Dynex Capital, Inc. Announces Fourth Quarter and Full Year 2022 Results

Dynex Capital, Inc. ("Dynex" or the "Company") (NYSE: DX) reported its fourth quarter and full year 2022 financial results today. Management will host a call today at 10:00 a.m. Eastern Time to discuss the results and business outlook. Details to access the call can be found below under "Earnings Conference Call."

Financial Performance Highlights

• Book value per common share of $14.73 as of December 31, 2022
• Dividends declared of $0.39 per common share for the fourth quarter of 2022 and $1.56 for the full year
• Total economic return of $0.89 per common share, or 6.2% of beginning book value, for the fourth quarter of 2022, and $(1.71) per common share, or (9.5)% of beginning book value, for the full year
• Comprehensive income of $1.17 per common share and net income of $0.85 per common share for the fourth quarter of 2022; comprehensive loss of $(1.24) per common share and net income of $3.19 per common share for the full year
• Realized gains on interest rate hedges included in GAAP net income were $204.8 million for the fourth quarter of 2022 and $690.7 million for the full year
• REIT taxable income included an estimated benefit of $11.8 million, or $0.24 per common share, from amortization of deferred tax hedge gains for the fourth quarter of 2022 and $22.5 million, or $0.53 per common share, for the full year
• Leverage including TBA dollar roll positions at 6.1 times shareholders' equity at December 31, 2022
• Raised equity capital of $92.4 million during the fourth quarter through at-the-market ("ATM") common stock issuances, bringing total capital raised for 2022 to $246.9 million, net of $3.1 million issuance costs

Management Remarks

"We believe our performance this decade, which started in 2020, illustrates that the Dynex team has the experience and discipline to manage through even the most volatile and challenging cycles, and we expect to continue generating long-term returns for our shareholders," stated Byron Boston, the Company's Chief Executive Officer. "We continue to believe that a flexible business model and our experienced team have positioned Dynex to deliver a solid cash dividend and total return experience to our shareholders. We enter 2023 with a highly liquid balance sheet and are prepared to be opportunistic investors this year."

Earnings Conference Call

As previously announced, the Company's conference call to discuss these results is today at 10:00 a.m. Eastern Time and may be accessed via telephone in the United States by dialing 1-888-330-2022 and providing the ID 1957092 or by live audio webcast by clicking the "Webcast" button in the “Current Events” section on the homepage of the Company's website (www.dynexcapital.com), which includes a slide presentation. To listen to the live conference call via telephone, please dial in at least 10 minutes before the call begins. An archive of the webcast will be available on the Company's website approximately two hours after the live call ends.

Results Discussion

Comprehensive income to common shareholders of $56.6 million, or $1.17 per common share, for the fourth quarter of 2022 resulted in the increase of $0.50 in the Company's book value per common share to $14.73 as of December 31, 2022. The fair value of the Company's MBS portfolio benefited from spread tightening during the quarter while the active management of its interest rate hedges mitigated the impact of an inverted yield curve on the Company's fourth quarter earnings. Partially offsetting the resulting increase of $55.2 million in the fair value of its investment and hedging portfolios, the Company's net interest income and TBA drop income declined. As the Federal Reserve continued its attempt to combat inflation by increasing the Federal Funds rate in 2022, these increases resulted in the Company's cost of funds increasing 132 basis points in the fourth quarter compared to the third quarter of 2022. To mitigate its higher financing costs, the Company sold a portion of its lower coupon Agency RMBS at the end of the third quarter and rotated into Agency RMBS and TBAs with higher coupons. The shift to higher coupon assets and slower prepayment speeds resulted in the Company's effective yield on its MBS increasing 63 basis points during the fourth quarter of 2022. The increase in the Federal Funds rate also adversely impacted the net implied spread earned on the Company's TBA securities, resulting in lower TBA drop income and further contributing to the decline in the Company's earnings available for distribution ("EAD"), a non-GAAP measure, which was $0.03 per common share for the fourth quarter of 2022. However, the Company's realized gains from its interest rate hedges, which are not included in EAD but recognized in GAAP earnings, will become a part of the Company's distribution requirements when amortized into REIT taxable income over time. Further discussion of the interest rate hedge gains is provided below under "Hedging Portfolio".

During the fourth quarter of 2022, the Company raised equity capital of $92.4 million through its ATM common stock program, and ended 2022 with over $600 million of cash and liquid assets. With room to increase its leverage of 6.1 times shareholders' equity at December 31, 2022, management believes the Company is well-positioned to selectively add incremental assets when spreads widen or to diversify into other mortgage products as attractive opportunities are presented.

