Dynex Looks Like a Mortgage REIT That’s Built to Last

by REIT Wrecks on August 10, 2009

Dynex Capital Inc. is a rather small US-based Mortgage REIT that invests in securitized residential and commercial mortgage loans and non-agency MBS. Management has a significant stake in the common stock, so it shouldn’t be surprising that the company made almost no new investments in 2006 and 2007.

As of June 30, 2009, Dynex Capital had carrying assets of $245.1 million in non-Agency MBS, which was financed with $192.5 million in securitizations and short term debt repurchase agreements. Shareholders’ equity amounted to $52.6 million or 21.5% of the total portfolio.

The most recent quarter benefited from historically wide spreads, resulting from costs of funds that are near zero. “The story of this quarter is the performance of our Agency MBS investment portfolio. We earned a net interest spread of 3.70% on Agency MBS as our borrowing costs continued to decline. Our highly seasoned non-Agency investments continue to generate solid earnings and cashflow for the Company.” In the year earlier quarter the spread was much smaller, only 1.45%. The conditional prepayment rate (CPR) also decreased from 27.3% a year earlier to 19.9% during the last quarter.

Delinquencies on Dynex’s securitized mortgage loans increased from April to June of 2009 to $15.0 million from $9.1 million at December 31, 2008, but the company incurred no credit loss during the quarter.

Shareholder equity was $136.3 million during the quarter, or 20.2% of the $672.4 million of the commercial and single family loan collateral combined. During the summer of 2006 non-Agency portfolio leverage of equity capital was therefore about 5 times, essentially unchanged to the most recent quarter, despite the horrible conditions in CRE.

There will be more on Dynex here in the coming months. Mortgage REITs are not for the faint of heart, but this is definitely one worthy of additional time and research.

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