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| 8-K - FORM 8-K EARNINGS PRESS RELEASE Q3 2011 - DYNEX CAPITAL INC | form8-kearningsreleaseq320.htm |
PRESS RELEASE
FOR IMMEDIATE RELEASE | CONTACT: | Alison Griffin | |
November 1, 2011 | (804) 217-5897 | ||
DYNEX CAPITAL, INC. REPORTS THIRD QUARTER
DILUTED EPS OF $0.04 AND DILUTED EPS OF
$0.32 EXCLUDING CERTAIN ITEMS
GLEN ALLEN, Va. -- Dynex Capital, Inc. (NYSE: DX) reported net income for the third quarter of 2011 of $1.5 million, or $0.04 per diluted common share, and $0.32 per diluted common share excluding certain items.
Third Quarter 2011 Highlights
• | Diluted earnings per common share of $0.04 for the third quarter of 2011 |
• | Diluted earnings per common share of $0.32 excluding certain items totaling $0.28 per diluted common share |
◦ | The $0.28 per common share for excluded items includes litigation settlement and related defense costs of $0.20 per common share, or $8.2 million, a non-cash charge on redemption of collateralized financings of $0.05 per common share, or $2.0 million, and net accelerated investment premium amortization of $0.03 per common share, or $1.3 million, from an increase in forecasted prepayment speeds during the quarter |
• | Book value per common share of $9.15 at September 30, 2011 versus $9.59 at June 30, 2011 |
◦ | Of this decline, $0.21 per common share relates to the decline in the fair value of the Company's investment portfolio with the remainder due primarily to the $0.28 reduction in earnings per common share from the three items noted above |
Other highlights for the quarter include:
• | Generated a net interest spread of 2.43% for the third quarter of 2011 versus 2.45% for the second quarter of 2011 and 2.98% for the same period in 2010 |
• | Had a constant prepayment rate, or CPR, for the third quarter 2011 of 17.0% for the investment portfolio which was a decrease from 18.0% for the second quarter of 2011 |
• | Declared a $0.27 dividend per share to common shareholders for the quarter for an annualized dividend yield of 13.4% based on the September 30, 2011 closing stock price of $8.06 |
• | Received a rating upgrade to 'AA' from 'A+' on a portion of the Company's collateralized financings secured by securitized commercial mortgage loans as a result of the performance of those loans |
• | As a result of the redemption of the $23.7 million in collateralized financing, annual borrowing costs will decline beginning in the fourth quarter of 2011 from 7.2% to 1.9% which, when coupled with a reduction in amortization costs on the financing, is expected to increase earnings by $2.0 million annually based on market conditions and repurchase agreement rates |
• | Reported overall leverage to 6.1 times equity capital at September 30, 2011 from 5.9 times at June 30, 2011 and 4.6 times at December 31, 2010 |
The Company also noted that it has no outstanding repurchase agreement borrowings from, or direct exposure to, MF Global Holdings Ltd. or any of its affiliates or subsidiaries, which filed for bankruptcy protection on Monday, October 31, 2011.
As previously announced, the Company's quarterly conference call to discuss the third quarter results is Wednesday, November 2, 2011 at 11:00 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.”
Thomas Akin, Chairman and Chief Executive Officer, commented, "We are pleased with our results; our strategy of investment in high quality, short duration assets has proven invaluable given the volatility experienced in the third quarter. Mortgage REITs face a myriad of challenges today and our conservative approach makes it substantially less challenging to manage a leveraged bond portfolio. We had several items weighing down the results for the third quarter such as litigation costs, but excluding these items we delivered solid results. By entering into the litigation settlement, we were able to remove a significant contingency. We have now refinanced $23.7 million in collateralized financings, as referenced in our press release of October 4, 2011, which could save the Company as much as $2.0 million annually in interest and amortization costs. We have another $50.5 million of collateralized financings that we may refinance based on current market conditions and repurchase agreement financing terms which could save the Company an additional $0.6 million annually in interest costs. We believe our high-quality, diversified investment portfolio is positioned to deliver consistent earnings and minimal book value volatility going forward. We invite our shareholders to join our call tomorrow as we review the results for the quarter and the investment portfolio in greater detail."
