Dynex Capital, Inc. Reports Third Quarter 2012

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Dynex Capital, Inc.Reports Third Quarter 2012

Diluted EPS of $0.34 and Book Value Per Common Share of $10.31

GLEN ALLEN, Va.--(BUSINESS WIRE)-- Dynex Capital, Inc. (NYS: DX) reported net income available to common shareholders of $18.4 million, or $0.34 per diluted common share for the third quarter of 2012 versus $18.8 million, or $0.35 per diluted common share, for the second quarter of 2012 and $1.5 million, or $0.04 per diluted common share, for the third quarter of 2011.


Third Quarter 2012 Highlights

  • Book value per common share was $10.31 at September 30, 2012 versus $9.66 at June 30, 2012 and $9.20 at December 31, 2011.
  • Annualized return on average common equity was 13.6% during the third quarter of 2012 compared to 14.3% for the second quarter of 2012.
  • Net interest spread was 2.00% for the third quarter of 2012 versus 2.18% for the second quarter of 2012 and 2.43% for the third quarter of 2011.
  • Interest earning assets were $4,316.2 million at September 30, 2012. Average interest earning assets for the third quarter of 2012 were $3,729.1 million versus $3,339.5 million for the second quarter of 2012 and $2,494.7 million for the third quarter of 2011. As of September 30, 2012, RMBS assets were $2,814.3 million and CMBS assets were $1,423.3 million. On an actual invested capital basis, approximately 39% of the Company's shareholders' capital is invested in RMBS with the balance in CMBS, cash and other assets.
  • Issued 2.3 million shares of 8.50% Series A Preferred Stock for net proceeds of $55.4 million after expenses.
  • Net interest income was $19.1 million for the third quarter of 2012 versus $19.0 million in the second quarter of 2012 and $14.6 million in the third quarter of 2011.
  • Gain on sale of investments, net during the third quarter of 2012 was $3.5 million which includes $3.3 million from the sale of $15.0 million in non-Agency CMBS and $56.1 million in Agency RMBS.
  • The investment portfolio (excluding CMBS interest only securities, or IOs) prepaid at a constant prepayment rate, or CPR, of 18.7% for the third quarter of 2012 versus 16.0% for the second quarter of 2012.
  • Dividend per common share for the third quarter of 2012 was $0.29 for an annualized dividend yield of 11.7% based on the October 31, 2012 closing stock price of $9.92.
  • Overall leverage was 6.1 times equity capital at September 30, 2012 the same as at June 30, 2012. Average leverage during the quarter was an estimated 5.9 times equity capital.

As previously announced, the Company's quarterly conference call to discuss the third quarter results is today at 10:00 a.m. ET. Interested investors may access the call and the related slides by dialing 1-877-317-6789 or by webcast over the internet at www.dynexcapital.com through a link provided under "Investor Relations/IR Highlights."

Commenting on the Company's results for the quarter, Mr. Thomas Akin, Chairman and Chief Executive Officer, stated, "We are very pleased with the consistency of our results in this challenging investment environment. Book value increased by almost 7% during the third quarter as all fixed income assets appreciated on the back of QE3. And while QE3 has supported our existing portfolio book value, it has reduced the expected returns we are seeing in our investment opportunity set. However, our diversified investment strategy and our significant holdings of prepayment protected commercial mortgage securities should dampen the effects of lower yields in the coming months. Additionally, our hybrid strategy affords us the flexibility to pursue opportunities in both the agency and non-Agency universe, where we continue to see pockets of value, particularly in CMBS. During the third quarter, we issued our Series A Preferred Stock at an attractive 8.5% coupon and we were very patient in adding assets with the new capital. As a result, our average earning assets were lower than target for the quarter. Currently, we are at our portfolio target size and may increase the investment portfolio modestly in the fourth quarter principally from reducing the amount of capital we hold against our Agency ARM portfolio. In summary, we were able to generate solid results for the third quarter while retaining balance sheet flexibility."

Results of Operations

Net interest income was $19.1 million for the third quarter of 2012, relatively unchanged from the $19.0 million in net interest income for the second quarter of 2012. While average interest earning investments increased to $3,729.1 million for the third quarter of 2012 versus $3,339.5 million for the second quarter of 2012, the Company was modestly under invested during the quarter. In addition, the net interest spread for the third quarter of 2012 declined to 2.00% versus 2.18% for the second quarter of 2012.

Net interest spread for the third quarter of 2.00% is the difference between the yield on the Company's interest-earning investment portfolio of 3.12% and the cost of funds of 1.12%. For the second quarter of 2012 the yield on the Company's interest-earning investments was 3.29% and its cost of funds was 1.11%. The net interest spread declined sequentially in the third quarter due primarily to the decline of 0.17% in the yield on interest-earning assets, principally from a higher percentage of Agency RMBS during the third quarter which are lower yielding investments. The Company's repurchase agreement borrowing costs also increased during the quarter by 0.04% which was partially offset by a decline in the average cost of interest rate swaps by 0.03%.

