Dynex Capital, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Dynex is an internally managed mortgage REIT investing primarily in mortgage-backed securities using repurchase-agreement financing. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Financial results and position
| Metric | Q2 2021 / June 30, 2021 | Comparison |
|---|---|---|
| Net interest income | $12.1 million; net interest spread 1.87% | Q1 2021: $12.3 million and 1.87% |
| Net income (loss) to common shareholders | $(45.7) million; $(1.43) per basic and diluted share | Q2 2020: $191.6 million; $8.31 per share |
| Comprehensive income (loss) to common shareholders | $(31.4) million | Q2 2020: $26.5 million |
| Core net operating income (non-GAAP) | $16.3 million; $0.51 per common share | Q1 2021: $12.4 million; $0.46 per share |
| Common dividend declared | $0.39 per share | Q2 2020: $0.43 |
| Assets / shareholders’ equity | $3,474.3 million / $755.6 million | December 31, 2020: $3,095.4 million / $633.5 million |
| Repurchase-agreement borrowings | $2,321.0 million; weighted average rate 0.21% | December 31, 2020: $2,437.2 million; 0.34% |
| Cash / most liquid assets | $349.4 million cash; $517.9 million of cash and unencumbered securities | Most liquid assets were $415.3 million at December 31, 2020 |
| Leverage | 6.7x shareholders’ equity | 6.3x at December 31, 2020 |
For the six months ended June 30, net income was $74.2 million versus $96.4 million in 2020; net interest income was $24.4 million versus $32.7 million. Net cash from operating activities was $67.9 million, investing activities provided $74.6 million, and financing activities used $18.1 million. Cash including collateral posted to counterparties increased $124.4 million to $434.7 million.
Material changes and drivers
- Q2 comprehensive loss reflected $93.8 million of losses on interest-rate hedges, primarily as the yield curve flattened. These were partly offset by a reported $58.2 million increase in fair value of investments, including TBA securities, as longer-term rates declined.
- Agency RMBS spreads widened during the quarter. Dynex reduced its investment portfolio early in Q2, then partially re-leveraged and bought lower-coupon Agency RMBS as spreads widened. TBA investments increased; Q2 TBA drop income was $12.2 million.
- H1 net interest income fell year over year due to a smaller average balance of lower-yielding investments. The net interest spread nevertheless increased to 1.90% from 1.56%, as borrowing costs fell more than investment yields.
- H1 derivative results improved to a $54.9 million gain from a $204.1 million loss in H1 2020; realized investment gains declined to $6.7 million from $277.9 million. H1 other comprehensive loss was $50.9 million.
- Dynex raised $196.5 million from common-stock issuance in H1, including $68.3 million in Q2, and redeemed its remaining Series B preferred shares for $69.7 million in Q1. Common shares outstanding rose to 34.3 million from 23.7 million at year-end.
Outlook, risks and unusual items
- Management gave no numerical earnings or dividend guidance. It expects rates to remain relatively range-bound for the next few quarters and believes the 10-year Treasury rate may move higher over the following 6–12 months. It expects Federal Reserve tapering could widen spreads and anticipates borrowing costs to remain low near term.
- Management said it is maintaining relatively low leverage, substantial liquidity, and exposure to liquid Agency RMBS and TBAs, while expecting leverage to increase modestly over the next six months. These are forward-looking views, not guarantees.
- Key risks include interest-rate and yield-curve moves, spread widening, prepayments, credit performance, repo renewal and margin-call risk, and the possibility that TBA positions cannot be rolled and require cash settlement. Most repo facilities are uncommitted and short term; the company reported covenant compliance at quarter-end.
- COVID-19-related forbearance and delinquencies could affect mortgage cash flows and valuations. The filing said observed effects on non-Agency CMBS IO cash flows had been nominal to date, but ultimate effects remained uncertain.
- A receiver’s litigation claim related to a cost-sharing agreement remained unresolved. Dynex said loss was not probable, could not reasonably estimate a possible loss after considering its offset claims, and recorded no liability. The filing cautions that an adverse outcome could materially affect a future period.
- The company adopted fair-value accounting through net income for MBS purchased on or after January 1, 2021; older MBS generally remain available-for-sale, with unrealized changes reported in OCI. This affects the presentation of earnings and OCI.
Important facts for investors to verify
- Review the reconciliation and definition of core net operating income, a non-GAAP measure that excludes portfolio and hedge fair-value effects.
- Track book value and the effects of curve changes, spread widening, and hedging; management reported a Q2 book-value decline of $1.32 per common share.
- Assess repo concentration, facility renewal terms, collateral haircuts, margin needs, and the sustainability of the reported $517.9 million liquid-asset position.
- Monitor TBA roll economics, settlement exposure, leverage, and share issuance, which materially increased common shares outstanding.
- Follow the receiver litigation and COVID-19-related mortgage performance for any material developments.