Dynex Capital, Inc. Reports THIRD QUARTER 2018 RESULTS

The following excerpt is from the company's SEC filing.

GLEN ALLEN, Va. -- Dynex Capital, Inc. (NYSE: DX) reported its

quarter 2018 results today. As previously announced, the Company's quarterly conference call to discuss these results is today at 10:00 a.m. Eastern Time and may be accessed via telephone in the U.S. at 1-866-393-4306 (internationally at 1-734-385-2616) using conference ID 4066216 or by live webcast, which includes a slide presentation, under “Investor Center” on the Company's website (www.dynexcapital.com).

Quarter 2018 Highlights

Comprehensive

income

per common share and net income of

Core net operating income, a non-GAAP measure, of

Book value per common share of

September 30, 2018

compared to

June 30, 2018

Leverage including TBA dollar roll positions increased to

shareholders’ equity at

at June 30, 2018 due to growth in the investment portfolio

Net interest spread and adjusted net interest spread of

, respectively, for the third quarter of 2018 compared to

, respectively, for the prior quarter

Management's Remarks

Byron Boston, President and CEO commented, “Core net operating income improved this quarter as we increased our investment portfolio and benefited from the diversification of our investment strategy in residential and commercial investments. In particular, our CMBS IO portfolio continues to outperform on a total return basis. Total economic return to common shareholders was flat for the quarter as rising interest rates and a flattening yield curve led to a reduction in our book value, offsetting our common stock dividend.”

            Mr. Boston continued, “We believe that the Federal Reserve is getting closer to the end of this policy tightening cycle with global markets already experiencing the negative impact of higher interest rates. In our view, as we have noted before, gathering macroeconomic headwinds from rapidly increasing amounts of global debt, emerging stress in financial markets, and fiscal policy concerns will ultimately limit how high interest rates in the U.S. may go on a sustained basis. Nonetheless, in the short-term we might see upward pressure on rates based on evolving economic data and technical factors. With this backdrop,

we believe the higher liquidity of an Agency MBS portfolio is preferable for generating attractive shareholder returns.  As the interest rate environment becomes more favorable, we expect return opportunities to further improve."

Book Value Per Common Share

Book value per common share decreased

$(0.18)

, or (2.0%), to

primarily due to the impact of higher interest rates on the fair value of the Company's investments versus its hedging portfolio. The decline in shareholders' equity since June 30, 2018 resulting from unrealized losses on MBS was partially offset by raising capital of $13.4 million during the third quarter. The Company has a year-to-date total economic loss on book value per common share of

(0.7)%

Third Quarter 2018 Earnings Summary

$0.7 million

quarter of 2018 versus comprehensive income to common shareholders of $3.0 million for the

second

quarter of 2018. Higher interest rates principally drove the decline in comprehensive income as unrealized losses on MBS increased while gains on related hedges decreased. Net income to common shareholders increased

$9.9 million

$22.6 million

quarter compared to

$12.7 million

quarter of 2018 due primarily to lower loss on sales of investments. Net interest income increased $0.4 million from the second quarter of 2018 to the third quarter of 2018 due to improved yields on investments as a result of recent purchases of higher yielding fixed rate MBS and increased prepayment penalty compensation earned on CMBS IO.

Core net operating income to common shareholders, a non-GAAP measure, was

$10.8 million

for the third quarter of 2018 versus $10.4 million for the second quarter of 2018 due to an increase in adjusted net interest income of

$0.5 million

during the third quarter. Adjusted net interest income, a non-GAAP measure, increased for the third quarter of 2018 compared to the prior quarter from the improved investment yields noted above, and also from a higher average volume of TBA dollar roll transactions that generated an increase in TBA drop income, partially offset by a lower benefit from net periodic interest on interest rate swaps for the third quarter of 2018 compared to the prior quarter as discussed further below.

Investments and Financing

The following table provides details of our MBS including TBA dollar roll positions as of

September 30, 2018

Type of Investment:

Amortized Cost Basis

Market Value

($ in thousands)

30-year fixed-rate RMBS:

3.0% coupon

228,116

229,734

218,671

4.0% coupon

1,339,668

1,386,905

1,356,169

4.5% coupon

158,111

163,388

163,244

TBA dollar roll positions (4.0% coupon)

(1) (2)

211,000

214,365

213,060

TBA dollar roll positions (4.5% coupon)

550,000

566,500

566,637

Total 30-year fixed-rate RMBS

2,486,895

2,560,892

2,517,781

Adjustable-rate RMBS:

4.1% coupon

35,379

36,339

37,068

Agency CMBS

987,266

997,058

948,296

562,327

564,826

Other non-Agency MBS

Total MBS portfolio including TBA dollar roll positions

3,517,476

4,161,449

4,074,207

Amortized cost basis and fair market value for TBA dollar roll positions represent implied cost basis and implied market value, respectively, for the underlying Agency MBS as if settled.