Gain on sale of investments, net for the third quarter of 2012 of $3.5 million includes $3.3 million from the sale of MBS. Of this amount, $2.1 million relates to the sale of $56.1 million in Agency RMBS that were collateralized by reverse mortgage loans and $1.2 million relates to the sale of $15.0 million in mezzanine non-Agency CMBS bonds from the Freddie K Multifamily Program.

Financial Condition

The Company's investment portfolio was $4,316.2 million at September 30, 2012 versus $3,628.2 million at June 30, 2012. The Company has increased its Agency MBS investments to $3,650.7 million at September 30, 2012 from $2,979.0 million at June 30, 2012 and increased its non-Agency MBS investments to $586.9 million at September 30, 2012 from $559.0 million at June 30, 2012. During the third quarter the Company concentrated its purchases in Agency Hybrid ARMs and Agency CMBS IO. Agency MBS investments increased as a percentage of the Company's investment portfolio from 82% at June 30, 2012 to 84% at September 30, 2012.

Byron L. Boston, President and Chief Investment Officer commented, "Consistent with our investment philosophy we were selective in adding assets during the quarter as we looked for pockets of opportunity in CMBS and better value in Hybrid ARMs. We sold certain securities which were not part of our core strategy or which had reached a price where we felt like the assets were fully valued relative to their expected future cash flow. We may continue to selectively sell assets in future periods given continued strong asset prices. From a prepayment standpoint, our Agency RMBS performance was generally in-line with expectations. We are aware of the risk from QE3 and HARP activities, but we believe that our forecasted prepayment speeds for our Agency RMBS incorporates this risk. While our overall premium on our investment portfolio is $750.4 million as of September 30, 2012, only $145.9 million relates to Agency RMBS which has exposure to prepayments. The remaining $604.5 million is primarily related to CMBS which have some form of prepayment protection intended to discourage the borrower from prepayment or compensate us if the loan does prepay. In addition, from a shareholders' capital allocation perspective, approximately 39% of our capital is invested in RMBS with the balance in CMBS, cash and other assets."

Agency MBS Investments

The following table presents the Company's Agency MBS portfolio by category and certain other information as of and for the three months ended September 30, 2012:

  
As of September 30, 2012

Quarter ended
September 30,
2012

($ in thousands) 

Principal
Balance
(notional for
IOs)

 

Net Premium
(Discount)

 

Amortized
Cost

 Fair Value 

WAVG
Coupon

 WAVG Yield (2)
RMBS$2,627,300 $145,908 $2,773,208 $2,800,095 3.73%2.15%
CMBS289,72621,898311,624335,0645.20%3.66%
CMBS IO9,251,338  508,326  508,326  515,513 0.96%4.93%
Total (1)$2,917,026  $676,132  $3,593,158  $3,650,672 2.63%
 

(1)Total for Principal Balance excludes notional amount of IO securities.

(2)Weighted average yield is based on weighted average amortized cost for the quarter.

The Company's Agency RMBS investments consist of ARMs and Hybrid ARMs and have a weighted average months to coupon reset of 55 months. The Company's Agency CMBS investments consist of fixed rate securities collateralized by multifamily loans and have a weighted average maturity of 98 months.

The following table summarizes average yield and financing costs for the Company's Agency MBS investments for the periods presented:

   
($ in thousands) 

Quarter ended
September 30, 2012

 

Quarter ended
June 30, 2012

 

Quarter ended
September 30, 2011

Weighted average annualized yield for the period2.63%2.75%3.11%
Weighted average annualized cost of funds including interest rate swaps for the period(0.90)%(0.88)%(0.81)%
Net interest spread for the period1.73%1.87%2.30%
Average balance of investments for the period$3,109,770$2,755,376$2,067,614
Average balance of financing for the period$(2,815,949)$(2,466,672)$(1,880,890)
 

The weighted average annualized yield on Agency MBS for the quarter ended September 30, 2012 declined 0.10% from the quarter ended June 30, 2012 primarily from the addition of lower yielding Hybrid ARMs to the portfolio and the downward reset of interest rates on ARMs that adjusted during the quarter. Premium amortization on Agency RMBS during the third quarter of 2012 was $9.5 million, or 0.39% of the average amortized cost of Agency RMBS for the third quarter versus $8.4 million, or 0.38% of the average amortized cost for Agency RMBS for the second quarter of 2012.

The following table presents the average constant prepayment rates for the Company's Agency RMBS and CMBS for the periods presented (CMBS IOs are not presented as CPRs are not available for IOs):

    
  

Quarter ended
September 30, 2012

 

Quarter ended
June 30, 2012

 

Quarter ended
March 31, 2012

 

Quarter ended
December 31, 2011

RMBS23.4%20.8%21.4%25.4%
CMBS% % % %
Total20.9% 18.3% 18.4% 21.5%
 

Non-Agency MBS Investments

The following table presents the Company's non-Agency MBS portfolio by category and certain other information as of and for the three months ended September 30, 2012:

  
As of September 30, 2012 

Quarter ended
September 30,
2012

($ in thousands) 

Principal
Balance
(notional for
IOs)

 

Net Premium
(Discount)

 

Amortized
Cost

 Fair Value 

WAVG
Coupon

WAVG Yield (2)
RMBS$15,007 $(812) $14,195 $14,241 4.38%5.63%
CMBS452,975(18,006)434,969475,2824.64%5.72%
CMBS IO2,252,064  93,096  93,096  97,408  0.69%5.39%
Total (1)$467,982  $74,278  $542,260  $586,931  5.67%
 

(1)Total Principal Balance excludes notional amount of IO securities.

