Dynex Capital, Inc. (NYSE: DX) reported net income of $16.5 million, or $0.33 per diluted common share for the first quarter of 2012 versus $14.4 million, or $0.36 per diluted common share, for the fourth quarter of 2011 and $10.3 million, or $0.31 per diluted common share, for the first quarter of 2011.
First Quarter 2012 Highlights
As previously announced, the Company's quarterly conference call to discuss the first quarter results is May 3, 2012 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.”
On the Company's operating results and the recent offering of common stock, Mr. Thomas Akin, Chairman and Chief Executive Officer, commented, "We believe our results for this quarter strongly demonstrate the benefits of our diversified investment model. We once again out-earned our dividend and posted a solid annualized return on average equity of 14.7%. Book value per common share was up almost 5% during the quarter to $9.62 at March 31, 2012 from $9.20 at December 31, 2011 primarily from improving prices on our CMBS investments even though longer-term rates increased during the quarter. Our average leverage was down during the quarter reflecting the lag in fully investing the capital raised in February. Our results for the quarter, while acceptable, reflect this lower average leverage for the first quarter. Our leverage target remains at approximately 6 times our equity capital based on the current investment portfolio and as of today, we are substantially fully invested and at our leverage target. We expect results for the second quarter to reflect a fully invested portfolio. Most importantly, risk-reward considerations continue to drive our investment and capital raising decision-making process and we fully expect to continue to deliver solid results for our shareholders without increasing the overall risk profile of the Company."
Results of Operations
Net interest income increased to $19.1 million for the first quarter of 2012 versus $17.0 million for the fourth quarter of 2011. Most of the increase is attributable to growth in average interest earning investments to $2,771.9 million for the first quarter of 2012 from $2,487.2 million for the fourth quarter of 2011. Net interest income in the first quarter of 2012 also includes yield maintenance payments of $1.1 million on non-Agency CMBS from early repayment of the underlying commercial mortgage loans. Amortization of investment purchase premium, which reduces interest income, was $12.6 million for the first quarter of 2012 versus $9.8 million for the fourth quarter of 2011 and $3.9 million for the first quarter of 2011.
Net interest spread for the first quarter of 2012 was 2.41% versus 2.56% for the fourth quarter of 2011 and 2.43% for the third quarter of 2011. The net interest spread for the first quarter of 2012 is the difference between the yield on the Company's interest-earning investment portfolio of 3.58% and its cost of funds of 1.17%. The net interest spread declined sequentially in the first quarter due principally to a higher mix of Agency MBS which are lower yielding investments.
The prepayment rate for the investment portfolio for the first quarter of 2012 as measured by CPR was 15.4% versus 17.8% for fourth quarter of 2011 as prepayment speeds remained muted during the first quarter of 2012. The Agency MBS portfolio prepaid at an 18.4% CPR (which includes both RMBS and CMBS) with Agency RMBS prepaying at 21.4% CPR for the first quarter of 2012. These compare to 21.5% and 25.4%, respectively, for the fourth quarter of 2011.
Gain on sale of investments, net for the first quarter of 2012 of $0.4 million includes gain from the sale of $50.0 million in unsecured mortgage-linked amortizing notes issued by Freddie Mac. We sold our remaining $55.0 million investment in these notes in April 2012 for an estimated gain of $0.7 million which will be included in the results for the second quarter of 2012. The capital invested in these notes was redeployed in Agency MBS.
The Company's investment portfolio was $3,276.2 million at March 31, 2012 versus $2,501.0 million at December 31, 2011. During the quarter, the Company increased its Agency MBS investments to $2,656.2 million at March 31, 2012 from $1,965.2 million at December 31, 2011 and increased its non-Agency MBS investments to $465.7 million at March 31, 2012 from $421.1 million at December 31, 2011. Agency MBS investments increased slightly as a percentage of the Company's investment portfolio, from 78.6% at December 31, 2011 to 81.1% at March 31, 2012.