Results of Operations
Net interest income increased to $14.6 million for the third quarter of 2011 versus $8.4 million for the third quarter of 2010. Most of the increase is attributable to growth in average interest earning investments to $2,494.7 million for the third quarter of 2011 from $954.1 million for the third quarter of 2010, partially offset by a decline in the yield on interest earning assets. Amortization of investment purchase premium, which reduces interest income, was $10.4 million for the third quarter of 2011 versus $0.7 million for the third quarter of 2010 and $6.6 million for the second quarter of 2011, reflecting the growing investment portfolio, the higher cost basis of recently added Agency MBS, and an increase in projected prepayment speeds. The Company increased its forecasted prepayment
speeds on its Agency RMBS investment portfolio during the third quarter due to the decline in interest rates during the quarter and announced changes to the Treasury Department's HARP program. The increase in the forecasted CPR resulted in an additional $1.3 million in premium amortization on the Agency RMBS investment portfolio during the quarter. The actual CPR for Agency RMBS for the third quarter of 2011 was 23.9%, and the CPR for the entire portfolio was 17.0%. The Company is forecasting a 28% CPR for Agency RMBS for the fourth quarter of 2011.
Net portfolio interest spread for the third quarter of 2011 was 2.43% versus 2.98% for the third quarter of 2010 and 2.45% for the second quarter of 2011. The net portfolio interest spread of 2.43% is the difference between the yield on the Company's interest-earning investment portfolio of 3.59% and its cost of funds of 1.16%. Cost of funds was flat at 1.16% for the third quarter of 2011 compared to 1.16% for the second quarter of 2011.
Litigation settlement and related costs of $8.2 million includes the settlement cost of the Teamsters' litigation plus related defense costs. Loss on extinguishment of debt of $2.0 million, which is a non-cash charge, resulted from the charge-off of the bond discount related to the early redemption of $23.7 million in collateralized financings which had a coupon of 7.16% at the time of the redemption. The Company has replaced these non-recourse financings with recourse repurchase agreement financing with an initial term of 90 days at an annual interest rate of 1.92%.
Gain on sale of investments, net for the third quarter of 2011 of $0.6 million includes gain from the sale of short-reset Agency Hybrid ARMs with a par value of $70.0 million. The Company selectively sold these lower yielding investments and redeployed the proceeds in higher yielding non-Agency investments during the third quarter of 2011.
During the quarter the fair value of the Company's Agency CMBS designated as trading instruments increased $0.7 million, which was offset by a decrease of $1.4 million in the fair value of the interest rate swaps designated as trading instruments. This net loss of $0.7 million is included in fair value adjustments, net in the accompanying statements of operations.
Financial Condition
The Company's investment portfolio was $2,595.6 million at September 30, 2011 versus $2,591.1 million at June 30, 2011. During the quarter, the Company increased its investment in non-Agency MBS to $403.7 million at September 30, 2011 from $277.2 million at June 30, 2011 and decreased its investments in Agency RMBS.
Byron Boston, Chief Investment Officer, stated, "During the quarter, we continued to rotate out of higher premium Agency RMBS into investments with prepayment protection including Agency and non-Agency CMBS. Our overall investment portfolio is well diversified in its construction, which we believe mitigates our exposure to prepayment risk, credit risk and extension risk. Despite our increase in forecasted prepayment rates, our overall portfolio prepayment speeds actually declined during the quarter. With the purchases this quarter, more than half the premium in our investment portfolio is in securities with explicit prepayment protection. With respect to our
non-Agency portfolio, the overall credit performance of the portfolio has been very good given the macroeconomic stress."
Agency MBS Investments
The Company purchased a total of $112.6 million in Agency MBS during the quarter consisting of $18.3 million in Hybrid Agency ARMs, $20.0 million in Agency RMBS and $74.3 million in fixed rate Agency CMBS during the third quarter.