The following table summarizes the changes in the Company's financial position during the fourth quarter of 2022:

Investment Portfolio

The following table provides information about the performance of the Company's MBS (including TBA securities) and repurchase agreement financing for the fourth quarter of 2022 compared to the prior quarter:

The following table provides detail on the coupon composition of the Company's 30-year fixed-rate Agency RMBS (including TBA securities) as of the dates indicated:

Repurchase Agreement Financing

The following table provides detail on the Company's repurchase agreement borrowings outstanding as of the dates indicated:

Hedging Portfolio

During 2022, the Company realized substantial gains on its interest rate hedges that were recognized in its GAAP earnings, but because these derivative instruments were designated for tax purposes as hedges of the Company's financing arrangements, the realized gains will be amortized into REIT taxable income over the next several years. On a tax basis, the benefit for the year ended December 31, 2022 is estimated to be $22.5 million, or $0.53 per common share. The Company's remaining estimated net deferred tax hedge gains from its interest rate hedging portfolio was $680.0 million as of December 31, 2022, which is a significant increase from $27.0 million as of December 31, 2021. These hedge gains will be part of the Company's future distribution requirements along with net interest income and other ordinary gains and losses in future periods. The table below provides the projected amortization of the Company's net deferred tax hedge gain that may be recognized as taxable income over the periods indicated given conditions known as of December 31, 2022; however, uncertainty inherent in the forward interest rate curve makes future realized gains and losses difficult to estimate, and as such, these projections are subject to change for any given period.

As of December 31, 2022, the Company held short positions of $4.2 billion in 10-year U.S. Treasury futures and $740.0 million in 5-year U.S. Treasury futures and held put options on 10-year U.S. Treasury futures of $250.0 million.

Use of Non-GAAP Financial Measures

In evaluating the Company’s financial and operating performance, management considers book value per common share, total economic return to common shareholders, and other operating results presented in accordance with GAAP as well as certain non-GAAP financial measures, which include the following: earnings available for distribution (“EAD”) to common shareholders, adjusted net interest income and the related metric adjusted net interest spread. Management believes these non-GAAP financial measures may be useful to investors because they are viewed by management as a measure of the investment portfolio’s return based on the effective yield of its investments, net of financing costs and, with respect to EAD, net of other normal recurring operating income/expenses. Drop income generated by TBA dollar roll positions, which is included in "gain (loss) on derivatives instruments, net" on the Company's consolidated statements of comprehensive income, is included in these non-GAAP financial measures because management views drop income as the economic equivalent of net interest income (interest income less implied financing cost) on the underlying Agency security from trade date to settlement date.

However, these non-GAAP financial measures are not a substitute for GAAP earnings and may not be comparable to similarly titled measures of other REITs because they may not be calculated in the same manner. Furthermore, though EAD is one of several factors management considers in determining the appropriate level of distributions to common shareholders, it should not be utilized in isolation, and it is not an accurate indication of the Company’s REIT taxable income nor its distribution requirements in accordance with the Tax Code.

Reconciliations of the non-GAAP financial measures used in this earnings release to the most directly comparable GAAP financial measures are presented below.

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," "will," "continue" 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, including statements made in Mr. Boston's quotes, may include, without limitation, statements regarding the Company's financial performance in future periods, future interest rates, future market credit spreads, management's views on expected characteristics of future investment and macroeconomic environments, central bank strategies, prepayment rates and investment risks, future investment strategies, 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 the Company's 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, volatility and disruption in national and international financial markets; adverse effects of the ongoing coronavirus (COVID-19) pandemic and any governmental or societal responses thereto, or other unusual and infrequently occurring events; ability to find suitable investment opportunities; changes in economic conditions, including an increased rate of inflation; changes in interest rates and interest rate spreads, including the repricing of interest-earning assets and interest-bearing liabilities; the Company’s investment portfolio performance particularly as it relates to cash flow, prepayment rates and credit performance; the impact on markets and asset prices from changes in the Federal Reserve’s policies regarding purchases of Agency residential and Agency commercial mortgage-backed securities and U.S. Treasuries; actual or anticipated changes in Federal Reserve monetary policy or the monetary policy of other central banks; adverse reactions in U.S. financial markets related to actions of foreign central banks or the economic performance of foreign economies including in particular China, Japan, the European Union, and the United Kingdom; uncertainty concerning the long-term fiscal health and stability of the United States; the cost and availability of financing, including the future availability of financing due to changes to regulation of, and capital requirements imposed upon, financial institutions; the cost and availability of new equity capital; changes in the Company’s use of leverage; changes to the Company’s investment strategy, operating policies, dividend policy or asset allocations; the quality of performance of third-party servicer providers of the Company’s loans and loans underlying securities owned by the Company; the level of defaults by borrowers on loans the Company has securitized or otherwise is invested through its ownership of MBS; changes in the Company’s industry; increased competition; changes in government regulations affecting the Company’s business and/or status as a real estate investment trust; changes or volatility in the repurchase agreement financing markets and other credit markets; changes to the market for interest rate swaps and other derivative instruments, including changes to margin requirements on derivative instruments; uncertainty regarding continued government support of the U.S. financial system and U.S. housing and real estate markets or reform of the U.S. housing finance system, including the resolution of the conservatorship of Fannie Mae and Freddie Mac; the composition of the Federal Reserve; systems failures or cybersecurity incidents; catastrophes affecting global markets; and exposure to current and future claims and litigation. 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, 2021, 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.

Company Description

Dynex Capital, Inc. is a financial services company committed to ethical stewardship of stakeholders' capital, employing comprehensive risk management and disciplined capital allocation to generate dividend income and long-term total returns through the diversified financing of real estate assets in the United States. Dynex operates as a REIT and is internally managed to maximize stakeholder alignment. Additional information about Dynex Capital, Inc. is available at www.dynexcapital.com.

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