DYNEX CAPITAL INC
For the period ended Mar 31, 2025. Filed Apr 30, 2025.
View on SEC.govAbout this filing
A company's report for each of its first three quarters. The financial statements are not audited. It shows how the business has moved since the last annual report, and what management says changed.
Mar 31, 2025 · Filed Apr 30, 2025
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What changed in Management’s Discussion and Analysis?
Read the current filingPrevious report: 10-Q
Period ended 2024-09-30; filed 2024-10-28.
0000826675-24-000128
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSCurrent report: 10-Q
Period ended 2025-03-31; filed 2025-04-30.
0000826675-25-000056
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe baseline is this issuer’s latest earlier reporting period of the same form that was filed before the current report. A previous 10-Q is a different quarter, not a year-over-year comparison. Amendments are excluded.
Compared 160 previous paragraphs and 163 current paragraphs.
90 unchanged; 42 reworded; 27 added; 23 removed; 5 previous and 4 current paragraphs rearranged.
Tables are not compared: 16 previous and 18 current tables excluded. Dates, whitespace, punctuation and numbering changes are ignored; changes to financial figures remain significant.
A changed paragraph is not evidence that risk increased or decreased. An unchanged paragraph does not establish that risk stayed the same.
Added paragraphs (27)
Current report
From year end 2024 to March 31, 2025, interest rates across the U.S. Treasury curve were mostly lower, spreads on Agency RMBS were slightly tighter while spreads on Agency and non-agency CMBS were wider. Real estate equities broadly performed well, experienced stock market price appreciation and strong trading volumes. Dynex was active in the ATM program raising $239.7 million of new capital to deploy into the Agency market and also to provide liquidity and flexibility to face the markets going forward in 2025. For Dynex, positive carry, based on our interest income less interest expense and the periodic interest component of our interest rate swaps, improved in the first quarter of 2025 compared to the fourth quarter of 2024 as higher yielding assets have been added to the portfolio and financing costs continued to trend down. The second quarter of 2025 has been dominated by tariff news, the immediate reactions and ongoing discussion on how negotiations may unfold. We continue to operate our business at the intersection of the global capital markets and the U.S. housing finance system and take seriously our responsibility of being stewards of shareholder capital. The Dynex team will continue to manage risk and invest to deliver compelling shareholder returns over the long term.
Current report
Our total economic return for the first quarter of 2025 was $0.33 per common share, or 2.6% of beginning book value. Our net interest income continues to grow as a result of our newer investments of MBS with more attractive yields and our financing costs continue to decline. We also continue to benefit from the net periodic interest we are earning from interest rate swaps. Despite another quarter of volatile interest rates, the mark-to-market impact of our investments compared to our hedges was close to neutral. We were also able to raise $239.7 million in capital through our ATM program at an average price of $13.61 per share.
Current report
Tariffs continue to dominate the news cycle in April, and markets continue to adjust. Markets are experiencing volatility in response to announcements and uncertainty about the economic impacts. While the broader market movements have impacted the valuation of mortgage securities, the current market turmoil is not a real estate or mortgage event. We expect volatility to continue and remain focused on maintaining a portfolio of high-quality liquid securities and maintaining liquidity. We are also focused on our hedging strategy and believe options will be part of our hedge portfolio going forward. We continue to monitor the prepayment risk of our portfolio. Consolidation in the mortgage finance sector that combine strong mortgage origination, underwriting, servicing, and technology platforms into a single company are likely to expedite refinancing, resulting in an increase in prepayment risk.
Current report
The future structure of the GSEs is uncertain, and we remain engaged with policymakers to monitor these developments. The current policy and economic environment remain dynamic. We continue to monitor global macroeconomic conditions and large investment flows.
Current report
We are active in our ATM Program, raising $239.7 million in the first quarter and an additional $38.7 million in the second quarter through April 24, 2025. We have invested some of the proceeds, but have maintained flexibility by keeping some of the new capital as dry powder to invest going forward. While we expect volatility to continue, mortgage spreads to swaps and U.S. Treasuries remain close to historic wides and offer attractive returns, while financing markets continue to be liquid and supportive of leveraged mortgage investing.
Current report
Our investment portfolio (including TBAs) as of March 31, 2025, increased approximately 13% compared to December 31, 2024 while the composition of our assets remained relatively unchanged with 74% in Agency RMBS, 24% in TBA securities, and 2% in Agency CMBS and CMBS IO. We purchased approximately $895.1 million of Agency RMBS during the three months ended March 31, 2025, of which $325.4 million were pending settlement as of March 31, 2025. We also increased our TBA positions by a notional of $430.0 million during the three months ended March 31, 2025 and purchased $54.6 million of Agency CMBS. The Agency CMBS purchases have a different convexity profile compared to our Agency RMBS, bringing a diversification benefit to the portfolio.