(2)Weighted average yield is based on weighted average amortized cost for the quarter.

The following table summarizes average yield and financing costs for the Company's non-Agency MBS investments for the periods presented:

   
($ in thousands) 

Quarter ended
September 30, 2012

 

Quarter ended
June 30, 2012

 

Quarter ended
September 30, 2011

Weighted average annualized yield for the period5.67%6.05%6.05%
Weighted average annualized cost of funds including interest rate swaps for the period(2.58)%(2.55)%(2.96)%
Net interest spread for the period3.09%3.50%3.09%
Average balance of investments for the period$533,536$472,106$300,750
Average balance of financing for the period$(427,487)$(381,826)$(254,438)
 

The decline in net interest spread for non-Agency MBS for the third quarter of 2012 compared to the second quarter of 2012 was primarily due to a lower weighted average coupon earned on securities purchased during the third quarter of 2012.

Information related to the credit ratings for the Company's non-Agency MBS as of September 30, 2012 is as follows:

      
    RMBS CMBS IOs Weighted average
AAA79.2%33.7%98.0%45.5%
AA1.2%9.8%2.0%8.3%
A0.5%55.2%%44.7%
Below A or not rated19.1%1.3%%1.5%
 

Securitized Mortgage Loans

Securitized mortgage loans had an amortized cost basis, net of reserves, of $77.7 million and a principal balance of $77.4 million with $34.4 million principal in commercial mortgage loans and $43.0 million principal in single-family mortgage loans at September 30, 2012. Seriously delinquent loans (loans 60+ days past due) totaled $3.4 million as of September 30, 2012 versus $4.4 million at June 30, 2012 and $18.4 million as of December 31, 2011. As of September 30, 2012, the allowance for loan losses for the Company's securitized mortgage loan portfolio decreased to $0.4 million compared to $1.6 million at June 30, 2012 and $2.5 million at December 31, 2011.

Hedging Activities

As of September 30, 2012, the Company had a notional total of $1.5 billion in pay-fixed interest rate swaps with a weighted average rate of 1.53% and a weighted average remaining maturity of 43 months. Of this amount, $275.0 million with a weighted average pay-fixed rate of 1.62% are forward-starting swaps which become effective in 2013. Additionally, $27.0 million of the Company's $1.5 billion of interest rate swaps are considered trading instruments and have a weighted average rate of 2.88% and weighted average remaining maturity of 53 months and are intended to offset market value changes of Agency CMBS with a par value at September 30, 2012 of $26.0 million which are also designated as trading instruments.

Shareholders' Equity

Shareholders' equity increased to $617.9 million at September 30, 2012 from $525.1 million at June 30, 2012 and $371.3 million at December 31, 2011. Book value per common share increased to $10.31 at September 30, 2012 from $9.66 at June 30, 2012 and $9.20 at December 31, 2011. The increase in shareholders' equity from June 30, 2012 to September 30, 2012 was due primarily to net proceeds received of $55.4 million from the Series A Preferred Stock issued in the third quarter of 2012 as well as the net increase in accumulated other comprehensive income of $34.4 million from improved market values on investments. In addition, net income of $18.4 million for the three months ended September 30, 2012 exceeded $16.6 million in common stock and preferred stock dividends declared as the Company utilized a portion of its tax net operating loss carryforwards to offset its distribution requirement. The increase in book value per common share largely resulted from the increase in accumulated other comprehensive income and the excess of earnings over dividends declared as noted above.

The following table summarizes the allocation of the Company's shareholders' equity as of September 30, 2012 and the net interest income contribution for the quarters indicated to each component of the Company's balance sheet:

      
($ in thousands) 

Asset Carrying
Basis

 

Associated
Financing(1)/
Liability
Carrying Basis

 

 

Allocated
Shareholders'
Equity

 

% of
Shareholders'
Equity

 

3Q12 Net
Interest Income
Contribution

 

2Q12 Net
Interest
Income
Contribution

Agency RMBS$2,800,095$2,560,779$239,31638.7%$8,125$8,561
Agency CMBS335,064225,880109,18417.7%1,5011,658
Agency CMBS IO515,513407,683107,83017.5%3,5842,494
Non-Agency RMBS14,24111,0423,1990.5%176188
Non-Agency CMBS475,282381,93793,34515.1%3,9033,768
Non-Agency CMBS IO97,40876,81820,5903.3%681966
Securitized mortgage loans (2)77,74850,69527,0534.4%9991,298
Other investments (2)8968960.1%2175
Derivative instruments(3)46,496(46,496)(7.5)%
Cash and cash equivalents34,72334,7235.6%
Other assets/other liabilities 54,060  25,769  28,291  4.6%   
  $4,405,030   Read Full Story

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