Press Release Details

GLEN ALLEN, Va.--(BUSINESS WIRE)-- Dynex Capital, Inc. (NYSE: DX) reported its first quarter 2019 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 1-844-840-0844 (internationally at 1-647-253-8795) using conference ID 2168666 or by live webcast, which includes a slide presentation, under “Investor Center” on the Company's website (www.dynexcapital.com).

First Quarter 2019 Highlights

• Comprehensive income of $0.46 per common share and net loss of $(0.81) per common share
• Core net operating income, a non-GAAP measure, of $0.18 per common share
• Book value per common share of $6.24 at March 31, 2019 compared to $6.02 at December 31, 2018
• Raised $58.9 million in capital from secondary and ATM offerings of preferred and common stock
• Purchased $1.1 billion of primarily Agency RMBS and CMBS, growing average balance of interest earnings assets by 25% compared to the prior quarter
• Leverage including TBA dollar roll positions increased to 8.5x shareholders’ equity at March 31, 2019 compared to 8.0x at December 31, 2018
• Net interest spread and adjusted net interest spread, a non-GAAP measure, of 0.84% and 1.19%, respectively, for the first quarter of 2019 compared to 0.93% and 1.24%, respectively, for the fourth quarter of 2018

First Quarter 2019 Earnings Summary

Comprehensive income to common shareholders for the first quarter of 2019 of $31.2 million consisted of a net loss to common shareholders of $(55.3) million and other comprehensive income of $86.5 million compared to a comprehensive loss to common shareholders for the fourth quarter of 2018 of $(31.4) million, which consisted of a net loss to common shareholders of $(81.5) million and other comprehensive income of $50.1 million. The Company's net loss to common shareholders for the first quarter of 2019 primarily consisted of:

• net interest income of $13.7 million
• net loss on derivative instruments of $(61.7) million
• general and administrative expenses of $(4.0) million, and
• preferred stock dividends of $(3.1) million.

Net interest income increased during the first quarter of 2019 compared to the prior quarter due to a larger and higher yielding portfolio of interest earning assets, which offset the Company's increased interest expense resulting from a higher average balance of repurchase agreement borrowings and higher borrowing rates. Like the prior quarter, net loss on derivative instruments for the first quarter of 2019 was primarily the result of a net loss in fair value of the Company's interest rate swaps as interest rates on the 2-10 year portion of the swap curve declined for the second consecutive quarter. Partially offsetting the loss in fair value of interest rate swaps, the Company recorded other comprehensive income of $86.5 million, which resulted primarily from the increase in fair value of MBS due to tighter credit spreads and declining longer-term interest rates during the first quarter of 2019.

Core net operating income to common shareholders, a non-GAAP measure, increased to $12.1 million for the first quarter of 2019 versus $10.9 million for the fourth quarter of 2018 due to the larger and higher yielding portfolio and higher net periodic interest benefit from the Company's interest rate swaps, which offset the higher interest expense on repurchase agreement borrowings and lower TBA drop income. The Company reduced its volume of TBA dollar roll transactions during the first quarter of 2019 as TBA net interest spreads declined. On a per share basis, core net operating income to common shareholders was unchanged compared to the fourth quarter of 2018 as the Company's weighted average shares outstanding increased due to additional shares issued during the first quarter of 2019. Please refer to "Use of Non-GAAP Financial Measures" below for additional important information about non-GAAP measures.

Book Value Per Common Share

Book value per common share increased to $6.24 at March 31, 2019 from $6.02 at December 31, 2018. This increase of $0.22 per common share and the first quarter dividend of $0.18 per common share resulted in a quarterly total economic return on book value per common share of 6.6%, The increase in book value was driven by the increase in fair value of the Company's MBS, net of the decline in fair value of its interest rate hedges. The increase in the Company's common shares outstanding, which resulted primarily from its secondary offering that closed at the end of January 2019, impacted book value per common share by $(0.05).

Investments and Financing Details

The following table provides details on the performance of our investments and financing including interest rate hedges for the periods indicated:

The Company's net interest spread declined 9 basis points for the first quarter of 2019 compared to the fourth quarter of 2018 as the favorable impact from a larger and higher yielding MBS portfolio was insufficient to offset the 18 basis point increase in the Company's cost of financing resulting from higher short-term interest rates during the first quarter of 2019. This increase in cost of financing also contributed to the decline of 5 basis points in adjusted net interest spread for the first quarter of 2019 compared to the prior quarter. In addition, the Company's TBA contracts contributed to the decline in adjusted net interest spread due to higher implied average funding costs for TBA dollar roll transactions as higher expected prepayment speeds impacted pricing of TBA contracts. Partially offsetting the higher financing costs and lower TBA net spread, the Company's net periodic interest benefit from interest rate swaps increased 14 basis points for the first quarter of 2019 compared to the prior quarter.

The following table compares details of our MBS including TBA dollar roll positions as of March 31, 2019 versus December 31, 2018:

The Company purchased $1.1 billion MBS during the first quarter of 2019, which consisted primarily of higher coupon 30-year fixed-rate Agency RMBS and newly issued Agency CMBS. The Company purchased these assets using proceeds from its common and preferred equity issuances as well as additional repurchase agreement borrowings, which increased leverage including TBA dollar roll positions to 8.5x shareholder's equity compared to 8.0x at December 31, 2018.

Hedging Summary

During the first quarter of 2019, the Company terminated interest rate swaps with a notional balance of $875.0 million, realizing a loss of $(6.8) million, and added interest rate swaps with a notional balance of $1.5 billion at a weighted average pay-fixed rate of 2.54%. The following table provides information related to the Company's average borrowings outstanding and interest rate swaps effective for the periods indicated:

The following table summarizes the weighted average notional amount and rate of interest rate hedges held as of March 31, 2019:

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 benefit (cost), drop income on TBA dollar roll transactions, 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 benefit (cost) 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 benefit (cost) 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, the Company’s ability to find suitable investment opportunities; changes in economic conditions; 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 the Federal Reserve’s balance sheet normalization process through the reduction in its holdings of Agency residential 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; 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; ownership shifts under Section 382 of the Internal Revenue Code of 1986, as amended, that further limit the use of the Company’s tax net operating loss carryforward; systems failures or cybersecurity incidents; 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, 2018, 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.

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Alison Griffin
(804) 217-5897

Source: Dynex Capital, Inc.