Current report
Our non-Agency CMBS IO were all originated prior to 2018 and are backed by loans collateralized by a number of different property types, such as multifamily, office, retail, hotels, industrial, storage, and others. Our non-Agency CMBS IO investments are nearing maturity and have very little amortized cost remaining; any changes in actual payments may result in large swings in yield as shown below.
Current report
Net interest income and net interest spread improved for the three months ended March 31, 2025, compared to the three months ended December 31, 2024 due to having a larger portfolio of Agency RMBS with higher yields. In addition, our financing costs during the three months ended March 31, 2025 declined approximately 41 basis points compared to the three months ended December 31, 2024 as the first quarter of 2025 received the full benefit of the 0.25% reduction in the targeted Federal Funds rate implemented by the FOMC in both November and December of 2024.
Current report
(6)Net periodic interest is the difference between the fixed interest rate we pay and the variable interest rate we receive on our interest rate swaps. It is a component of economic net interest income (expense), a non-GAAP measure. Please refer to the section below “Non-GAAP Financial Measures” for more information.
Current report
The following table presents information regarding the performance of our TBA dollar roll transactions for the periods indicated:
Current report
(1)Implied net interest income (expense) is also referred to as “drop income (loss)” and represents a portion of the total realized gain (loss) from our TBA dollar roll transactions recorded within “gain (loss) on derivative instruments, net.”
Current report
(6)Net periodic interest is the difference between the fixed interest rate we pay and the variable interest rate we receive on our interest rate swaps. It is a component of economic net interest income (expense), a non-GAAP measure. Please refer to the section below “Non-GAAP Financial Measures” for more information.
Current report
The following table presents information regarding the performance of our TBA dollar roll transactions for the periods indicated:
Current report
(1)Implied net interest income (expense) is also referred to as “drop income (loss)” and represents a portion of the total realized gain (loss) from our TBA dollar roll transactions recorded within “gain (loss) on derivative instruments, net.”
Current report
During the three months ended March 31, 2025, the fair value of our investment portfolio increased $171.6 million primarily due to a decline of 36 basis points in the 10-year U.S. Treasury rate. These gains were mostly offset by net losses on our hedging portfolio of $(171.1) million (excluding $10.9 million of net periodic interest we earned from our interest rate swaps), as a result of the decline in 10-year and 30-year U.S. Treasury rates as well as SOFR rates across the curve.
Current report
During the three months ended December 31, 2024, longer-term U.S. Treasury rates and the SOFR swap curve rose higher, resulting in hedge gains on our U.S. Treasury futures and interest rate swaps totaling $337.3 million (excluding $11.9 million of net periodic interest we earned from our interest rate swaps). These gains were partially offset by net declines in the fair value of our investments of $(332.4) million due to an increase of 79 basis points in the 10-year U.S. Treasury rate and wider mortgage spreads.
Current report
During the three months ended March 31, 2024, the 10-year U.S. Treasury rate increased approximately 32 basis points which resulted in net gains of $139.8 million for our hedging portfolio. Though the increase in 32 basis point increase negatively impacted the fair value of our investment portfolio, these losses were partially buffered by modest spread tightening on some of our assets during the first quarter of 2024.
Current report
2)Realized gain (loss) for interest rate swaps consists of net periodic interest benefit of $10.9 million for the three months ended March 31, 2025 and $11.9 million for the three months ended December 31, 2024. We did not hold any interest rate swap agreements during the three months ended March 31, 2024.
Current report
Operating expenses for the three months ended March 31, 2025, increased $2.9 million compared to the three months ended December 31, 2024 due to an increase in our accrual for bonus expense and higher stock-based compensation expense due to the immediate expensing of RSUs granted to a retirement eligible employee. Operating expenses for the three months ended March 31, 2025 increased $0.8 million compared to the three months ended March 31, 2024 due to an increase in our accrual for bonus expense and higher legal fees.
Current report
(2)The following table reconciles “change in fair value of derivative instruments, net” to the “gain (loss) on derivative instruments, net” shown on the consolidated statements of comprehensive income.
