Dynex Capital, Inc. (NYSE: DX) reported net income available to common shareholders of $29.4 million, or $0.54 per diluted common share for the second quarter of 2013 versus $18.8 million, or $0.35 per diluted common share for the second quarter of 2012. The Company also reported book value per common share of $8.94 per common share at June 30, 2013 versus $10.50 at March 31, 2013.
|($ in thousands, except per share amounts)||2Q2013||1Q2013||2Q2012|
|Net interest income||$||22,444||$||22,526||$||19,008|
|Gain on sale of investments, net||$||2,031||$||1,391||$||2,587|
|Fair value adjustments, net||$||10,753||$||(157||)||$||117|
|General and administrative expenses||$||(3,795||)||$||(3,808||)||$||(3,024||)|
|Net income to common shareholders||$||29,442||$||18,381||$||18,847|
|Earnings per common share||$||0.54||$||0.34||$||0.35|
|Dividend per common share||$||0.29||$||0.29||$||0.29|
|Return on average common equity (annualized) (1)||13.2||%||13.0||%||14.3||%|
|Interest earnings assets, end of period||$||4,627,188||$||4,531,342||$||3,276,170|
|Average interest earning assets||$||4,565,733||$||4,098,681||$||3,339,546|
|Average interest bearing liabilities||$||(4,068,830||)||$||(3,641,654||)||$||(2,916,801||)|
|RMBS/single-family capital allocation, end of period||$||218,029||$||233,870||$||204,631|
|CMBS/commercial capital allocation, end of period||$||313,133||$||362,693||$||279,545|
|Book value per common share, end of period||$||8.94||$||10.50||$||9.66|
|Net interest spread||1.75||%||1.89||%||2.18||%|
|Portfolio CPR (excluding CMBS IO)||21.0||%||19.3||%||14.3||%|
|Debt to shareholders' equity ratio, end of period||6.8x||6.3x||6.1x|
(1) The annualized return on average common equity for the second quarter of 2013 was calculated using an adjusted net income to common shareholders of $18.4 million. This amount excludes fair value adjustments of $11.0 million related to long-term interest rate swaps added during the quarter for which the Company did not elect hedge accounting. On a GAAP basis, including the fair value adjustments, our net income to common shareholders and annualized return on average common equity for the second quarter of 2013 were $29.4 million and 21.0%, respectively. Management believes the adjusted return on average common equity is useful to investors because it enhances comparability between the periods presented.
As previously announced, the Company's quarterly conference call to discuss the second quarter results is 11:00 a.m. ET on August 1, 2013. Interested investors may access the call by dialing 1-888-317-6016 or by accessing the webcast, the link for which is provided under “Investor Relations/IR Highlights” on our website (www.dynexcapital.com). A slide presentation will accompany the webcast and will also be available one hour prior to the call at the same location on our website.
Mr. Thomas Akin, Chairman and Chief Executive Officer, commented, "Mortgage REIT portfolios experienced a volatile combination of rising rates and spreads during the second quarter that sent book values substantially lower. Leverage ratios were also affected and moved sharply higher for most mortgage REITs as book values dropped. At Dynex, we were disappointed to see our book value decrease, but our business model and portfolio remain largely intact as our leverage moved modestly higher and yet remained within our targets. Additionally, because we did not invest in 15-year or 30-year mortgages but instead invested in securities with shorter maturities and more predictable cash flows, our duration extension in the quarter was minimal. Going forward, we expect to maintain our leverage target below 6.5 times consistent with our investment discipline. Our conservative investment strategy of low duration, high quality investments remains applicable in the current environment, and we expect to recover shareholder value as our portfolio rolls down the yield curve and as markets stabilize."
Mr. Byron Boston, President and Chief Investment Officer commented, "Market events were extraordinary during the quarter leading to extreme price volatility in fixed income securities. During the quarter the ten-year Treasury rate increased by 64 basis points, but the bulk of the price volatility resulted from widening in market credit spreads versus higher interest rates. Fed talk of reducing bond purchases, global de-risking, bond fund redemptions, and regulatory constraints, led to reduced liquidity and lack of transparency in MBS pricing. The unusual combination of the increase in interest rates and the simultaneous widening of credit spreads had the equivalent impact of an approximate 200 basis point rise in interest rates on a substantial portion of our investment portfolio. While we have seen some stabilizing since quarter end, markets continue to be data dependent and volatile and could remain this way until the economic picture becomes clearer. Financing has not been a concern, and we are continuing to prioritize our liquidity and financial flexibility."