The net carrying value of TBA dollar roll positions, which is the difference between their implied market value and implied cost basis, was

$(1.2) million

and is included on the consolidated balance sheet within “derivative assets”.

Represents the weighted average coupon based on amortized cost.

Includes both Agency and non-Agency IO securities with a combined notional balance of $23.6 billion.

The Company's MBS portfolio including TBA dollar roll positions as of

increased 13% since June 30, 2018. During the third quarter of 2018, we purchased $695.2 million of investments which consisted primarily of higher coupon, higher yielding 30-year fixed-rate Agency RMBS, and we sold $118.4 million of Agency CMBS, CMBS IO, and U.S. Treasuries. The Company's repurchase agreement borrowings including payables for unsettled securities as of

increased 14% to $2.9 billion compared to $2.5 billion at June 30, 2018, which resulted in leverage including TBA dollar roll positions of 6.7 times shareholder's equity compared to 6.1 times at June 30, 2018.

Net Interest Income and Spread

The following table provides details on the performance of our investments and financing including hedging costs for the periods indicated:

Three Months Ended

Income/Expense

Average Balance

Effective Yield/Cost of Funds

Interest-earning assets:

Agency RMBS-fixed rate

11,561

1,384,926

1,135,365

Agency CMBS-fixed rate

1,002,661

1,011,945

Agency RMBS-adjustable rate

37,634

254,850

581,770

632,376

156,420

Other investments

13,226

14,576

26,925

3,031,388

25,922

3,210,554

Interest-bearing liabilities:

Repurchase agreements

14,780

2,564,863

14,181

2,716,097

Non-recourse collateralized financing

De-designated cash flow hedge accretion

14,751

2,569,123

14,175

2,721,099

Net interest income/net interest spread

12,174

11,747

Add: TBA drop income

Add: net periodic interest benefit

Less: de-designated cash flow hedge accretion

Adjusted net interest income/adjusted net interest spread

18,147

17,651

CMBS IO includes Agency and non-Agency securities.

Amount represents net periodic interest benefit of effective interest rate swaps outstanding during the period and excludes realized and unrealized gains and losses from changes in fair value of derivatives.

Represents a non-GAAP measure.

Net interest income and net interest spread increased for the

quarter of 2018 compared to the prior quarter due primarily to having a larger average balance of higher yielding fixed-rate Agency RMBS and higher prepayment compensation on CMBS IO, which were almost entirely offset by higher cost of repurchase agreement financing as a result of increasing short-term interest rates. Adjusted net interest spread for the

quarter of 2018 decreased 10 basis points compared to the second quarter of 2018 primarily because the Company's net receive rate on its interest rate swaps declined 8 basis points, resulting in a lower net periodic interest benefit. In addition, although TBA drop income was $0.6 million higher during the third quarter of 2018 compared to the second quarter of 2018 as a result of a larger volume of TBA dollar roll transactions, the implied financing rate on these transactions increased approximately 37 basis points from the second quarter of 2018 to the third quarter of 2018. As a result, the net yield from TBA dollar roll transactions declined 32 basis points to 1.61% for the third quarter of 2018 compared to 1.93% for the prior quarter.

Hedging Summary

The Company's interest rate swaps had a positive net impact on comprehensive income of $25.0 million during the

quarter of 2018. Interest rate swaps with a notional balance of $250.0 million were terminated during the

quarter, resulting in a net realized gain of $2.6 million, and interest rate swaps with a notional balance of $380.0 million at a weighted average pay-fixed rate of 2.94% were added during the third quarter. The following table provides information related to the Company's average borrowings outstanding and interest rate swaps effective for the periods indicated:

Average repurchase agreement borrowings outstanding

Average net TBAs outstanding - at cost

982,665

722,005

Average borrowings and net TBAs outstanding

3,547,528

3,438,102

Average notional amount of interest rate swaps outstanding (excluding forward starting swaps)

2,502,609

2,707,967

Ratio of average interest rate swaps to average borrowings and net TBAs outstanding

Average interest rate swap net pay-fixed rate (excluding forward starting swaps)

Average interest rate swap net receive-floating rate

Average interest rate swap net pay/(receive) rate

Because the Company executes TBA dollar roll transactions, which economically represent the purchase and financing of fixed-rate Agency RMBS, the average TBAs outstanding are included in the ratio calculation.

