Dynex Capital Q3 Book Value Drops as EAD Rises

Dynex Capital (NYSE: DX) reported a negative 11.5% total economic return for the third quarter of 2026 as book value per common share fell sharply, outweighing higher net interest income and growth in the mortgage investment portfolio. Book value declined to $10.91 at September 30 from $12.90 at June 30, while the company maintained quarterly common dividends of $0.51 per share.

The mortgage REIT recorded a comprehensive loss to common shareholders of $374.8 million, or $1.49 per share, compared with comprehensive income of $177.3 million, or $0.80 per share, in the second quarter. Net loss attributable to common shareholders was $338.3 million, or $1.34 per share, reversing net income of $178.1 million, or $0.80 per share, in the prior quarter.

The quarterly result included $1.47 billion of unrealized losses on investments, partly offset by $1.04 billion of net gains on derivative instruments. Dynex’s book-value rollforward showed a total net fair-value decline of $461.1 million across mortgage-backed securities, to-be-announced securities and hedging instruments.

Earnings available for distribution, a non-GAAP measure that excludes certain fair-value changes, increased to $94.7 million, or $0.38 per common share, from $80.7 million, or $0.36 per share, in the second quarter. Economic net interest income, also a non-GAAP measure, rose to $101.6 million from $94.3 million. On a GAAP basis, net interest income increased to $101.6 million from $93.8 million as higher interest income more than offset increased funding costs.

Portfolio Expands as Leverage Rises

Dynex’s investment portfolio, including Agency residential mortgage-backed securities held through TBA positions, grew to $28.3 billion from $27.6 billion at the end of the second quarter. Agency RMBS pools accounted for 86% of the portfolio, Agency RMBS TBAs represented 9%, and Agency commercial mortgage-backed securities made up the remaining 5%.

The company added $3.1 billion of Agency RMBS specified pools during the quarter. Management said it favored specified pools over TBAs because of their convexity characteristics, lower hedging costs and monthly principal and interest payments. The portfolio combined seasoned, lower-coupon assets intended to provide stability with higher-coupon securities offering income and carry.

Leverage increased to 9.0 times shareholders’ equity from 8.1 times, while total shareholders’ equity decreased to $3.1 billion from $3.2 billion. Cash and unencumbered assets declined to $1.3 billion from $1.6 billion.

Dynex expanded its hedging portfolio as interest rates rose and mortgage duration extended. Total hedge notional increased to $24.3 billion from $18.3 billion, including $17.6 billion of interest-rate swaps and $6.7 billion of Treasury futures. The company increased its use of 30-year Treasury futures to $3.1 billion and said it sought to reduce exposure to the direction of interest rates while retaining mortgage-spread exposure.

Repo financing totaled $24.2 billion at quarter-end. The weighted-average repo rate rose 12 basis points sequentially to 3.91%, while weighted-average maturity shortened to 87 days from 96 days. Dynex said repo markets remained orderly during the quarter and that it conducted business with more than 25 counterparties.

Preferred Offering Adds Long-Term Capital

Dynex completed a $120 million offering of 9.375% Series D fixed-rate preferred equity in September, its first preferred issuance since 2020. The company said the transaction increased its access to long-term capital and provided greater flexibility to pursue investment opportunities. Because the offering closed on September 29, no Series D dividend was recorded for the third quarter.

The company also raised approximately $268 million through common-stock issuances under its at-the-market program during the quarter. After issuance-related items, capital transactions contributed $261.0 million to common equity, partly offsetting the comprehensive loss and $129.2 million of common dividends declared.

Management Sees Attractive Agency MBS Conditions

Management characterized the Agency MBS opportunity as attractive, citing historically wide mortgage spreads, limited refinancing incentives, deep financing markets and supportive demand from insurers, pension funds and government-sponsored enterprises. The company said liquidity would remain central to portfolio construction, allowing it to retain positions through market repricing and preserve their potential returns.

That positioning leaves results sensitive to further changes in mortgage spreads. Dynex estimated that an instantaneous 20-basis-point widening in spreads would reduce common shareholders’ equity by 11.5%, compared with an estimated 9.2% decline using its June 30 portfolio. A 20-basis-point tightening was estimated to increase equity by 11.5%.

The presentation also identified elevated inflation, higher long-term rates, geopolitical conflict, tariffs, energy-market disruption, fiscal deficits and uncertainty over Federal Reserve policy as material considerations. Additional risks include the availability and cost of financing, changes in leverage, mortgage prepayments and credit performance, repurchase-market volatility, regulatory changes, reliance on third-party service providers and cybersecurity incidents.