Current report
The following table provides details on the “net receipts (payments) on derivative instruments” shown on our consolidated statements of cash flows for the periods indicated:
Current report
(1)Net periodic interest from our effective interest rate swaps is recognized as income or expense during the period earned or incurred, but the cash is not received or paid until the anniversary of each agreement’s effective date or upon maturity.
Current report
provides the projected amortization of the Company's net deferred tax hedge gains that may be recognized as taxable income over the periods indicated, given conditions known as of March 31, 2025; however, uncertainty inherent in the forward interest rate curve makes future realized gains and losses difficult to estimate, and as such, these projections are subject to change for any given period.
Current report
•tariffs that the U.S. imposes on trading partners or tariffs imposed on the U.S. from trading partners;
Current report
•global government policy changes and the ability or inability to react to rapidly changing global economic policies;
Current report
Regulation FD Disclosures
Current report
We routinely announce material information to investors and the marketplace using filings with the SEC, press releases, public conference calls, presentations, webcasts, and the investor relations page of our website at www.dynexcapital.com/investors and our LinkedIn Page at www.linkedin.com/company/dynex-capital-inc. We use these channels for purposes of compliance with Regulation FD and as routine channels for distribution of important information. While not all of the information that we post to the investor relations page of our website or to our LinkedIn Page is of a material nature, some information could be deemed to be material. Accordingly, investors should monitor these channels, in addition to following our press releases, SEC filings, and public conference calls and webcasts. The web addresses are included in this Quarterly Report on Form 10-Q as textual references only and the information posted on these channels are not incorporated by reference in this Quarterly Report on Form 10-Q or in any other report or document we file with the SEC.
Removed paragraphs (23)
Previous report
The following discussion should be read in conjunction with our unaudited consolidated financial statements and the accompanying notes included in Part I, Item 1, “Financial Statements” in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and the accompanying notes included in Part II, Item 8, “Financial Statements and Supplementary Data” in our 2023 Form 10-K. References herein to “Dynex,” the “Company,” “we,” “us,” and “our” include Dynex Capital, Inc. and its consolidated subsidiaries, unless the context otherwise requires. In addition to current and historical information, the following discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our future business, financial condition, or results of operations. For a description of certain factors that may have a significant impact on our future business, financial condition, or results of operations, see “Forward-Looking Statements” at the end of this discussion and analysis.
Previous report
For more information about our business including our operating policies, investment philosophy and strategy, financing and hedging strategies, and other important information, please refer to Part I, Item 1, “Business” of our 2023 Form 10-K.
Previous report
The headline for the third quarter of 2024 was the 50 basis point cut to the U.S. Federal Funds rate at the September Federal Open Market Committee meeting; the first rate cut since the Federal Reserve started raising rates in 2022. The rate cut was long awaited and was in reaction to weakening labor market conditions. The Federal Reserve is signaling its desire make proactive adjustments while labor markets are still generally strong and to deliver on its goal of price stability. The anticipated and actual cuts drove the 10-year U.S. Treasury down from 4.40% at the end of the second quarter of 2024 to 3.78% at the end of the third quarter. MBS spreads were broadly tighter during the third quarter of 2024, but had an upswing from mid-September through the end of the quarter.
Previous report
The Company increased book value by $0.50 per common share this quarter driven by the outperformance of MBS and TBAs over losses on the hedge book. Rates trended down for most of the quarter, and MBS spreads were broadly tighter during the third quarter, with significant performance divergence between coupons. In addition, we added $56.8 million of new capital to deploy into MBS opportunities. We added $1.5 billion of swaps during the quarter on which we received net periodic interest benefit of $4.2 million to offset financing costs.
Previous report
Global economic conditions, geopolitical risk and the U.S. election continue to be a focus for the Company. U.S. economic growth remains modest, inflation has declined closer to the Federal Reserve’s target, and monetary policy appears likely to be less restrictive. The broader investment environment remains favorable with mortgage spreads near historic wides. With a steeper yield curve, the opportunities to earn carry and experience appreciation on our bonds are growing. The yield curve shows forward financing costs declining well into 2025. We also expect the environment will be favorable for our hedging portfolio and to continue to lock in more compelling yields on our hedges as SOFR swap rates offer increasing returns. In the intermediate term, we believe equilibrium Agency RMBS spreads will be significantly tighter than market levels available today.
