage: Track the remaining capacity of the ATM program (approx. 161.3 million shares authorized) and the dilution impact of future issuances.