The following table provides various interest rates and credit spreads on assets (expressed in basis points) owned by the Company as well as other market credit spreads as of June 30, 2013 and March 31, 2013:
|June 30, 2013||March 31, 2013|
|2 year vs. 10 year Treasury spread||218||166|
|Hybrid ARM 5/1 (2.0% coupon) spread to Treasuries||45||18|
|Hybrid ARM 10/1 (2.5% coupon) spread to Treasuries||75||34|
|Agency CMBS spread to Treasuries||92||59|
|'A'-rated CMBS spread to Treasuries||287||205|
|Agency CMBS IO spread to interest rate swaps||200||115|
|CC 30 year FNMA zero vol spread to Treasuries||43||29|
|IG Index spread to Treasuries||165||154|
|HY Index spread to Treasuries||537||501|
|CMBX.NA.A.6 (2012 'A'-rated)||254||200|
Quarterly Performance Summary
Net interest income decreased slightly to $22.4 million for the second quarter of 2013 from $22.5 million for the first quarter of 2013 due primarily to increased expense from interest rate swaps and lower prepayment penalty income received on CMBS IO securities. Net interest spread for the second quarter of 2013 was 1.75% which consisted of the yield on interest-earning investments of 2.86% less the cost of funds of 1.11%. For the first quarter of 2013, net interest spread was 1.89% which consisted of the yield on the Company's interest-earning investments of 3.04% less the cost of funds of 1.15%. For the second quarter of 2012, the net interest spread was 2.18% which consisted of the yield on the Company's interest-earning investments of 3.29% less the cost of funds of 1.11%. Although our average interest earning investments increased in the second quarter of 2013 compared to the first quarter of 2013, our net interest spread declined in the second quarter compared to the first quarter primarily due to the addition of lower coupon assets at the end of the first quarter and the beginning of the second quarter.
Fair value adjustments, net for the second quarter of 2013 include $11.4 million related to the market value increase in the Company's interest rate swaps designated as trading, which is primarily the result of four 10-year interest rate swaps with a combined notional balance of $180 million that the Company entered into during the second quarter. Please see "Hedging Activities" below for further discussion. Partially offsetting that increase was a $0.6 million decline in the market value of certain Agency CMBS designated as trading securities.
During the second quarter of 2013, the Company sold CMBS and CMBS IO investments with an amortized cost basis of $144.5 million for a net gain of $2.6 million. These investments earned a weighted-average yield of 4.88% during the quarter. The Company also sold RMBS investments with an amortized cost basis of $10.1 million at a loss of $0.6 million.
General and administrative expenses were $3.8 million in the second quarter of 2013, or 0.57% of average shareholders' equity, versus $3.8 million, or 0.61% of average shareholders' equity, in the first quarter of 2013.
During the quarter the Company issued 2.25 million shares of 7.625% Series B Preferred Stock for net proceeds of $54.3 million which it invested principally in Agency hybrid ARMs. No shares of common stock were repurchased during the quarter. Principally as a result the decline in fair value in the Company's investments, accumulated other comprehensive income declined $96.7 million, or $1.76 per common share, during the second quarter to an accumulated loss position of $35.1 million, or $0.64 per common share at June 30, 2013. Book value per common share was $8.94, representing a decline of 15% from March 31, 2013 and 13% from December 31, 2012. The following table reconciles the changes in the Company's book value per common share from March 31, 2013 to June 30, 2013 (changes in fair value of MBS due to changes in interest rates and changes in credit spreads are based on Company estimates):
|Book value per common share, March 31, 2013||$||10.50|
|Net income in excess of dividends declared (1)||0.05|
Changes in fair value of MBS classified as available-for-sale, net of hedges, due to changes in interest rates
|Changes in fair value of MBS classified as available-for-sale due to changes in credit spreads||(1.06||)|
|Issuance of Series B Preferred Stock||(0.04||)|
|Book value per common share, June 30, 2013||$||8.94|
(1) "Net income in excess of dividends declared" excludes $11.0 million, or $0.20 per common share, in fair value adjustments, net recorded during the quarter which relates to 10-year interest rate swaps which are designated as trading but considered economic hedges of interest rate risk. Such amounts are included in "Changes in fair value of MBS classified as available-for-sale, net of hedges, due to changes in interest rates" in the table.
