Dynex Capital, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Dynex is an internally managed mortgage REIT investing primarily in leveraged Agency mortgage-backed securities (MBS), with smaller CMBS and other holdings.
Financial performance and position
| Metric | Q3 2023 / September 30, 2023 | Comparison |
|---|---|---|
| Interest income | $63.3 million | $20.4 million in Q3 2022 |
| Net interest income (expense) | $(2.3) million | $7.1 million in Q3 2022; $(2.9) million in Q2 2023 |
| Net income (loss) | $(43.1) million | $(46.7) million in Q3 2022 |
| Net income (loss) to common shareholders | $(45.0) million; $(0.82) per diluted share | $(48.6) million; $(1.07) per diluted share in Q3 2022 |
| Comprehensive loss to common shareholders | $(86.7) million | $(99.7) million in Q3 2022 |
| Investment and hedge fair-value changes | Investments lost $290.7 million; interest-rate hedges gained $216.8 million | Asset losses exceeded hedge gains in Q3 |
| Common dividend declared | $0.39 per share | Unchanged from Q3 2022 |
| Assets / shareholders’ equity | $6.04 billion / $804.3 million | $3.61 billion / $901.3 million at December 31, 2022 |
| MBS at fair value | $5.58 billion | $3.11 billion at December 31, 2022 |
| Repurchase agreements | $5.00 billion; 5.47% weighted-average rate | $2.64 billion; 4.18% at December 31, 2022 |
| Cash and cash equivalents | $271.2 million | $332.0 million at December 31, 2022 |
For the first nine months, Dynex reported a net loss of $30.4 million and a common-shareholder loss of $36.2 million ($0.67 per diluted share), versus net income of $99.9 million and common income of $94.1 million ($2.31 per diluted share) in the prior-year period. Net interest income swung from $36.9 million to a $5.7 million expense. Operating cash flow was $45.6 million, compared with $96.3 million; investing activities used $2.40 billion, while financing activities provided $2.33 billion.
Material changes and management commentary
- Higher interest rates and wider MBS spreads drove significant portfolio losses. The Federal Funds rate reached 5.50% during Q3, while longer-term Treasury yields rose; management noted continued yield increases after quarter-end.
- The company shifted toward higher-coupon Agency RMBS and reduced TBA exposure. Its investment portfolio, including TBAs, increased 23% by amortized cost from year-end 2022.
- Common book value per share fell to $12.25 at September 30 from $14.20 at June 30. Q3 total economic loss was $1.56 per common share, including declared common dividends.
- Management sees wider spreads as a potential opportunity to buy Agency MBS, but expects spreads to remain volatile and range-bound in the intermediate term. It intends to preserve flexibility and higher liquidity and adjust investments, hedges, and leverage as conditions change. No specific earnings or dividend guidance is provided.
- Most liquid assets were $452.8 million, down from $632.3 million at year-end 2022. Management reported no difficulty obtaining repo financing and said counterparties had not expressed liquidity or leverage concerns. Repo facilities are uncommitted and renewable at lenders’ discretion; the company reported covenant compliance.
- Leverage was 8.5 times shareholders’ equity using the company’s measure that includes TBA cost basis, and 6.2 times using repo borrowings. These measures reflect substantial financing and collateral exposure.
- Estimated deferred tax hedge gains totaled $830.5 million, including an estimated $56.8 million benefit to REIT taxable income for the first nine months. The timing and effect on dividends remain uncertain; GAAP earnings, taxable income, and the company’s non-GAAP EAD measure differ.
Risks, contingencies, and unusual items
Key risks include interest-rate and spread volatility, prepayment and reinvestment risk, margin calls, short-term uncommitted repo funding, and the possibility that TBA positions cannot be rolled and require cash settlement. The company does not hedge spread risk. It also identifies macroeconomic and geopolitical uncertainty, including Federal Reserve policy and global conflicts. A 100-basis-point parallel rate increase was modeled to reduce common equity by 4.2%; a modeled 20-basis-point spread widening for MBS (50 basis points for CMBS IO) would reduce common equity by 12.5%. These are scenario estimates, not forecasts. The filing reports no pending material litigation or material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether portfolio income and financing costs improve as higher-coupon assets enter the portfolio and borrowing rates evolve.
- How book value, MBS spreads, hedge effectiveness, and leverage respond to further rate moves and market volatility.
- Liquidity available after collateral and margin requirements, and continued access to uncommitted repo financing.
- The relationship among GAAP losses, EAD, REIT taxable income, deferred tax hedge gains, and future common dividends.
- The potential effects of share issuance: Dynex issued 2.85 million common shares through its ATM program during the first nine months for $36.7 million net, while common shares outstanding rose from 53.6 million at year-end to 56.6 million at September 30.