Previous report
Our investment portfolio (including TBAs) as of September 30, 2024 has increased approximately 26% compared to December 31, 2023. The following charts compare the composition of our MBS portfolio including TBA securities as of the dates indicated:
Previous report
Repurchase Agreements
Previous report
The table below discloses details on the Company's interest rate hedges held as of September 30, 2024 compared to hedging portfolio held as of December 31, 2023:
Previous report
Net Interest Income
Previous report
Interest income and effective yield for the three months ended September 30, 2024 increased compared to the three months ended June 30, 2024 due primarily to the addition of higher coupon Agency RMBS. We expect this trend to continue as our higher yielding Agency RMBS comprise a larger portion of our interest income and as our lower yielding Agency RMBS continue to pay down. Our interest expense increased compared to the prior quarter due to the increase in our average balance of repurchase agreement borrowings, although our financing cost as a percentage of our average borrowing declined for the third quarter of 2024 compared to the prior quarter.
Previous report
In addition to lower financing costs for our repurchase agreement borrowings, we recognized a net periodic interest benefit of $4.2 million from short positions in interest rate swaps during the third quarter of 2024, which we expect will continue to partially offset our repurchase agreement financing costs in the coming months.
Previous report
During the three months ended September 30, 2024, the fair value of our investment portfolio increased as a result of spread tightening and the decline in the 10-year U.S. Treasury rate as investors gained confidence that the Federal Reserve is on a path of lowering the Federal Funds rate. The resulting gains on our investment portfolio outpaced the losses on our interest rate hedges created by the decline in rates.
Previous report
During the three months ended June 30, 2024, the 10-year U.S. Treasury rate increased 20 basis points. The impact of this rate increase on our investments was mitigated by the resulting gains on our interest rate hedges of $64.1 million. The net loss of $(2.6) million on our investments, net of our interest rate hedges, was primarily driven by spread widening on Agency RMBS versus U.S. Treasuries.
Previous report
2)Realized gain (loss) for interest rate swaps includes net periodic interest benefit earned as well as amounts recognized or incurred upon maturity or termination, if applicable, during the period indicated.
Previous report
Operating expenses for the three months ended September 30, 2024 increased $1.5 million compared to the three months ended June 30, 2024 primarily due to an increase in the Company’s performance based bonus accrual for employees based on projected results for the year.
Previous report
Nine Months Ended September 30, 2024 Compared to the Nine Months Ended September 30, 2023
Previous report
Net Interest Expense
Previous report
During the nine months ended September 30, 2024, gains on our investment portfolio exceeded losses on our interest rate hedging portfolio by $115.2 million primarily because we purchased higher coupon investments during the nine months ended September 30, 2024 when spreads were wider versus spreads as of September 30, 2024.
Previous report
During the nine months ended September 30, 2023, the fair value of our investment portfolio declined $(313.3) million primarily as a result of higher interest rates and significant spread widening across most asset classes. These losses were mitigated by net gains from our interest rate hedges of $276.1 million during the nine months ended September 30, 2023.
Previous report
2)Realized gain (loss) for interest rate swaps includes net periodic interest benefit earned as well as amounts recognized or incurred upon maturity or termination, if applicable, during the period indicated.
Previous report
Operating Expenses
Previous report
Operating expenses for the nine months ended September 30, 2024 increased $3.2 million compared to the nine months ended September 30, 2023 primarily due to accelerated recognition of share-based compensation expense for certain stock incentive awards granted in March 2024 to a retirement eligible employee.
Previous report
(2)Amount includes unrealized gains and losses from changes in fair value of derivatives (including TBAs accounted for as derivative instruments) and realized gains and losses on terminated derivatives and excludes TBA drop loss and net periodic interest benefit/cost from interest rate swaps.
Reworded paragraphs (42)
Previous wording
The charts below show the range of U.S. Treasury rates for the past nine months and information regarding market spreads as of and for the periods indicated:
Current wording
The charts below show the range of U.S. Treasury and SOFR-based swap rates for the first quarter of 2025 and information regarding market spreads as of and for the periods indicated:
Previous wording
The following table summarizes the changes in the Company's financial position during the third quarter of 2024:
Current wording
The following table summarizes the changes in the Company's financial position during the first quarter of 2025:
Previous wording
(2)Net proceeds from stock issuance include $56.2 million from the common stock ATM program and $0.5 million from amortization of share-based compensation, net of grants.
Current wording
(2)Net proceeds from stock issuance include $0.8 million from amortization of share-based compensation, net of grants, and adjustments for payroll tax withholding on share-based compensation vesting during the three months ended March 31, 2025.