The following tables present certain information for the Company's MBS portfolio by category as of and for the dates and periods presented:
|As of June 30, 2013||2Q2013|
|(notional for||Net Premium||Amortized|
($ in thousands)
|CMBS IO)||(Discount)||Cost||Fair Value|
|Total MBS portfolio:||$||3,734,797||$||880,841||$||4,578,062||$||4,559,323||2.82||%|
|($ in thousands)||2Q2013||1Q2013||2Q2012|
|Weighted average annualized yield for the period (2)||2.43||%||2.60||%||2.75||%|
|Weighted average annualized cost of funds including interest rate swaps for the period||(0.91||)%||(0.93||)%||(0.88||)%|
|Net interest spread for the period||1.52||%||1.67||%||1.87||%|
|Average balance of investments for the period (1)||$||3,903,717||$||3,456,841||$||2,755,376|
|Average balance of financing for the period||$||(3,520,250||)||$||(3,128,324||)||$||(2,466,672||)|
|Weighted average annualized yield for the period (2)||5.39||%||5.39||%||6.05||%|
|Weighted average annualized cost of funds including interest rate swaps for the period||(2.45||)%||(2.58||)%||(2.55||)%|
|Net interest spread for the period||2.94||%||2.81||%||3.50||%|
|Average balance of investments for the period (1)||$||596,506||$||572,312||$||472,106|
|Average balance of financing for the period||$||(511,034||)||$||(473,177||)||$||(381,826||)|
Total principal balance and average balance of investments exclude notional amounts of CMBS IO.
Weighted average yield is based on weighted average amortized cost of investments for the quarter.
The following table presents the weighted average of constant prepayment rates ("CPRs") for the Company's Agency MBS for the periods presented:
|Total weighted average (1)||23.2%||22.0%||21.5%||20.9%|
CPRs for CMBS IO are not calculated and reported. If CPRs for CMBS IO were included, the total weighted averages above would be lower.
The following table presents the weighted average coupon by weighted average months-to-reset ("MTR") for the variable-rate portion of our Agency RMBS based on par value as of June 30, 2013 and December 31, 2012:
|June 30, 2013||December 31, 2012|
($ in thousands)
|Par Value||Coupon||Par Value||Coupon|
|Over 84 MTR||1,029,426||3.02||%||490,759||3.40||%|
Information related to the credit ratings for the Company's non-Agency MBS as of June 30, 2013 is as follows:
($ in thousands)
|Below A or not rated||12,064||61,600||—||12.6||%|
Repurchase Agreement Borrowings
The following tables present the components of the Company’s repurchase agreements as of June 30, 2013 by the fair value and type of securities pledged as collateral to the repurchase agreements:
|June 30, 2013|
|Fair Value of|
($ in thousands)
|Agency CMBS IOs||439,482||1.19||%||541,133|
|Non-Agency CMBS IO||102,298||1.38||%||130,605|
|Securitization financing bonds||23,017||1.61||%||25,893|
The combined weighted average original term to maturity for the Company’s repurchase agreements was 49 days as of June 30, 2013 and 57 days as of December 31, 2012.
During the second quarter the Company entered into 10-year current pay and forward starting interest rate swaps with an aggregate notional balance of $180 million and a weighted average effective pay rate of 2.13%. Given the longer term of these interest rate swaps, the Company did not designate them as cash flow hedges under GAAP. As such, the increase in fair value of $11.0 million related to these additional swaps was included in the Company's income statement for the second quarter.
Additionally, effective on June 30, 2013, the Company voluntarily discontinued hedge accounting for interest rate swaps which previously had been accounted for as cash flow hedges under GAAP. Under GAAP cash flow hedge accounting, interest rate swaps are recorded at fair value as assets and liabilities on the balance sheet with any changes in fair value recorded in accumulated other comprehensive income, a separate component of shareholders' equity. As a result of discontinuing hedge accounting, future changes in the fair value of interest rate swap contracts will be recorded in the Company's consolidated statement of income rather than accumulated other comprehensive income. The Company discontinued hedge accounting in order to more effectively manage the maturity dates of its repurchase agreements. Hedge accounting limits the ability of the Company to extend maturity dates for its repurchase agreements beyond 30-days, forcing the Company to have repurchase agreements mature, or roll, at fixed intervals throughout a given 30-day period. A fuller description of the reasons and the impact of the discontinuing of hedge accounting will be included in the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2013. The Company has also begun utilizing other instruments to hedge its interest risk exposures such as Eurodollar contracts and has sold $450 million in such contracts since the end of the second quarter. The Company's interest rate swaps and Eurodollar contracts will continue to be treated as hedges for income tax purposes.