Includes one receive-fixed interest rate swap with a notional balance of $100.0 million at a rate of 1.70%.

During the third quarter of 2018, the Company incurred a loss of $(0.2) million on Eurodollar futures used to hedge interest rate risk. Eurodollar futures with a notional balance of $650.0 million and a weighted average rate of 1.86% matured during the third quarter of 2018, for which the Company realized a gain of $0.8 million over the life of contract. Management views Eurodollar futures as economically similar to interest rate swaps, but unlike interest rate swaps, Eurodollar futures do not incur periodic interest or similar costs/benefits and therefore do not have an impact on core net operating income to common shareholders. The Company had no Eurodollar futures outstanding at September 30, 2018.

The aggregate notional amount of currently effective and forward-starting interest rate swaps as of

was $2.7 billion and

$1.5 billion

, respectively. The following table summarizes the weighted average notional amount and rate of interest rate hedges (including Eurodollar futures) held as of

Weighted Average Notional

Pay-Fixed Rate

Remainder of 2018

3,236,630

3,054,027

2,444,495

2,195,479

2,243,521

1,529,397

1,396,503

2025 and thereafter

244,716

Company Description

Dynex Capital, Inc. is an internally managed real estate investment trust, or REIT, which invests in mortgage assets on a leveraged basis. The Company invests in Agency and non-Agency RMBS, CMBS, and CMBS IO.  Additional information about Dynex Capital, Inc. is available at www.dynexcapital.com.

Use of Non-GAAP Financial Measures

In addition to the Company's operating results presented in accordance with GAAP, this release includes certain non-GAAP financial measures including core net operating income to common shareholders (including per common share), adjusted interest expense, adjusted net interest income and the related metrics adjusted cost of funds and adjusted net interest spread. Because these measures are used in the Company's internal analysis of financial and operating performance, management believes that they provide greater transparency to our investors of management's view of our economic performance. Management also believes the presentation of these measures, when analyzed in conjunction with the Company's GAAP operating results, allows investors to more effectively evaluate and compare the performance of the Company to that of its peers, although the Company's presentation of its non-GAAP measures may not be comparable to other similarly-titled measures of other companies. Schedules reconciling core net operating income to common shareholders, adjusted interest expense, and adjusted net interest income to GAAP financial measures are provided as a supplement to this release.

Management views core net operating income to common shareholders as an estimate of the Company's financial performance excluding changes in fair value of its investments and derivatives. In addition to the non-GAAP reconciliation set forth in the supplement to this release, which derives core net operating income to common shareholders from GAAP net income to common shareholders as the nearest GAAP equivalent measure, core net operating income to common shareholders can also be determined by adjusting net interest income to include interest rate swap periodic interest costs, drop income on TBA dollar roll positions, general and administrative expenses, and preferred dividends. Management includes drop income, which is included in "gain (loss) on derivatives instruments, net" on the Company's consolidated statements of comprehensive income, in core net operating income and in adjusted net interest income because TBA dollar roll positions are viewed by management as economically equivalent to holding and financing Agency RMBS using short-term repurchase agreements. Management also includes periodic interest costs from its interest rate swaps, which are also included in "gain (loss) on derivatives instruments, net", in adjusted net interest expense, and in adjusted net interest income because interest rate swaps are used by the Company to economically hedge the impact of changing interest rates on its borrowing costs from repurchase agreements, and including periodic interest costs from interest rate swaps is a helpful indicator of the Company’s total cost of financing in addition to GAAP interest expense. However, these non-GAAP measures do not provide a full perspective on our results of operations, and therefore, their usefulness is limited. For example, these non-GAAP measures do not include gains or losses from available-for-sale investments, changes in fair value of and costs of terminating interest rate swaps, as well as realized and unrealized gains or losses from any instrument used by management to economically hedge the impact of changing interest rates on its portfolio and book value per common share, such as Eurodollar futures.

As a result, these non-GAAP measures should be considered as a supplement to, and not as a substitute for, the Company's GAAP results as reported on its consolidated statements of comprehensive income.

