GLEN ALLEN, Va.--(BUSINESS WIRE)--Aug 2, 2018--Dynex Capital, Inc. (NYSE:DX) reported its second quarter 2018 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 1-866-393-4306 (internationally at 1-734-385-2616) using conference ID 1679166 or by live webcast, which includes a slide presentation, under “Investor Center” on the Company's website ( www.dynexcapital.com ).

Second Quarter 2018 Highlights

Comprehensive income to common shareholders of $0.05 per common share and net income to common shareholders of $0.23 per common share Core net operating income to common shareholders, a non-GAAP measure, of $0.18 per common share Dividend declared of $0.18 per common share Book value per common share of $6.93 at June 30, 2018 compared to $7.07 at March 31, 2018, resulting in an economic return on book value per common share of 0.6%, inclusive of the dividend declared Leverage including TBA dollar roll positions of 6.1x shareholders’ equity at June 30, 2018 compared to 6.5x at March 31, 2018

Management's Remarks

Byron Boston, President and CEO commented, “Interest rates continued to move higher during the second quarter while the yield curve modestly flattened. The impact of these movements on our results was partially limited by our hedge position and the benefit of our diversified portfolio of Agency residential and commercial MBS. Book value declined $0.14 during the quarter, or approximately 2%, as a result of the higher interest rates and also modestly wider credit spreads on Agency CMBS. Inclusive of the dividend of $0.18, we posted a total economic return of $0.04 for the quarter. We increased our capital allocation to Agency fixed-rate RMBS during the quarter which continue to offer the best risk-adjusted return in our investment opportunity set. Our leverage at the end of the quarter was temporarily reduced by sales of certain Agency hybrid ARMs and U.S. Treasuries at the end of the quarter, and we have already reinvested these proceeds into fixed-rate Agency RMBS during the third quarter. We continue to remain cautious given the fragile global economic environment which is dependent on ever increasing levels of debt and is exposed to a high potential for fiscal or monetary policy mistakes. Overall, however, we believe market conditions will remain favorable in the near term. Our liquidity is strong and leverage reasonable as we move into the third quarter of 2018.”

Second Quarter 2018 Earnings Summary

Comprehensive income to common shareholders was $3.0 million for the second quarter of 2018 versus comprehensive loss to common shareholders of $(4.1) million for the first quarter of 2018. Net income to common shareholders declined $(28.7) million to $12.7 million for the second quarter compared to $41.4 million for the first quarter of 2018 due primarily to lower net gain on derivative instruments as interest rate swap rates did not increase during the second quarter of 2018 at the magnitude experienced during the first quarter of 2018. In addition, the Company realized a loss on sales of investments of $(12.4) million during the second quarter of 2018, resulting primarily from sales of the Company's adjustable-rate Agency RMBS and U.S. Treasuries, compared to a net loss on sales of investments of $(3.8) million during the first quarter of 2018. Net interest income also declined $(1.8) million over the same period due to an increase of $2.5 million in interest expense to $14.2 million from higher borrowing rates, partially offset by an increase of $0.7 million in interest income as a result of a larger average balance of higher yielding fixed-rate Agency RMBS. The Company recognized an other comprehensive loss of $(9.8) million for the second quarter of 2018 due to the decline in fair value of the Company's investments resulting primarily from increasing interest rates.

Core net operating income to common shareholders, a non-GAAP measure, was $10.4 million for the second quarter of 2018 compared to $10.2 million for the first quarter of 2018 due to an increase in adjusted net interest income of $0.6 million partially offset by an increase of $0.4 million in legal expenses. Adjusted net interest income increased as a result of the increased yield on investments including TBAs, while adjusted interest expense was unchanged as the net periodic interest benefit from interest rate swaps offset the increase in repurchase agreement costs during the quarter.

Book Value and Economic Return

Book value per common share decreased $(0.14), or (2.0%), to $6.93 at June 30, 2018 from $7.07 at March 31, 2018 primarily due to the impact of higher interest rates during the quarter and modest credit spread widening in Agency CMBS as previously noted. The $(0.14) decline in book value and the $0.18 dividend declared resulted in an economic return on book value of $0.04 per common share, or 0.6% of beginning book value, for the second quarter of 2018. Year-to-date economic loss on book value is (0.7)%, which is primarily driven by declines in fair value of the Company's investments, particularly during the first quarter of 2018.

Investments and Financing

The following table provides details of our available-for-sale ("AFS") investments and TBA dollar roll positions as of June 30, 2018:

(1) Amortized cost basis and fair market value for TBA dollar roll positions represent implied cost basis and implied market value, respectively, for the underlying Agency MBS as if settled.

(2) The net carrying value of TBA dollar roll positions, which is the difference between their implied market value and implied cost basis, was $2.0 million as of June 30, 2018 and is included on the consolidated balance sheet within “derivative assets”.

