Dynex Capital reels as volatility roils secondary market

Dynex Capital on Monday reported mixed earnings results for the second quarter as volatility intensified in the mortgage-backed securities markets it invests in.

The real estate investment trust generated $29.3 million in net income, down from $117.2 million the previous quarter but improving on a $48.3 million loss a year earlier. It also took a comprehensive loss of $0.85 per common share. In addition, Dynex recorded a negative total economic return of $1.06 per common share, consisting of $0.39 in declared dividends and a decrease in book value by $1.45, departing Chief Financial Officer Steve Benedetti said during the company’s earnings call.

Adjusted earnings per share, which reflect only gains likely to be recurring, disappointed analysts by coming in at $0.40 rather than a little higher. However, the company’s book value to common shareholders of $16.79, while down 7.9% on a consecutive quarter basis, surprised to the upside.

“We view this book-value performance to be strong. Further, we suspect that the book value performance was better than peers,” Keefe, Bruyette & Woods analysts Bose George, Michael Smyth and Thomas McJoynt-Griffith said in a research note Monday.

The REIT eked out a total return of just 0.8% during the quarter, according to a Dynex investor presentation. In comparison, other total returns for REITs during the quarter were as follows: investors in agency mortgage bonds, -12.8%; and for those that also invest in the private market, the number was -24.1%. Dynex has invested in both types of assets, and recently appointed as its CFO a former Chimera executive with a background in private-label residential mortgage-backed securities, Robert Colligan. 

Dynex also noted that its total return for the quarter was competitive with those of some exchange traded funds, which are designed to be relatively safe investments. ETFs such as certain iShares’ real estate and Treasury funds had total returns of -16.3% and -0,5%, respectively.

Given the extraordinarily challenging environment the company was operating in, it bore up well, Byron Boston, CEO and chief investment officer, said during the company’s earnings call.

“In the first half of 2022, I witnessed some of the most volatile movements in the fixed income market in my career, especially during the month of June,” he said.

Boston reiterated some past comments indicating that that company has been stockpiling capital and is prepared to buy mortgage-related assets at historically attractive prices that could generate strong returns in a market roiled by tensions related to federal monetary policy and geopolitical issues.

The company currently is not positioning itself to address any particular outcome from these tensions, according to Boston.

“We’re preparing for multiple scenarios as opposed to relying on our ability to predict the future,” he said.