Previous wording
We have purchased approximately $1.6 billion of Agency RMBS during the nine months ended September 30, 2024. The following tables compare our fixed-rate Agency RMBS investments, including TBA dollar roll positions, as of the dates indicated:
Current wording
The following tables compare our fixed-rate Agency RMBS investments, including TBA dollar roll positions, as of the dates indicated:
Previous wording
(7)Represents the weighted average market yield projected using cash flows generated off the forward curve based on market prices as of the date indicated and assuming zero volatility.
Current wording
(7)Represents the weighted average market yield projected using cash flows generated from the forward curve based on market prices as of the date indicated and assuming zero volatility.
Previous wording
Less than 3% of our MBS portfolio as of September 30, 2024 is comprised of Agency CMBS, Agency CMBS IO, and non-Agency CMBS IO. Our Agency CMBS and Agency CMBS IO are backed by loans collateralized by multifamily properties, which have performed well for the last decade versus other sectors of the commercial real estate market. Our Agency CMBS IO are Class X1 from Freddie Mac Series K deals from which interest continues to be advanced even in the event of an underlying default up until liquidation. According to Freddie Mac, 99.8% of the loans in K-deals are current as of August 2024. Our non-Agency CMBS IO were all originated prior to 2018 with a weighted average remaining life of less than 2 years. The underlying loans for the non-Agency CMBS IO securities are collateralized by a number of different property types including: 27% retail, 26% office, 17% multifamily, 11% hotel and 19% all other real estate categories. In the current macroeconomic environment, we are not actively purchasing CMBS or CMBS IO as current risk versus reward remains unattractive relative to Agency RMBS.
Current wording
Our Agency CMBS and Agency CMBS IO are backed by loans collateralized by multifamily properties, which have performed well given the demand for housing in the United States. Our Agency CMBS IO are from Freddie Mac Series K deals from which interest continues to be advanced even in the event of an underlying default up until liquidation. According to Freddie Mac, 99.6% of the loans in K-deals are current as of February 2025.
Previous wording
We have not experienced any difficulty in securing financing with any of our counterparties, and our repurchase agreement counterparties have not indicated any concerns regarding leverage or credit. Please refer to Note 4 of the Notes to the Consolidated Financial Statements contained within this Quarterly Report on Form 10-Q as well as “Results of Operations” and “Liquidity and Capital Resources” contained within this Item 2 for additional information relating to our repurchase agreement borrowings.
Current wording
Our repurchase agreement borrowings increased to $7.2 billion as of March 31, 2025 from $6.6 billion as of December 31, 2024 as we used these funds to partially finance our purchases of Agency RMBS during the year. We have not experienced any difficulty in securing financing with any of our counterparties, and our repurchase agreement counterparties have not indicated any concerns regarding leverage or credit. Please refer to Note 4 of the Notes to the Consolidated Financial Statements contained within this Quarterly Report on Form 10-Q as well as “Results of Operations” and “Liquidity and Capital Resources” contained within this Item 2 for additional information relating to our repurchase agreement borrowings.
Previous wording
Please refer to Note 5 of the Notes to the Consolidated Financial Statements for details on our interest rate hedging instruments as well as “Quantitative and Qualitative Disclosures about Market Risk” in Item 3 of this Quarterly Report on Form 10-Q.
Current wording
Please refer to Note 5 of the Notes to the Consolidated Financial Statements for details on our interest rate hedging instruments as well as “Liquidity and Capital Resources” within Item 2 and “Quantitative and Qualitative Disclosures about Market Risk” in Item 3 of this Quarterly Report on Form 10-Q.
Previous wording
(3)Effective yield is calculated by dividing interest income by the average balance of asset type outstanding during the reporting period. Unscheduled adjustments to premium/discount amortization/accretion, such as for prepayment compensation, are not annualized in this calculation.
Current wording
(3)Effective yield is calculated by dividing annualized interest income by the average balance of asset type outstanding during the reporting period. Unscheduled adjustments to premium/discount amortization/accretion, such as for prepayment compensation, are not annualized in this calculation.
Previous wording
Net interest expense and net interest spread improved for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. Though our interest expense increased due to a higher average balance of repurchase agreement borrowings at a higher financing rate, additions of higher yielding Agency RMBS to our investment portfolio over the past year increased our interest income for the nine months ended September 30, 2024 by approximately 76% compared to the nine months ended September 30, 2023.
Current wording
Net interest income and net interest spread improved for the three months ended March 31, 2025, compared to the three months ended March 31, 2024 due to the purchases of higher yielding Agency RMBS over the past year. In addition, our financing costs during the three months ended March 31, 2025 declined approximately 95 basis points compared to the three months ended March 31, 2024, due primarily to the interest rate cuts implemented by the FOMC since March 31, 2024.