The following table presents the Agency MBS portfolio by category and certain other information as of and for the three months ended September 30, 2011:
($ in thousands) | Fair value | Amortized cost as a % of par (1) | WAVG MTR/Maturity | WAVG CPR-period | |||||
ARMs | $ | 358,777 | 104.3 | % | 8 | 16.6 | % | ||
Hybrid ARMs | 1,337,275 | 106.2 | % | 40 | 25.9 | % | |||
Fixed rate | 376,058 | 107.4 | % | 99 | — | % | |||
Total (2) | $ | 2,072,110 | 106.0 | % | 45 | 20.8 | % | ||
(2) Weighted averages, where applicable.
The following table summarizes certain information about the Company's Agency MBS investments for the periods presented:
($ in thousands) | Quarter ended September 30, 2011 | Quarter ended June 30, 2011 | Quarter ended September 30, 2010 | ||||||
Weighted average annualized yield for the period | 3.11 | % | 3.17 | % | 3.44 | % | |||
Weighted average annualized cost of funds including interest rate swaps for the period | (0.81 | )% | (0.81 | )% | (0.69 | )% | |||
Net interest spread for the period | 2.30 | % | 2.36 | % | 2.75 | % | |||
Average balance for the period | $ | 2,067,614 | $ | 1,966,814 | $ | 574,395 | |||
Weighted average coupon | 5.13 | % | 4.65 | % | 4.40 | % | |||
Weighted average repurchase agreement original term to maturity (days), period end | 45 | 50 | 52 | ||||||
Non-Agency Investments
As of September 30, 2011, the fair value of the Company's non-Agency CMBS and RMBS was $390.8 million and $12.9 million, respectively. Below is certain information about the Company's non-Agency MBS and securitized mortgage loan portfolio as of and for the quarter ended September 30, 2011:
(amounts in thousands) | CMBS | RMBS | Securitized loans | ||||||
Principal balance | $ | 357,644 | $ | 14,271 | $ | 119,425 | |||
Amortized cost basis, net of reserves | $ | 380,122 | $ | 13,227 | $ | 118,700 | |||
Average balance for the period, amortized cost | $ | 277,370 | $ | 10,391 | $ | 125,239 | |||
Weighted average annualized yield for the period | 6.03 | % | 6.58 | % | 5.54 | % | |||
Weighted average annualized cost of funds | (3.08 | )% | (1.27 | )% | (3.46 | )% | |||
Net interest spread for the period | 2.95 | % | 5.31 | % | 2.08 | % | |||
Amortized cost (excluding reserves and I/O products) as a % of par | 96.6 | % | 92.7 | % | 100.6 | % | |||
Percentage 'AAA' and 'AA'-rated | 74.4 | % | 33.1 | % | 59.6 | % | |||
Percentage below 'AA'-rated | 25.6 | % | 66.9 | % | 40.4 | % | |||
Seriously delinquent loans (loans 60+ days past due) in the Company's securitized mortgage loan portfolio totaled $18.7 million as of September 30, 2011, $25.2 million as of June 30, 2011, and $17.7 million as of December 31, 2010. Three seriously delinquent commercial loans were liquidated in the third quarter with a total combined unpaid principal balance of $4.9 million at no loss to the Company above their net carrying balance. As of September 30, 2011, the allowance for loan losses was $2.4 million for the Company's securitized mortgage loan portfolio.
Hedging Activities
During the third quarter of 2011, the Company entered into $15 million of pay-fixed interest rate swaps with an average rate of 2.18% and original weighted average maturity of 82 months. As of September 30, 2011, the Company had a total of $1,022 million in pay-fixed interest rate swaps with a weighted average rate of 1.58% and a weighted average remaining maturity of 36 months. Of this amount, $27 million are considered trading instruments and have a weighted average rate of 2.88% and weighted average remaining maturity of 60 months and are intended to offset market value changes of Agency CMBS with a par value at September 30, 2011 of $25.5 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 for is repurchase agreement borrowings.
Shareholders' Equity and Book Value per Common Share
Shareholders' equity was $369.5 million as of September 30, 2011 versus $386.9 million at June 30, 2011 and $292.4 million as of December 31, 2010. The decline in shareholders' equity from June 30, 2011 was due to the declared dividend of $10.9 million on the common stock in excess of earnings for the quarter of $1.5 million and a decline in accumulated other comprehensive income of $8.3 million due primarily to the decline in value on the Company's interest rate swaps. The Company's common shares outstanding at September 30, 2011 were 40,380,276 versus 40,343,159 at June 30, 2011 and 30,342,897 at December 31, 2010.