Forward Looking Statements

This release contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The words “believe,” “expect,” “forecast,” “anticipate,” “estimate,” “project,” “plan,” "may," "could," and similar

expressions identify forward-looking statements that are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Forward-looking statements in this release may include, without limitation, statements regarding the Company's financial performance in future periods, future interest rates, future market credit spreads, our views on expected characteristics of future investment environments, prepayment rates and investment risks, future investment strategies, our future leverage levels and financing strategies, the use of specific financing and hedging instruments and the future impacts of these strategies, future actions by the Federal Reserve, and the expected performance of our investments. The Company's actual results and timing of certain events could differ materially from those projected in or contemplated by the forward-looking statements as a result of unforeseen external factors. These factors may include, but are not limited to, changes in general economic and market conditions, including volatility in the credit markets which impacts asset prices and the cost and availability of financing, changes in monetary policy and in particular the impact of changes in balance sheet reinvestment policy of the Federal Reserve, defaults by borrowers, availability of suitable reinvestment opportunities, variability in investment portfolio cash flows, fluctuations in interest rates, fluctuations in property capitalization rates and values of commercial real estate, defaults by third-party servicers, prepayments of investment portfolio assets, other general competitive factors, uncertainty around the impact of government regulatory changes, including ongoing financial institution regulatory reform efforts, the full impacts of which are unknown at this time, and another ownership change under Section 382 that further impacts the use of our tax net operating loss carryforward. For additional information on risk factors that could affect the Company's forward-looking statements, see the Company's Annual Report on Form 10-K for the year ended December 31, 2017, and other reports filed with and furnished to the Securities and Exchange Commission.

All forward-looking statements are qualified in their entirety by these and other cautionary statements that the Company makes from time to time in its filings with the Securities and Exchange Commission and other public communications. The Company cannot assure the reader that it will realize the results or developments the Company anticipates or, even if substantially realized, that they will result in the consequences or affect the Company or its operations in the way the Company expects. Forward-looking statements speak only as of the date made. The Company undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances arising after the date on which they were made, except as otherwise required by law. As a result of these risks and uncertainties, readers are cautioned not to place undue reliance on any forward-looking statements included herein or that may be made elsewhere from time to time by, or on behalf of, the Company.

DYNEX CAPITAL, INC.

CONSOLIDATED BALANCE SHEETS

($ in thousands except per share data)

December 31, 2017

ASSETS

(unaudited)

Available-for-sale investments, at fair value:

Mortgage-backed securities

3,294,510

2,759,894

3,026,989

57,923

146,530

Mortgage loans held for investment, net

12,342

13,628

15,738

Cash and cash equivalents

55,251

165,126

40,867

Restricted cash

58,334

52,832

46,333

Derivative assets

Accrued interest receivable

19,575

19,326

19,819

Other assets, net

Total assets

3,448,179

3,082,777

3,305,778

LIABILITIES AND SHAREHOLDERS’ EQUITY

Liabilities:

2,690,858

2,514,984

2,565,902

Payable for unsettled securities

182,922

156,899

Derivative liabilities

Accrued interest payable

Accrued dividends payable

13,121

12,727

12,526

Other liabilities

 Total liabilities

2,901,426

2,540,543

2,748,720

Shareholders’ equity:

Preferred stock - aggregate liquidation preference of $148,541; $147,725; and $147,217, respectively

142,574

141,788

141,294

Common stock, par value $.01 per share: 59,016,554; 56,906,200; and 55,831,549 shares issued and outstanding, respectively

Additional paid-in capital

795,630

782,011

775,873

Accumulated other comprehensive loss

(85,833

(63,919

(8,697

Accumulated deficit

(306,208

(318,215

(351,970

 Total shareholders' equity

546,753

542,234

557,058

Total liabilities and shareholders’ equity

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(amounts in thousands except per share data)

March 31, 2018

September 30, 2017

Interest income

25,190

24,124

23,103

Interest expense

11,595

10,056

13,595

14,068

13,214

Gain on derivative instruments, net

19,499

20,667

38,354

12,678

Loss on sale of investments, net

(1,726

(12,444

(3,775

(5,211

Fair value adjustments, net

Other operating expense, net

General and administrative expenses:

Compensation and benefits

(1,712

(1,751

(1,962

(2,153

(2,070

Other general and administrative

(2,252

(2,255

(1,681

(1,690

(1,529

25,586

15,652

44,307

21,963

10,311

Preferred stock dividends

(2,956

(2,942

(2,940

(2,910

(2,808

22,630

12,710

41,367

19,053

Other comprehensive income:

