Dynex Capital, Inc. Reports Third Quarter 2014 Results

Dynex Capital, Inc. (NYSE:DX) reported its third quarter results for 2014 today. GAAP net income to common shareholders was $28.6 million, or $0.52 per common share, for the third quarter of 2014 versus GAAP net loss of $(8.3) million, or $(0.15) per common share, for the second quarter of 2014 and net loss of $(6.9) million, or $(0.13) per common share, for the third quarter of 2013. Core net operating income to common shareholders (a non-GAAP financial measure management uses for analyzing its financial and operational performance) was $13.8 million for the third quarter of 2014, or $0.25 per common share, versus $14.1 million, or $0.26 per common share, for the second quarter of 2014, and $14.9 million, or $0.27 per common share, for the third quarter of 2013. See "Use of Non-GAAP Financial Measures" for more information on this and other non-GAAP measures discussed in this release. Book value per common share at September 30, 2014 was $9.14 versus $9.12 at June 30, 2014 and $8.69 at December 31, 2013.

Quarterly Highlights

Management Remarks

"We are very pleased with our results for the third quarter as we continued to manage our portfolio in a disciplined manner. We held our book value steady while generating an 11% adjusted return on equity based on core net operating income. Earlier this year, we communicated that we felt the global financial markets have increased in complexity and hence disciplined risk management was of utmost importance. As a result, we have reduced our exposure to spread risk by taking profits on a portion of our CMBS portfolio. In doing so, we have monetized gains on a very profitable investment. We have adjusted our hedges to maintain a relatively consistent duration risk profile given our interest rate outlook. We continue to emphasize appropriate risk adjusted returns and liquidity in our balance sheet, and we will make investments as we see opportunities arise."

Book Value Per Common Share

Book value per common share was $9.14 at September 30, 2014, an increase of $0.02 per common share from June 30, 2014. Overall, book value per common share increased as spread tightening offset declines in the fair values of our investments, net of hedges, due to higher interest rates during the quarter. The following table reconciles the changes in the Company's book value per common share from June 30, 2014 to September 30, 2014:

Investments

The following table summarizes the changes in the Company's MBS portfolio during the third quarter of 2014:

The following table provides information related to sales of MBS during the third quarter of 2014:

The following tables present certain information for the Company's MBS portfolio by category as of and for the periods indicated:

The following table presents the weighted average coupon by months-to-reset ("MTR") for the ARM and hybrid ARM portion of the Company's Agency RMBS based on par value as of September 30, 2014 and December 31, 2013:

The following table presents the constant prepayment rates ("CPRs") for the Company's Agency MBS for the periods presented:

(1) CPRs for CMBS IO are not calculated and therefore are not included in the total weighted average.

Information related to the credit ratings for the Company's non-Agency MBS as of September 30, 2014 is as follows:

Investment Performance

The following table provides weighted average effective yield by type of investment, effective borrowing rate, adjusted net interest spread, and adjusted net interest income for the periods indicated:

Adjusted net interest spread and adjusted net interest income as presented above are non-GAAP measures which management considers better measures of portfolio performance because they include periodic interest costs on derivative instruments whereas net interest spread computed under GAAP does not include these costs. Adjusted net interest spread remained relatively stable for the third quarter of 2014 compared to the second quarter of 2014 as lower effective yields were offset by lower financing and hedging costs. As compared to the same period in 2013, adjusted net interest spread for the third quarter of 2014 was 28 bps higher due to greater periodic interest costs incurred from the significantly larger notional amount of hedging instruments outstanding during the third quarter of 2013.

Repurchase Agreement Borrowings

The following table presents repurchase agreements by the type of security pledged as collateral as of the periods indicated:

The combined weighted average original term to maturity for our repurchase agreements was 106 days as of September 30, 2014 and 114 days as of December 31, 2013.

Hedging Activities

During the third quarter of 2014, the Company entered into $275.0 million in receive-fixed interest rate swaps to offset a portion of its pay-fixed interest rate swaps in order to maintain its net interest rate exposure, given the investment sales during the quarter. The following table summarizes the weighted average notional balance of interest rate derivatives that will be effective for the periods indicated:

The following table details the components of our gain on derivative instruments, net recognized in our consolidated statement of comprehensive income for the third quarter of 2014:

Other Income and Expense Items

Other income, net, for the third quarter of 2014 includes $0.9 million from reversal of the discount on a securitized commercial mortgage loan which was repaid during the quarter. General and administrative expenses annualized as a percentage of shareholders' equity was 2.55% for the third quarter of 2014 versus 2.51% for the second quarter of 2014 and 2.44% for the third quarter of 2013.

Conference Call

As previously announced, the Company's quarterly conference call to discuss the third quarter results is today at 11:00 a.m. Eastern Time. Interested investors may access the call by dialing 1-888-339-0823 or by accessing the live webcast, the link for which is provided under “Investor Relations/IR Highlights” on our website (www.dynexcapital.com). A slide presentation will accompany the webcast and will also be available at least one hour prior to the call at the same location on our website.

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 and CMBS. Additional information about Dynex Capital, Inc. is available at www.dynexcapital.com.

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,” 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 future interest rates, our views on expected characteristics of future investment environments, prepayment rates on our investment portfolio and risks posed by our investment portfolio, our future investment strategies, our future leverage levels and financing strategies including the use of specific financing and hedging instruments and the future impacts of these strategies, 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, 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 Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the full impacts of which are unknown at this time, and another ownership change under Section 382 that further impacts the use of our tax net operating loss carryforward. 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, 2013, and other reports filed with and furnished to the Securities and Exchange Commission.

Use of Non-GAAP Financial Measures

In addition to the Company's operating results presented in accordance with GAAP, this release includes the following non-GAAP financial measures: core net operating income to common shareholders (including per common share), adjusted return on average common equity, effective borrowing costs and rates, adjusted net interest income, and adjusted net interest spread. Management uses these non-GAAP financial measures in its internal analysis of financial and operating performance and believes that it provides better transparency to our investors. 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, particularly those competitors that continue to use hedge accounting in reporting their financial results. In addition, management uses these non-GAAP financial measures to compare the Company's financial results generated prior to discontinuing GAAP hedge accounting in 2013 with the Company's financial results for 2014 periods. Because these non-GAAP financial measures exclude certain items used to compute GAAP net income to common shareholders and GAAP interest expense, 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. In addition, because not all companies use identical calculations, the Company's presentation of core net operating income, adjusted return on average common equity, effective borrowing costs and rates, adjusted net interest income, and adjusted net interest spread may not be comparable to other similarly-titled measures of other companies.

Core net operating income to common shareholders equals GAAP net income to common shareholders adjusted for amortization of accumulated other comprehensive loss on de-designated cash flow hedges included in GAAP interest expense, net change in fair value of derivative instruments which includes gains and losses on terminated derivative instruments (if applicable), gains and losses on sales of investments, and fair value adjustments on investments not classified as available for sale. Adjusted return on average common equity equals core net operating income to common shareholders divided by average common equity for the respective period. Effective borrowing costs equals GAAP interest expense excluding the amortization of accumulated other comprehensive loss on interest rate swaps de-designated as cash flow hedges on June 30, 2013 plus net periodic interest costs on derivative instruments (including accrued amounts) which are not already included in GAAP interest expense. Effective borrowing rate equals annualized cost of funds calculated on a GAAP basis, less the effect of amortization of de-designated cash flow hedges and plus the effect of net periodic interest costs of derivative instruments. Adjusted net interest spread equals average annualized yields on investments less effective borrowing rates. Schedules reconciling these non-GAAP financial measures to GAAP are provided as a supplement to this release.