Dynex Capital, Inc. (NYSE: DX) reported its third quarter 2022 results today. Management will host a call today at 10:00 a.m. Eastern Time to discuss the results and business outlook. Details to access the call can be found below under "Earnings Conference Call."

Third Quarter 2022 Summary

• Total economic loss of $(2.17) per common share, or (12.9)% of beginning book value, comprised of a decline in book value per common share of $(2.56) to $14.23 as of September 30, 2022 partially offset by dividends declared of $0.39 per common share for the third quarter of 2022
• Comprehensive loss of $(2.20) per common share and net loss of $(1.07) per common share
• Realized gains on interest rate hedges included in GAAP results were $149.6 million for the third quarter and $486.0 million year-to-date
• Earnings available for distribution ("EAD") to common shareholders, a non-GAAP measure, of $0.24 per common share, excludes the benefit of interest rate hedge gains and includes severance expenses of approximately $0.06 per share related to our CFO transition
• REIT taxable income for the third quarter of 2022 includes an estimated benefit of $9.4 million, or $0.21 per common share, from amortization of deferred tax hedge gains
• Net interest spread of 0.23% and adjusted net interest spread, a non-GAAP measure, of 1.12%

Management Remarks

“The third quarter of 2022, and in particular September, continued to be defined by extreme interest rate volatility and spread widening driven by increasing interest rates domestically and geopolitical factors. While we experienced a decline in book value during the quarter related to this volatility and spread widening, our liquidity remains solid. We are prepared and well-positioned to benefit when the markets find equilibrium,” stated Byron L. Boston, Chief Executive Officer. “Our disciplined top-down macroeconomic focus has led us to pursue an ‘up in credit, up in liquidity’ strategy for the past several years. As a result, our portfolio continues to be comprised of highly liquid Agency MBS assets, and our strong balance sheet provides us the ability to remain steadfast in allocating our capital and making prudent investment decisions. As always, our experienced management team is committed to providing our investors an attractive long-term return, and we will continue to be disciplined, patient and ethical stewards of their capital.”

Earnings Conference Call

As previously announced, the Company's quarterly conference call to discuss third quarter 2022 results is today at 10:00 a.m. Eastern Time and may be accessed via telephone in the United States by dialing 1-888-330-2022 and providing the ID 1957092 or by live audio webcast by clicking the "Webcast" button in the “Current Events” section on the homepage of the Company's website (www.dynexcapital.com), which includes a slide presentation. To listen to the live conference call via telephone, please dial in at least 10 minutes before the call begins. An archive of the webcast will be available on the Company's website approximately two hours after the live call ends.

Third Quarter 2022 Results

During the third quarter of 2022, the market value of the Company's investment portfolio declined but was partially offset by gains on the Company's hedging portfolio. Agency RMBS spreads widened during the third quarter, resulting in a reduction in the market value of the Company's portfolio which exceeded the gains from interest rate hedges the Company uses to mitigate the impact of higher interest rates. The Federal Reserve has been aggressively raising the U.S. Federal Funds rate all year in an effort to tame inflation, which has caused the Company's borrowing costs to increase. As a result, net interest income for the third quarter declined approximately 50% from the second quarter of 2022. In addition to lower net interest income, comprehensive results for the third quarter of 2022 were also impacted by non-recurring severance expenses of $2.7 million, or $0.06 per common share, related to the CFO transition in August 2022. The non-recurring severance expenses and lower net interest income were also the primary drivers of the $(0.16) decline in the Company's EAD to $0.24 per common share for the third quarter of 2022 when compared to the prior quarter. However, the Company continues to benefit from significant gains on the interest rate hedges it uses to buffer losses due to rising interest rates. Interest rate hedge gains, which are recognized in GAAP earnings when realized, are excluded from the Company's calculation of EAD, but will become a part of the Company's distribution requirements when amortized into REIT taxable income over time. Further discussion of these interest rate hedge gains is provided below under "Hedging Portfolio".

The following table summarizes the changes in the Company's financial position during the third quarter of 2022, including its components of comprehensive loss to common shareholders:

Investment Portfolio

The following table provides information about the performance of the Company's MBS (including TBA securities) and repurchase agreement financing for the third quarter of 2022 compared to the prior quarter:

The following table provides detail on the coupon composition of the Company's 30-year fixed-rate Agency RMBS (including TBA securities) as of the dates indicated:

Repurchase Agreement Financing

The following table provides detail on the Company's repurchase agreement borrowings outstanding as of the dates indicated:

Hedging Portfolio

During 2022, the Company has realized substantial gains on its interest rate hedges that were recognized in its GAAP earnings, but because these derivative instruments were designated for tax purposes as hedges of the Company's financing arrangements, the realized gains will be amortized into REIT taxable income over the next several years. The Company's estimated deferred tax hedge gains from its interest rate hedging portfolio was $512.9 million as of September 30, 2022, which is a significant increase from $27.0 million as of December 31, 2021. On a tax basis, the benefit for the third quarter of 2022 was $9.4 million, or $0.21 per share, which mitigates the impact of higher financing costs. These hedge gains will be part of the Company's distribution requirements along with net interest income and other ordinary gains and losses.