Byron L. Boston, President and Chief Investment Officer commented, "We deployed the capital raised during the quarter principally in Agency RMBS and CMBS IO with complementary risk-return profiles to our existing investment portfolio. Our timing in raising the capital was excellent as we were able to add assets at attractive yields and before prices increased in the latter half of the first quarter. Attractive investment opportunities still exist, particularly in Agency and non-Agency CMBS, though supply of these securities is somewhat limited. We are very satisfied with the balance that we have struck with our investment strategy of protecting shareholder value while providing an attractive return."
Agency MBS Investments
The following table presents the Agency MBS portfolio by category and certain other information as of and for the three months ended March 31, 2012:
|($ in thousands)||Fair value|
(notional for IOs) (1)
as a % of par (2)
|Interest only (IO) securities||254,935||3,924,736||n/a||100||—||%|
Total principal balance excludes notional amount of IO securities.
Amortized cost as a percentage of par excludes premiums related to IO securities.
Weighted averages, where applicable.
The following table summarizes certain information about the Company's Agency MBS investments for the periods presented:
|($ in thousands)|
March 31, 2012
December 31, 2011
March 31, 2011
|Weighted average annualized yield for the period||2.98||%||3.11||%||3.32||%|
|Weighted average annualized cost of funds including interest rate swaps for the period||(0.91||)%||(0.91||)%||(0.87||)%|
|Net interest spread for the period||2.07||%||2.20||%||2.45||%|
|Average balance for the period||$||2,179,787||$||1,963,313||$||1,377,160|
|Weighted average coupon (excluding IOs)||4.44||%||4.65||%||4.59||%|
Non-Agency MBS Investments
Below is certain information about the Company's non-Agency MBS as of and for the quarter ended March 31, 2012:
|($ in thousands)||CMBS||IOs||RMBS|
|Principal balance (notional for IOs)||$||375,733||$||1,014,438||$||15,401|
|Amortized cost basis||$||360,583||$||65,779||$||14,504|
|Average balance for the period, amortized cost||$||352,351||$||53,960||$||15,670|
|Weighted average annualized yield for the period||6.14||%||8.99||%||5.69||%|
|Weighted average annualized cost of funds||(2.73||)%||(1.40||)%||(1.85||)%|
|Net interest spread for the period||3.41||%||7.59||%||3.84||%|
|Amortized cost as a % of par||96.0||%||n/a||94.2||%|
|Percentage 'AAA' and 'AA'-rated||65.6||%||100.0||%||28.8||%|
|Percentage below 'AA'-rated||34.4||%||—||%||71.2||%|
The net interest spread for non-Agency MBS was 3.97% for the first quarter of 2012 versus 3.63% for the fourth quarter of 2011 and 3.09% for the third quarter of 2011. The change in the net interest spread in the first quarter of 2012 from the fourth quarter of 2011 was primarily due to decreased repurchase agreement financing costs.
Securitized Mortgage Loans
Securitized mortgage loans had an amortized cost basis, net of reserves, of $100.7 million and a principal balance of $101.5 million with approximately $55.8 million principal in commercial mortgage loans and $45.7 million principal in single-family mortgage loans at March 31, 2012. Seriously delinquent loans (loans 60+ days past due) totaled $15.2 million as of March 31, 2012 versus $18.4 million as of December 31, 2011. Given the seasoning of the mortgage loan portfolio (most loans were originated from 1994-1998), the Company expects seriously delinquent loans to continue to trend down over the remainder of 2012 as delinquencies are resolved and fewer loans become delinquent. As of March 31, 2012, the allowance for loan losses was $1.6 million for the Company's securitized mortgage loan portfolio versus $2.5 million as of December 31, 2011.