Previous wording
The following provide details on realized and unrealized gains and losses within our investment and interest rate hedging portfolios for the periods indicated:
Current wording
The following tables provide details on realized and unrealized gains and losses within our investment and interest rate hedging portfolios for the periods indicated:
Previous wording
1)Realized and unrealized gains (losses) on TBA securities are recorded within “gain on derivative instruments, net” on the Company’s consolidated statements of comprehensive income.
Current wording
1)Realized and unrealized gains (losses) on TBA securities are recorded within “gain (loss) on derivative instruments, net” on the Company’s consolidated statements of comprehensive income.
Previous wording
In evaluating the Company’s financial and operating performance, management considers book value per common share, total economic return (loss) to common shareholders, and other operating results presented in accordance with GAAP as well as earnings available for distribution (“EAD”) to common shareholders (including per common share), a non-GAAP financial measure. Management believes this non-GAAP financial measure is useful to investors because management uses it as a measure of the investment portfolio’s return based on the effective yield of its investments, net of financing costs and 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 EAD 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. Management also includes periodic interest benefit/cost from its interest rate swaps, which are included in "gain (loss) on derivatives instruments, net", in EAD because interest rate swaps are used by the Company to economically hedge the impact of changing interest rates on its borrowing costs from repurchase agreements, and including periodic interest benefit/cost from interest rate swaps is a helpful indicator of the Company’s total financing cost in addition to GAAP interest expense. However, non-GAAP financial measures are not a substitute for GAAP earnings and may not be comparable to similarly titled
Current wording
In evaluating the Company’s financial and operating performance, management considers book value per common share, total economic return (loss) to common shareholders, and other operating results presented in accordance with GAAP as well as certain non-GAAP financial measures, which include earnings available for distribution (“EAD”) to common shareholders (including per common share) and economic net interest income and the related metric economic 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.
Previous wording
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.
Current wording
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, its distribution requirements in accordance with the Tax Code or total economic return.
Previous wording
Reconciliations of EAD to common shareholders to certain GAAP financial measures are provided below.
Current wording
Reconciliations of each non-GAAP measure to certain GAAP financial measures are provided below.
Previous wording
(3)TBA drop income (loss) is calculated by multiplying the notional amount of the TBA dollar roll positions by the difference in price between two TBA securities with the same terms but different settlement dates.
Current wording
(3)TBA drop income is calculated by multiplying the notional amount of the TBA dollar roll positions by the difference in price between two TBA securities with the same terms but different settlement dates.
Previous wording
Our primary sources of liquidity include borrowings under repurchase arrangements and monthly principal and interest payments we receive on our investments. Additional sources may also include proceeds from the sale of investments, equity offerings, and net payments received from counterparties for derivative instruments. We use our liquidity to purchase investments, to pay amounts due on our repurchase agreement borrowings, and to pay our operating expenses and dividends on our common and preferred stock. We also use our liquidity to meet margin requirements for our repurchase agreements and derivative transactions, including TBA contracts, under the terms of the related agreements. We may also periodically use liquidity to repurchase shares of the Company’s stock.
Current wording
Our primary sources of liquidity include borrowings under repurchase arrangements and monthly principal and interest payments we receive on our investments. Additional sources may include proceeds from the sale of investments, equity offerings, and net payments received from counterparties for derivative instruments. We use our liquidity to purchase investments, to pay amounts due on our repurchase agreement borrowings, and to pay our operating expenses and dividends on our common and preferred stock. We also use our liquidity to meet margin requirements for our repurchase agreements and derivative transactions, including TBA contracts, under the terms of the related agreements. We may also periodically use liquidity to repurchase shares of the Company’s stock.
Previous wording
During the nine months ended September 30, 2024, we issued 10,500,000 shares of common stock through a public offering, resulting in proceeds of $124.5 million, net of issuance costs. We also issued 11,559,359 shares of common stock through our ATM program, resulting in proceeds of $143.2 million, net of broker commissions and fees. We partially deployed these proceeds into purchases of specified pools of higher coupon Agency RMBS. We are reserving a portion of the proceeds in order to navigate through potential volatility and to deploy into additional investments as spreads widen during the remainder of 2024.
Current wording
During the three months ended March 31, 2025, we issued 17,604,999 shares of common stock through our ATM program, resulting in proceeds of $239.7 million, net of broker commissions and fees. We partially deployed these proceeds into Agency RMBS and to post initial margin requirements related to a larger hedge portfolio including interest rate swaps, swaptions, and U.S. Treasury futures.