Unrealized (loss) gain on available-for-sale investments, net

(23,574

(22,156

(49,189

(15,438

Reclassification adjustment for loss on sale of investments, net

Reclassification adjustment for de-designated cash flow hedges

Total other comprehensive (loss) income

(21,914

(9,760

(45,462

(14,584

Comprehensive income (loss) to common shareholders

(4,095

13,647

Net income per common share-basic and diluted

Weighted average common shares

57,727

56,295

55,871

53,399

49,832

KEY STATISTICS

Portfolio and Other Balance Sheet Statistics:

Total MBS fair value

2,864,822

2,921,444

Agency CMBS, amortized cost

1,008,887

1,015,486

1,134,409

1,314,925

Agency RMBS-fixed rate, amortized cost

1,780,027

1,163,875

965,173

903,269

541,262

Agency RMBS-variable rate, amortized cost

38,966

278,474

289,305

305,265

CMBS IO, amortized cost

607,452

652,563

683,833

717,115

Other non-Agency MBS, amortized cost

23,536

37,441

TBA dollar roll positions, fair value (if settled)

779,697

784,442

846,940

830,908

683,680

TBA dollar roll positions, amortized cost (if settled)

780,865

782,408

844,941

829,425

683,813

TBA dollar roll positions, carrying value

(1,168

U.S. Treasuries, fair value

204,535

Leverage including TBA dollar roll positions at cost as if settled

Performance Statistics:

Core net operating income per common share

Comprehensive income (loss) per common share

Dividends per common share

Average interest earning assets

3,140,125

2,939,786

2,960,595

Average TBA dollar roll position

1,037,347

742,111

866,821

944,103

797,484

Average interest bearing liabilities

2,651,101

2,563,206

2,622,067

Effective yield on investments

Cost of funds

Adjusted cost of funds

CPR for adjustable-rate Agency RMBS

CPR for fixed-rate Agency RMBS

CMBS IO includes Agency and non-Agency issued securities.

Leverage equals the sum of (i) total liabilities and (ii) amortized cost basis of TBA dollar roll positions (if settled) divided by total shareholders' equity.

Non-GAAP financial measures are reconciled in the supplement to this release.

Excludes TBA dollar roll positions.

Percentages shown are equal to annualized interest expense divided by average interest bearing liabilities.

Adjusted cost of funds is equal to annualized adjusted interest expense (a non-GAAP measure) divided by average interest bearing liabilities.

Adjusted net interest spread includes the impact of drop income from TBA dollar roll positions after deducting adjusted cost of funds from effective yield.

Represents the average constant prepayment rate ("CPR") experienced during the quarter.

SUPPLEMENTAL INFORMATION

Computations of Non-GAAP Measures:

Add: TBA drop income

Add: net periodic interest benefit (cost)

(1,131

17,060

17,626

15,937

Other expense, net

(3,964

(4,006

(3,643

(3,843

(3,599

10,818

10,364

10,224

10,823

TBA drop income is calculated by multiplying the notional amount of the TBA dollar roll positions by the difference in price between two TBA securities with the same terms but different settlement dates.

Amount represents net periodic interest benefit (cost) of effective interest rate swaps outstanding during the period and excludes realized and unrealized gains and losses from changes in fair value of derivatives.

Amount recorded as a portion of "interest expense" in accordance with GAAP related to the accretion of the balance remaining in accumulated other comprehensive loss as a result of the Company's discontinuation of cash flow hedge accounting effective June 30, 2013.

RECONCILIATIONS OF GAAP MEASURES TO NON-GAAP MEASURES

March 31, 2018

September 30, 2017

Change in fair value of derivative instruments, net

(13,460

(14,715

(34,841

(9,072

(3,222

De-designated cash flow hedge accretion

Amount includes unrealized gains and losses from changes in fair value of derivatives and realized gains and losses on terminated derivatives and excludes net periodic interest benefits/costs incurred on effective interest rate swaps outstanding during the period.

GAAP net interest income

Less: de-designated cash flow hedge accretion

Non-GAAP adjusted net interest income

Add: net periodic interest (benefit) cost

(1,777

(2,333

Non-GAAP adjusted interest expense

13,040

11,890

11,863

10,423

11,068

The above information was disclosed in a filing to the SEC. To see the filing, click here.

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Other recent filings from the company include the following:

Statement of acquisition of beneficial ownership by individuals - Dec. 10, 2019

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