The following table summarizes the contractual maturities remaining for the Company’s outstanding interest rate swap agreements as of June 30, 2013:
|Notional Amount:||Notional Amount:||Notional Amount:||Number of||Weighted-Average|
($ in thousands)
|Trading||Hedging||Total||Swaps||Fixed Rate Swapped|
|Over 60 months||605,000||—||605,000||20||1.76||%|
The following table summarizes the allocation of the Company's shareholders' equity as of June 30, 2013 and the net interest income contribution for the quarters indicated to each component of the Company's balance sheet:
|2Q2013 Net||1Q2013 Net|
($ in thousands)
|Securitized mortgage loans (2)||62,083||36,832||25,251||4.2||%||777||522|
|Other investments (2)||5,782||—||5,782||1.0||%||19||19|
|Cash and cash equivalents||29,343||—||29,343||4.8||%||—||—|
|Other assets/other liabilities||77,880||24,816||53,064||8.7||%||—||—|
Associated financing for investments includes repurchase agreements and securitization financing issued to third parties (which is presented on the Company's balance sheet as “non-recourse collateralized financing”). Associated financing for hedging instruments represents the fair value of the interest rate swap agreements in a liability position.
Net interest income contribution amount is after provision for loan losses.
Net interest expense from derivative instruments designated as hedges of repurchase agreement financing is included within net interest income contribution amounts for each respective investment category.
Dynex Capital, Inc. is an internally managed real estate investment trust, or REIT, which invests in mortgage assets on a leveraged basis. The Company is actively investing in Agency and non-Agency RMBS and CMBS. The Company also has investments in securitized single-family residential and commercial mortgage loans originated by the Company from 1992 to 1998. Additional information about Dynex Capital, Inc. is available at www.dynexcapital.com.
Note: 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,” 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 include, without limitation, statements regarding future interest rates, our views on expected characteristics of future investment environments and risks posed by our investment portfolio, our future investment strategies, our future leverage levels and financing strategies including the use of specific financing and hedging instruments and strategies, and the expected performance of our investment portfolio and certain 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, 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 government policy, the impact of regulatory changes, including the Emergency Economic Stabilization Act of 2008 and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, 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, 2012, and other reports filed with and furnished to the Securities and Exchange Commission.
DYNEX CAPITAL, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands except share and per share data)
|June 30, 2013||December 31, 2012|
Mortgage-backed securities, at fair value (including pledged of $4,437,651 and $3,967,134, respectively)
|Securitized mortgage loans, net||62,083||70,823|
|Other investments, net||5,782||858|
|Cash and cash equivalents||29,343||55,809|
|Receivable from securities sold||22,875||—|
|Principal receivable on investments||22,860||17,008|
|Accrued interest receivable||24,304||23,073|
|Other assets, net||7,841||8,677|
|LIABILITIES AND SHAREHOLDERS’ EQUITY|
|Non-recourse collateralized financing||24,634||30,504|
|Accrued interest payable||1,661||2,895|
|Accrued dividends payable||17,902||16,770|
|Preferred stock, par value $.01 per share, 8.5% Series A Cumulative Redeemable; 8,000,000 shares authorized; 2,300,000 shares issued and outstanding, respectively ($58,532 aggregate liquidation preference)||55,407||55,407|
|Preferred stock, par value $.01 per share, 7.625% Series B Cumulative Redeemable; 7,000,000 shares authorized; 2,250,000 shares issued and outstanding, respectively ($57,108 aggregate liquidation preference)||54,251||—|
Common stock, par value $.01 per share, 200,000,000 shares|
authorized; 55,173,392 and 54,268,915 shares issued and outstanding, respectively
|Additional paid-in capital||767,172||759,214|
|Accumulated other comprehensive income (loss)||(35,100||)||52,511|
|Total shareholders' equity||607,237||616,710|
|Total liabilities and shareholders’ equity||$||4,749,271||$||4,280,229|
|Book value per common share||$||8.94||$||10.30|
DYNEX CAPITAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands except per share data)
|Three Months Ended||Six Months Ended|
|June 30,||June 30,|
|Mortgage-backed securities, at fair value||$||32,968||$||25,519||$||65,007||$||49,982|
|Securitized mortgage loans||903||1,527||1,827||3,031|
|Non-recourse collateralized financing||281||254||519||735|
|Net interest income||22,444||19,008||44,970||38,155|
|Provision for loan losses||—||—||(261||)||(60||)|
|Net interest income after provision for loan losses||22,444||19,008||44,709||38,095|
|Gain on sale of investments, net||2,031||2,587||3,422||2,938|
|Fair value adjustments, net||10,753||117||10,596||(93||)|
|Other income, net||101||159||13||528|
|General and administrative expenses:|
|Compensation and benefits||(2,308||)||(1,779||)||(4,666||)||(3,577||)|
|Other general and administrative||(1,487||)||(1,245||)||(2,938||)||(2,568||)|
|Preferred stock dividends||(2,092||)||—||(3,313||)||—|
|Net income to common shareholders||$||29,442||$||18,847||$||47,823||$||35,323|
|Weighted average common shares:|
|Net income per common share:|
|Dividends declared per common share||$||0.29||$||0.29||$||0.58||$||0.57|
Alison Griffin, 804-217-5897
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