Previous wording
consolidated balance sheet. We also include in our measure of liquidity the fair value of noncash collateral pledged to us by our counterparties, which we typically receive when the fair value of our pledged collateral exceeds our current margin requirement. Though the fair value of this noncash collateral is not recorded on our consolidated balance sheet, we include this amount in our liquidity measure because we have the right to repledge the noncash collateral pledged to us by our counterparties. Our liquidity as of September 30, 2024 was $708.7 million, which consisted of unrestricted cash of $268.3 million, unencumbered Agency MBS with a fair value of $392.9 million, margin receivable on derivatives of $26.0 million, and noncash collateral received from our counterparties, which consisted of U.S. Treasuries and Agency RMBS, with a fair value of $21.4 million. Our liquidity as of December 31, 2023 was $453.6 million.
Current wording
Our liquidity fluctuates based on our investment activities, leverage, capital raising activities, and changes in the fair value of our investments and derivative instruments. Our measurement of liquidity includes unrestricted cash and cash equivalents and unencumbered Agency MBS, which are recognized as assets on our consolidated balance sheet. In our measure of liquidity, we also include the fair value of noncash collateral pledged to us by our counterparties, which we typically receive when the fair value of our pledged collateral exceeds our current margin requirement. Our liquidity as of March 31, 2025, was $789.9 million, which consisted of unrestricted cash of $327.4 million, unencumbered Agency MBS with a fair value of $450.3 million, and noncash collateral pledged by our counterparties of $12.2 million. Our liquidity as of December 31, 2024, was $658.3 million.
Previous wording
We continuously monitor our liquidity, especially with potential risk events on the horizon, such as uncertainty regarding Federal Reserve policy decisions, the size of the Federal Reserve’s balance sheet, quantitative tightening or easing measures, frequent potential for a government shutdown, and the impact on global markets stemming from global central bank policies. We are also monitoring the wars between Russia and Ukraine and between Israel and Hamas, and the broadening of conflict across the Middle East. We continuously assess the adequacy of our liquidity under various scenarios based on changes in the fair value of our investments and derivative instruments due to market factors such as changes in the absolute level of interest rates and the shape of the yield curve, credit spreads, lender haircuts, and prepayment speeds, which in turn have an impact on derivative margin requirements. In performing these analyses, we will also consider the current state of the fixed income markets and the repurchase agreement markets in order to determine if market forces such as supply-demand imbalances or structural changes to these markets could change the liquidity of MBS or the availability of financing. We also communicate frequently with our counterparties. We have not experienced any material changes in the terms of our repurchase agreements with our counterparties, and they have not indicated to us any concerns regarding access to liquidity.
Current wording
We continuously monitor our liquidity, especially with potential risk events on the horizon, such as tariff changes, potential GSE transition, uncertainty regarding Federal Reserve policy decisions, the size of the Federal Reserve’s balance sheet, quantitative tightening or easing measures, the frequent potential for a government shutdown, and the impact on global markets stemming from global central bank policies. We are also monitoring the wars and conflicts around the globe. We continuously assess the adequacy of our liquidity under various scenarios based on changes in the fair value of our investments and derivative instruments due to market factors such as changes in the absolute level of interest rates and the shape of the yield curve, credit spreads, lender haircuts, and prepayment speeds, which in turn have an impact on margin requirements. In performing these analyses, we will also consider the current state of the fixed-income markets and the repurchase agreement markets to determine if market forces such as supply-demand imbalances or structural changes to these markets could change the liquidity of MBS or the availability of financing. We have not experienced any material changes in the terms of our repurchase agreements with our counterparties, and they have not indicated to us any concerns regarding access to liquidity.
Previous wording
Our perception of the liquidity of our investments and market conditions significantly influences our targeted leverage. In general, our leverage will increase if we view the risk-reward opportunity of higher leverage on our capital outweighs the risk to our liquidity and book value. Our leverage, which we calculate using total liabilities plus the cost basis of TBA long positions, was 7.6 times shareholders’ equity as of September 30, 2024. We include the cost basis of our TBA securities in evaluating our leverage because it is possible under certain market conditions that it may be uneconomical for us to roll a TBA long position into future months, which may result in us having to take physical delivery of the underlying securities and use cash or other financing sources to fund our total purchase commitment. Leverage based on repurchase agreement amounts outstanding was 5.6 times shareholders’ equity as of September 30, 2024.