The following table provides the projected amortization of our deferred tax hedge gain as of September 30, 2022 that will be recognized as taxable income over the periods indicated:

During the third quarter of 2022, the Company increased its short position in U.S. Treasury futures by $810.0 million and purchased $750.0 million in options on 10-year U.S. Treasury futures. As of September 30, 2022, the Company held short positions of $4.4 billion in 10-year U.S. Treasury futures and $740.0 million in 5-year U.S. Treasury futures and had $750.0 million in options on 10-year U.S. Treasury futures.

Use of Non-GAAP Financial Measures

In evaluating the Company’s financial and operating performance, management considers book value per common share, total economic return to common shareholders, and other operating results presented in accordance with GAAP as well as certain non-GAAP financial measures, which include the following: earnings available for distribution (“EAD”) to common shareholders, adjusted net interest income and the related metric adjusted net interest spread. Management believes these non-GAAP financial measures may be useful to investors because they are viewed by management as a measure of the investment portfolio’s return based on the effective yield of its investments, net of financing costs and, with respect to EAD, net of other normal recurring operating income/expenses. Drop income generated by TBA dollar roll positions, which is included in "gain (loss) on derivatives instruments, net" on the Company's consolidated statements of comprehensive income, is included in these non-GAAP financial measures because management views drop income as the economic equivalent of net interest income (interest income less implied financing cost) on the underlying Agency security from trade date to settlement date.

However, these non-GAAP financial measures are not a substitute for GAAP earnings and may not be comparable to similarly titled measures of other REITs because they may not be calculated in the same manner. Furthermore, though EAD is one of several factors our management considers in determining the appropriate level of distributions to common shareholders, it should not be utilized in isolation, and it is not an accurate indication of the Company’s REIT taxable income or its distribution requirements in accordance with the Tax Code.

Reconciliations of the non-GAAP financial measures used in this earnings release to the most directly comparable GAAP financial measure are presented below.

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,” "may," "could," 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, including statements made in Mr. Boston's quotes, may include, without limitation, statements regarding the Company's financial performance in future periods, future interest rates, future market credit spreads, management's views on expected characteristics of future investment and macroeconomic environments, central bank strategies prepayment rates and investment risks, future investment strategies, future leverage levels and financing strategies, the use of specific financing and hedging instruments and the future impacts of these strategies, future actions by the Federal Reserve, and the expected performance of the Company's 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, volatility and disruption in national and international financial markets; adverse effects of the ongoing novel coronavirus (COVID-19) pandemic and any governmental or societal responses thereto, or other unusual and infrequently occurring events; ability to find suitable investment opportunities; changes in economic conditions, including an increased rate of inflation; changes in interest rates and interest rate spreads, including the repricing of interest-earning assets and interest-bearing liabilities; the Company’s investment portfolio performance particularly as it relates to cash flow, prepayment rates and credit performance; the impact on markets and asset prices from changes in the Federal Reserve’s policies regarding purchases of Agency residential and Agency commercial mortgage-backed securities and U.S. Treasuries; actual or anticipated changes in Federal Reserve monetary policy or the monetary policy of other central banks; adverse reactions in U.S. financial markets related to actions of foreign central banks or the economic performance of foreign economies including in particular China, Japan, the European Union, and the United Kingdom; uncertainty concerning the long-term fiscal health and stability of the United States; the cost and availability of financing, including the future availability of financing due to changes to regulation of, and capital requirements imposed upon, financial institutions; the cost and availability of new equity capital; changes in the Company’s use of leverage; changes to the Company’s investment strategy, operating policies, dividend policy or asset allocations; the quality of performance of third-party servicer providers of the Company’s loans and loans underlying securities owned by the Company; the level of defaults by borrowers on loans the Company has securitized or otherwise is invested through its ownership of MBS; changes in the Company’s industry; increased competition; changes in government regulations affecting the Company’s business and/or status as a real estate investment trust; changes or volatility in the repurchase agreement financing markets and other credit markets; changes to the market for interest rate swaps and other derivative instruments, including changes to margin requirements on derivative instruments; uncertainty regarding continued government support of the U.S. financial system and U.S. housing and real estate markets or reform of the U.S. housing finance system, including the resolution of the conservatorship of Fannie Mae and Freddie Mac; the composition of the Federal Reserve; systems failures or cybersecurity incidents; catastrophes affecting global markets; and exposure to current and future claims and litigation. 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, 2021, and other reports filed with and furnished to the Securities and Exchange Commission.

All forward-looking statements are qualified in their entirety by these and other cautionary statements that the Company makes from time to time in its filings with the Securities and Exchange Commission and other public communications. The Company cannot assure the reader that it will realize the results or developments the Company anticipates or, even if substantially realized, that they will result in the consequences or affect the Company or its operations in the way the Company expects. Forward-looking statements speak only as of the date made. The Company undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances arising after the date on which they were made, except as otherwise required by law. As a result of these risks and uncertainties, readers are cautioned not to place undue reliance on any forward-looking statements included herein or that may be made elsewhere from time to time by, or on behalf of, the Company.

Company Description

Dynex Capital, Inc. is a financial services company committed to ethical stewardship of stakeholders' capital, employing comprehensive risk management and disciplined capital allocation to generate dividend income and long-term total returns through the diversified financing of real estate assets in the United States. Dynex operates as a REIT and is internally managed to maximize stakeholder alignment. Additional information about Dynex Capital, Inc. is available at www.dynexcapital.com.

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