(3) Represents the weighted average coupon based on amortized cost.

(4) Includes both Agency and non-Agency IO securities with a combined notional balance of $24.6 billion.

The Company's AFS portfolio including TBA dollar roll positions as of June 30, 2018 declined approximately 8% since March 31, 2018 due primarily to sales of $225.6 million of adjustable-rate RMBS, $8.6 million of non-Agency CMBS IO, and $149.2 million of U.S. Treasuries during the second quarter of 2018. Average balances of the AFS portfolio including TBA dollar roll positions were substantially the same at $3.95 billion and $4.00 billion during the second and first quarter of 2018, respectively. The Company has already re-invested the sale proceeds into 30-year fixed-rate Agency RMBS during the third quarter of 2018. As a result of these sales, the Company's repurchase agreement borrowings including payables for unsettled securities as of June 30, 2018 declined $121.8 million compared to March 31, 2018. The Company also held $62.5 million less in TBA dollar roll positions, which the Company includes at amortized cost as if settled in its leverage ratio, as of June 30, 2018 compared to March 31, 2018. As a result of its lower repurchase agreement borrowings and payables as well as TBA dollar roll positions, the Company's leverage declined to 6.1 times shareholder's equity as of June 30, 2018 from 6.5 times as of March 31, 2018.

Net Interest Income and Spread

The following table provides certain information about the performance of our investments and financing including hedging costs for the periods indicated:

(1) CMBS IO includes Agency and non-Agency securities.

(2) Amount represents net periodic interest benefit (cost) of effective interest rate swaps outstanding during the period and excludes unrealized gains and losses from changes in fair value of derivatives and realized gains and losses on terminated derivatives.

(3) Represents a non-GAAP measure.

Interest income increased $0.7 million for the second quarter of 2018 compared to the prior quarter due to having a larger average balance of higher yielding fixed-rate Agency RMBS during the second quarter. Though the Company's interest-earning asset balance was lower at June 30, 2018 compared to March 31, 2018, it held a larger average balance during the second quarter of 2018, compared to the first quarter of 2018, because the majority of the Company's investment sales of $383.4 million occurred late in the second quarter.

The larger average balance of fixed-rate Agency RMBS resulted in an increase of 4 basis points in the Company's effective yield on its investment portfolio (excluding TBAs) from the first quarter of 2018 to the second quarter of 2018. The increase in effective yield was offset by an increase of 31 basis points in cost of financing due to higher short-term interest rates, resulting in a net interest spread of 1.07% for the second quarter of 2018 compared to 1.34% for the first quarter of 2018. Adjusted net interest spread for the second quarter of 2018 increased compared to the first quarter of 2018 primarily because periodic interest for the Company's interest rate swaps as a percentage of its average borrowings resulted in a net benefit of 35 basis points for the second quarter of 2018 compared to a net cost of 3 basis points for the first quarter of 2018.

Hedging Summary

The Company's interest rate swaps had a positive net impact on comprehensive income of $20.6 million during the second quarter of 2018. Interest rate swaps with a notional balance of $1.0 billion and a weighted-average pay-fixed rate of 1.32% matured during the second quarter, and the Company added swaps with a notional balance of $0.2 billion at a weighted average pay-fixed rate of 2.75% during the second quarter. The following table provides information related to the Company's average borrowings outstanding and interest rate swaps effective for the periods indicated:

(1) Because the Company executes TBA dollar roll transactions, which economically represent the purchase and financing of fixed-rate Agency RMBS, the average TBAs outstanding are included in the ratio calculation.

(2) Includes one receive-fixed interest rate swap with a notional balance of $100.0 million at a rate of 1.70%.

In addition to interest rate swaps, the Company has Eurodollar futures, which it also uses to hedge its interest rate risk, with a notional balance of $650.0 million at a weighted average rate of 1.86% with a contractual life of 3 months that will mature in September of 2018. Eurodollar futures do not incur periodic interest or similar costs/benefits and therefore are not included in core net operating income to common shareholders. The Company's Eurodollar futures had a net favorable impact on comprehensive income of $0.2 million during the second quarter of 2018 and a year-to-date impact of $2.1 million. This favorable impact includes a net realized gain of $0.9 million on $650.0 million of Eurodollar futures with a contract rate of 1.79% that matured during the second quarter of 2018.

The aggregate notional amount of currently effective and forward-starting interest rate swaps as of June 30, 2018 was $2.5 billion and $1.6 billion, respectively. The following table summarizes the weighted average notional amount and rate of interest rate hedges (including Eurodollar futures) held as of June 30, 2018:

(1) Includes one receive-fixed interest rate swap at a notional amount of $100.0 million at a rate of 1.70%.

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.

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