During the first quarter of 2012, the Company entered into an additional pay-fixed interest rate swap with a notional amount of $100.0 million, a rate of 1.89%, and a maturity of 84 months. Also, during the quarter, an interest rate swap expired which had a notional amount of $75.0 million and a rate of 1.03%. As of March 31, 2012, the Company had a total of $1.1 billion in pay-fixed interest rate swaps with a weighted average rate of 1.65% and a weighted average remaining maturity of 40 months. Of this amount, $27.0 million are considered trading instruments and have a weighted average rate of 2.88% and weighted average remaining maturity of 59 months and are intended to offset market value changes of Agency CMBS with a par value at March 31, 2012 of $26.2 million which are also designated as trading instruments. The remaining interest rate swaps are being used to hedge the Company's exposure to changes in LIBOR under its repurchase agreement borrowings.
Shareholders' equity increased to $522.9 million as of March 31, 2012 from $371.3 million at December 31, 2011, and our book value per common share increased to $9.62 at March 31, 2012 from $9.20 at December 31, 2011. The increase in shareholders' equity from December 31, 2011 was due primarily to the equity the Company raised as well as the increase in accumulated other comprehensive income of $26.2 million from improved market values on investments, particularly non-Agency CMBS, and the excess of $16.5 million in net income over $15.2 million in common stock dividends declared. The increase in book value per common share largely resulted from the increase in accumulated other comprehensive income reflecting improving valuations on MBS investments.
The following table summarizes the allocation of the Company's shareholders' equity as of March 31, 2012 and the net interest income contribution for the quarters indicated to each component of the Company's balance sheet:
|($ in thousands)|
Asset Carrying Basis
Interest Income Contribution
|Agency CMBS IO||254,934||200,586||54,348||10.4||%||1,273||909|
|Non-Agency CMBS IO||68,553||53,968||14,585||2.8||%||1,032||922|
|Securitized mortgage loans (2)||100,675||65,835||34,840||6.7||%||1,339||1,329|
|Other investments (2)||53,621||22,855||30,766||5.9||%||272||26|
|Cash and cash equivalents||41,724||—||41,724||8.0||%||—||—|
|Other assets/other liabilities||31,073||20,640||10,433||1.9||%||—||—|
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 income contribution 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, 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. 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, 2011, 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)
|March 31, 2012||December 31, 2011|
|Securitized mortgage loans, net||100,675||113,703|
|Other investments, net||53,621||1,018|
|Cash and cash equivalents||41,724||48,776|
|Principal receivable on investments||9,408||13,826|
|Accrued interest receivable||15,979||12,609|
|Other assets, net||5,686||6,006|
|LIABILITIES AND SHAREHOLDERS’ EQUITY|
|Payable for securities pending settlement||59,416||—|
|Non-recourse collateralized financing||32,237||70,895|
|Accrued interest payable||1,697||2,165|
|Accrued dividends payable||15,215||11,307|
Common stock, par value $.01 per share, 100,000,000 shares authorized; 54,338,367 and 40,380,276 shares issued and outstanding, respectively
|Additional paid-in capital||758,652||634,683|
|Accumulated other comprehensive income (loss)||22,924||(3,255||)|
|Total shareholders' equity||522,897||371,349|
|Total liabilities and shareholders’ equity||$||3,349,056||$||2,582,193|
|Book value per common share||$||9.62||$||9.20|
|DYNEX CAPITAL, INC.|
|CONSOLIDATED STATEMENTS OF INCOME|
(amounts in thousands except per share data)
|Three Months Ended|
|Securitized mortgage loans||1,504||2,219|
|Cash and cash equivalents||—||4|
|Non-recourse collateralized financing||481||1,306|
|Net interest income||19,147||12,731|
|Provision for loan losses||(60||)||(250||)|
|Net interest income after provision for loan losses||19,087||12,481|
|Gain on sale of investments, net||351||—|
|Fair value adjustments, net||(210||)||(126||)|
|Other income, net||369||43|
|General and administrative expenses:|
|Compensation and benefits||(1,798||)||(1,132||)|
|Other general and administrative||(1,323||)||(986||)|
|Weighted average common shares:|
|Net income per common share:|
|Dividends declared per common share||$||0.28||$||0.27|