The following table summarizes the allocation of the Company's shareholders' equity as of September 30, 2011 and the net earnings contribution for the quarters indicated to each component of the Company's balance sheet:
(amounts in thousands) | Asset Carrying Basis | Associated Financing(1)/Liability Carrying Basis | Allocated Shareholders' Equity | % of Shareholders' Equity | 3Q11 Net Interest Income Contribution | 2Q11 Net Interest Income Contribution | |||||||||||
Agency RMBS | $ | 1,716,221 | $ | 1,542,593 | $ | 173,628 | 47.0 | % | $ | 9,006 | $ | 10,099 | |||||
Agency CMBS | 355,889 | 251,341 | 104,548 | 28.3 | % | 2,007 | 1,597 | ||||||||||
Non-Agency RMBS | 12,921 | 10,048 | 2,873 | 0.8 | % | 151 | 165 | ||||||||||
Non-Agency CMBS | 390,784 | 322,850 | 67,934 | 18.4 | % | 2,370 | 2,002 | ||||||||||
Securitized mortgage loans (2) | 118,700 | 84,965 | 33,735 | 9.1 | % | 696 | 940 | ||||||||||
Other investments (2) | 1,059 | — | 1,059 | 0.3 | % | 29 | 29 | ||||||||||
Derivative instruments(3) | — | 28,838 | (28,838 | ) | (7.8 | )% | — | — | |||||||||
Cash and cash equivalents | 10,156 | — | 10,156 | 2.7 | % | 1 | 1 | ||||||||||
Other assets/other liabilities | 27,956 | 23,517 | 4,439 | 1.2 | % | — | — | ||||||||||
$ | 2,633,686 | $ | 2,264,152 | $ | 369,534 | 100.0 | % | $ | 14,260 | $ | 14,833 | ||||||
(1) | Associated financing for investments includes repurchase agreements, securitization financing issued to third parties and TALF financing (the latter two of which are 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. |
(2) | Net interest income contribution amount is after provision for loan losses. |
(3) | Net interest income contribution from derivative instruments designated as hedges of repurchase agreement financing is included within net interest income contribution amounts for Agency RMBS, Agency CMBS, and non-Agency CMBS. Derivative instruments designated as trading do not have an effect on net interest income as changes in their fair value are included on the statement of income in “fair value adjustments, net”. |
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. 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, our future investment strategies, our future leverage levels and financing strategies, including future redemptions of collateralized financings and the potential impact on our operating results, 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 the ongoing 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,
and the impact of Section 404 of the Sarbanes-Oxley Act of 2002. 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, 2010, and other reports filed with and furnished to the Securities and Exchange Commission.
# | # | # |
DYNEX CAPITAL, INC.
Consolidated Balance Sheets
(Thousands except per share data)
September 30, 2011 | December 31, 2010 | ||||||
ASSETS | (unaudited) | ||||||
Agency MBS | $ | 2,072,110 | $ | 1,192,579 | |||
Non-Agency MBS | 403,705 | 267,356 | |||||
Securitized mortgage loans, net | 118,700 | 152,962 | |||||
Other investments, net | 1,059 | 1,229 | |||||
2,595,574 | 1,614,126 | ||||||
Cash and cash equivalents | 10,156 | 18,836 | |||||
Derivative assets | — | 692 | |||||
Principal receivable on investments | 10,305 | 3,739 | |||||
Accrued interest receivable | 12,353 | 6,105 | |||||
Other assets, net | 5,298 | 6,086 | |||||
Total assets | $ | 2,633,686 | $ | 1,649,584 | |||
LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||
Liabilities: | |||||||
Repurchase agreements | $ | 2,053,686 | $ | 1,234,183 | |||
Payable for securities pending settlement | 74,098 | — | |||||
Non-recourse collateralized financing | 84,013 | 107,105 | |||||
Derivative liabilities | 28,838 | 3,532 | |||||
Accrued interest payable | 1,240 | 1,079 | |||||
Accrued dividends payable | 10,903 | 8,192 | |||||
Other liabilities | 11,374 | 3,136 | |||||
Total liabilities | 2,264,152 | 1,357,227 | |||||
Shareholders’ equity: | |||||||
Common stock, par value $.01 per share, 100,000,000 shares authorized; 40,380,276 and 30,342,897 shares issued and outstanding, respectively | 404 | 303 | |||||
Additional paid-in capital | 634,317 | 538,304 | |||||
Accumulated other comprehensive (loss) income | (1,605 | ) | 10,057 | ||||
Accumulated deficit | (263,582 | ) | (256,307 | ) | |||
Total shareholders' equity | 369,534 | 292,357 | |||||
Total liabilities and shareholders’ equity | $ | 2,633,686 | $ | 1,649,584 | |||
Book value per common share | $ | 9.15 | $ | 9.64 | |||
DYNEX CAPITAL, INC.
