Dynex Capital(DX)2019-08-06 19:53Investment Strategy and Portfolio Composition - Dynex Capital, Inc. primarily invests in residential and commercial mortgage-backed securities (MBS) on a leveraged basis, aiming to provide attractive risk-adjusted returns to shareholders [129]. - The investment portfolio consists mainly of Agency MBS, including residential MBS (RMBS) and commercial MBS (CMBS), with a focus on capital preservation [131]. - As of June 30, 2019, approximately 59% of the investment portfolio consisted of 30-year Agency RMBS, down from 65% as of December 31, 2018 [172]. - The investment portfolio included approximately 33% Agency CMBS as of June 30, 2019, up from 23% as of December 31, 2018 [172]. - The total investment portfolio, including TBA dollar roll positions, was valued at 4,646,499,000 as of December 31, 2018, reflecting a significant increase [173]. - The company purchased 6,088,477,000 [175]. - Agency RMBS, fixed-rate investments amounted to 3,013,279,000 at the end of 2018, indicating a growth of approximately 18.7% [175]. - The fair value of the total investment portfolio increased to 4,646,499,000 in December 2018, representing a rise of about 31.2% [173]. Financial Performance and Income - The financial performance is driven by net interest income, net interest spread, comprehensive income, and total economic return, which includes dividends declared and changes in book value [141]. - Comprehensive loss to common shareholders for Q2 2019 was 31.2 million in Q1 2019 [151]. - Net loss to common shareholders for Q2 2019 was (55.3) million in Q1 2019 [151]. - Core net operating income to common shareholders decreased to 12.1 million in Q1 2019 [154]. - Adjusted net interest income for Q2 2019 was 19.38 million in Q1 2019, reflecting a decrease in the adjusted net interest spread from 1.19% to 1.03% [165]. - Interest income for the second quarter of 2019 was 25.9 million in the same period in 2018, primarily due to higher yielding fixed-rate Agency RMBS and Agency CMBS [205]. - Net interest income for the three months ended June 30, 2019 increased by 32,594 thousand for the six months ended June 30, 2019, compared to the same period in 2018, primarily due to higher yielding fixed-rate Agency RMBS and Agency CMBS [218]. Interest Rate and Market Conditions - Market conditions indicate a shift towards a lower interest rate environment, with expectations of multiple reductions in the U.S. Federal Funds Rate due to slowing global economic growth [146]. - Management anticipates the 10-year U.S. Treasury yield will range between 1.5%-2.5% in the near term [157]. - The company believes the current environment is characterized by lower returns and elevated funding costs due to an inverted yield curve [158]. - The downward trend in net interest spread continues due to higher funding costs and a flattening yield curve [152]. - The company identified challenges to returns including elevated short-term funding costs and expected elevated prepayment speeds due to seasonal factors and lower mortgage rates [158]. Leverage and Risk Management - The company utilizes leverage through repurchase agreements, with terms generally ranging from overnight to six months, to enhance returns on invested capital [138]. - The company’s investments are subject to various risks, including interest rate risk, credit risk, and liquidity risk, which could impact financial performance [145]. - The average interest rate swap net receive rate increased to 2.60% for the six months ended June 30, 2019, compared to 2.15% for the same period in 2018 [237]. - The company recorded a net loss on interest rate swaps of (139,910,000) on Agency 30-Year RMBS during the six months ended June 30, 2019 [175]. Stock and Capital Management - The company is open to expanding its capital base and exploring merger, acquisition, or divestiture opportunities to maximize shareholder value [144]. - The company executed a 1-for-3 reverse stock split on June 20, 2019, reducing the number of common shares from 62,817,218 to 24,646,964 [193]. - The company issued 198.2 million, a decrease from 61.4 million posted as collateral under derivative agreements as of June 30, 2019 [257]. - The total contractual obligations as of June 30, 2019, amounted to 4,822.2 million due within one year [263].