Dynex Capital Inc (DX): This 11% Yielder Is Well Positioned to Maintain Its Dividend

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Dynex Capital Inc (NYSE:DX) is operating as a mortgage REIT since 1988 with an objective of providing higher risk-adjusted returns to its shareholders primarily through dividends.  For this purpose, the company originates and securitizes various types of loans, largely single-family and commercial mortgage loans and manufactured housing loans. Besides, the company invests in Agency and non-Agency mortgage backed securities.  The company’s Agency RMBS consist of hybrid adjustable and ARMs. The primary source of company’s income is net interest spread, which is the spread over what the company earns on its interest yielding assets and what it pays on its interest bearing liabilities.

Dynex Capital Inc (NYSE:DX)Diversified Investment Portfolio

At the end of the fourth quarter, the company had an investment portfolio of $4.18 billion, compared to $4.3 billion at the end of the linked quarter. The following graphs will display each security type in the company’s investment portfolio.

It is evident from the above graph that Dynex Capital has a large concentration of Agency MBS in its investment portfolio. At the end of the most recent quarter, Agency MBS were 85% of the entire portfolio, while non-Agency MBS were 15%. However, during the quarter the company declined its Agency holdings by 229 million, primarily through prepayments and amortization of premiums. During the recent quarter, RMBS and CMBS were $2.6 billion (62% of the portfolio) and $1.6 billion (38% of the portfolio), respectively.

Recent Quarter’s Performance

Dynex Capital reported strong fourth quarter results on February 20, 2013. The results were positively affected by higher interest income, higher gain on sale of investments, partially offset by higher interest expense and higher general and administrative expenses during the quarter.

At the end of the fourth quarter, the company generated of $31.6 million, up 33.2% from a year ago. This improvement in interest income was a result of higher interest income from both Agency and non-Agency MBS, partially offset by securitized mortgage loans.  Higher interest income was attributed to higher interest yielding assets, partially offset by lower net interest spread. While interest yielding assets of $4.12 billion were up 10.5%, during the quarter, of 1.93% was recognized, down 7 basis points from a year ago.

during the most recent quarter was $10.4 million, up 55% compared to the same quarter of the previous year. The surge in interest expense was primarily due to the rise in repurchase agreement costs, partially offset by non-recourse collateralized financing.

As a result, the company posted a of $21.2 million, up 25% year over year, on higher interest income. The bottom line for the fourth quarter was also supported by lower and higher . The company recognized $22,000 in provision for loan losses during the most recent quarter, compared to $121,000 a year ago. $2.04 billion were recognized as gain on sale of investments, compared to $773,000 a year ago. climbed 8% year over year, on higher compensation and benefits, partially offset by lower other general and administrative expenses.

As a result, Dynex was able to post a of $19.6 million, compared to $14.4 million a year ago.

Other Key Matrices of Dynex Capital

At the end of the fourth quarter, Dynex Capital posted a book value of $10.3, slightly down from $10.31 a year ago. The prepayment speed for Dynex Capital’s investment portfolio was up from 18.7% to 19% over the same time period, while the leverage came down from 6.1 times to 5.9 times.

Competition

Dynex Capital competes with other hybrid mortgage REITs in the United States, like Two Harbors Investment Corp (NYSE:TWO) and CYS Investments Inc (NYSE:CYS).

Two Harbors, formed in 2009, owns a highly well diversified investment portfolio with 81% Agency RMBS and the remaining non-Agency RMBS. Besides, the company diversifies its portfolio with the combination of fixed rate and adjustable rate securities. Fixed rate are 80% of the recent quarter end investment portfolio. Just like Dynex, Two Harbors posted 2.9% net interest spread, down from 3.1% in the linked quarter, while its leverage came down from 3.8 times to 3.4 times.

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