Consolidated Statements of Operations
(Thousands except per share data)
(unaudited)
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2011 | 2010 | 2011 | 2010 | ||||||||||||
Interest income: | |||||||||||||||
Agency MBS | $ | 14,898 | $ | 5,607 | $ | 41,660 | $ | 15,085 | |||||||
Non-Agency MBS | 4,442 | 3,345 | 11,963 | 9,586 | |||||||||||
Securitized mortgage loans | 1,773 | 2,748 | 5,953 | 9,726 | |||||||||||
Other investments | 29 | 30 | 91 | 94 | |||||||||||
Cash and cash equivalents | 1 | 4 | 6 | 9 | |||||||||||
21,143 | 11,734 | 59,673 | 34,500 | ||||||||||||
Interest expense: | |||||||||||||||
Repurchase agreements | 5,305 | 1,672 | 13,493 | 4,297 | |||||||||||
Non-recourse collateralized financing | 1,278 | 1,661 | 3,856 | 6,674 | |||||||||||
6,583 | 3,333 | 17,349 | 10,971 | ||||||||||||
Net interest income | 14,560 | 8,401 | 42,324 | 23,529 | |||||||||||
Provision for loan losses | (300 | ) | (211 | ) | (750 | ) | (770 | ) | |||||||
Net interest income after provision for loan losses | 14,260 | 8,190 | 41,574 | 22,759 | |||||||||||
Litigation settlement and related costs | (8,240 | ) | — | (8,240 | ) | — | |||||||||
(Loss) Gain on extinguishment of debt | (1,970 | ) | 561 | (1,970 | ) | 561 | |||||||||
Gain on sale of investments, net | 581 | — | 1,323 | 794 | |||||||||||
Fair value adjustments, net | (662 | ) | 77 | (657 | ) | 230 | |||||||||
Other income, net | (102 | ) | 165 | 84 | 1,389 | ||||||||||
General and administrative expenses: | |||||||||||||||
Compensation and benefits | (1,106 | ) | (1,191 | ) | (3,447 | ) | (3,033 | ) | |||||||
Other general and administrative | (1,229 | ) | (780 | ) | (3,261 | ) | (2,874 | ) | |||||||
Net income | 1,532 | 7,022 | 25,406 | 19,826 | |||||||||||
Preferred stock dividends | — | (1,056 | ) | — | (3,061 | ) | |||||||||
Net income to common shareholders | $ | 1,532 | $ | 5,966 | $ | 25,406 | $ | 16,765 | |||||||
Weighted average common shares: | |||||||||||||||
Basic | 40,353 | 17,230 | 37,973 | 15,532 | |||||||||||
Diluted | 40,353 | 21,457 | 37,974 | 19,757 | |||||||||||
Net income per common share: | |||||||||||||||
Basic | $ | 0.04 | $ | 0.35 | $ | 0.67 | $ | 1.08 | |||||||
Diluted | $ | 0.04 | $ | 0.33 | $ | 0.67 | $ | 1.00 | |||||||
Dividends declared per common share | $ | 0.27 | $ | 0.25 | $ | 0.81 | $ | 0.94 | |||||||