Current wording
Our perception of the liquidity of our investments and market conditions significantly influences our targeted leverage. In general, our leverage will increase if we view the risk-reward opportunity of higher leverage on our capital outweighs the risk to our liquidity and book value. Our leverage, which we calculate using total liabilities plus the cost basis of TBA long positions, was 7.4 times shareholders’ equity as of March 31, 2025. We include 100% of the cost basis of our TBA securities in evaluating our leverage because it is possible under certain market conditions that it may be uneconomical for us to roll a TBA long position into future months, which may result in us having to take physical delivery of the underlying securities and use cash or other financing sources to fund our total purchase commitment.
Previous wording
Our repurchase agreement borrowings are uncommitted with terms renewable at the discretion of our lenders and generally have original terms to maturity of overnight to six months, though in some instances we may enter into longer-dated maturities depending on market conditions. We seek to maintain unused capacity under our existing repurchase agreement credit lines with multiple counterparties, which helps protect us in the event of a counterparty's failure to renew existing repurchase agreements. As part of our continuous evaluation of counterparty risk, we maintain our highest counterparty exposures with broker dealer subsidiaries of regulated financial institutions or primary dealers.
Current wording
Leverage based solely on repurchase agreement amounts outstanding was 5.2 times shareholders’ equity as of March 31, 2025. Our repurchase agreement borrowings are uncommitted with terms renewable at the discretion of our lenders and generally have original terms to maturity of overnight to six months, though in some instances, we may enter into longer-dated maturities depending on market conditions. We seek to maintain unused capacity under our existing repurchase agreement credit lines with multiple counterparties, which helps protect us in the event of a counterparty's failure to renew existing repurchase agreements. As part of our continuous evaluation of counterparty risk, we maintain our highest counterparty exposures with broker-dealer subsidiaries of regulated financial institutions or primary dealers.
Previous wording
The amount outstanding for our repurchase agreement borrowings will typically fluctuate in any given period as it is dependent upon a number of factors, but particularly the extent to which we are active in buying and selling securities, including the volume of activity in TBA dollar roll transactions versus buying specified pools. The following table presents information regarding the balances of our repurchase agreement borrowings as of and for the periods indicated:
Current wording
The amount outstanding for our repurchase agreement borrowings will typically fluctuate in any given period as it is dependent upon several factors, but particularly the extent to which we are active in buying and selling securities, including the volume of activity in TBA dollar roll transactions versus buying specified pools. The following table presents information regarding the balances of our repurchase agreement borrowings as of and for the periods indicated:
Previous wording
For our repurchase agreement borrowings, we are required to post and maintain margin to the lender (i.e., collateral in excess of the repurchase agreement borrowing) in order to support the amount of the financing. This excess collateral is often referred to as a “haircut” and is intended to provide the lender protection against fluctuations in fair value of the collateral and/or the failure by us to repay the borrowing at maturity. Lenders have the right to change haircut requirements at maturity of the repurchase agreement and may change their haircuts based on market conditions and the perceived riskiness of the collateral pledged. If the fair value of the collateral falls below the amount required by the lender, the lender has the right to demand additional margin, or collateral. These demands are referred to as “margin calls,” and if we fail to meet any margin call, our lenders have the right to terminate the repurchase agreement and sell any collateral pledged. The weighted average haircut for our borrowings as of September 30, 2024 was consistent with prior periods, which has typically averaged less than 5% for borrowings collateralized with Agency RMBS and CMBS and between 10-14% for borrowings collateralized with CMBS IO.
Current wording
For our repurchase agreement borrowings, we are required to post and maintain margin to the lender (i.e., collateral in excess of the repurchase agreement borrowing) in order to support the amount of the financing. This excess collateral is often referred to as a “haircut” and is intended to provide the lender protection against fluctuations in the fair value of the collateral and/or the failure by us to repay the borrowing at maturity. Lenders have the right to change haircut requirements at maturity of the repurchase agreement and may change their haircuts based on market conditions and the perceived riskiness of the collateral pledged. If the fair value of the collateral falls below the amount required by the lender, the lender has the right to demand additional margin or collateral. These demands are referred to as “margin calls,” and if we fail to meet any margin call, our lenders have the right to terminate the repurchase agreement and sell any collateral pledged. The weighted average haircut for our borrowings as of March 31, 2025, was consistent with prior periods, typically averaging less than 5% for borrowings collateralized with Agency RMBS and CMBS and between 10-14% for borrowings collateralized with CMBS IO.
Previous wording
The collateral we post in excess of our repurchase agreement borrowing with any counterparty is also typically referred to by us as “equity at risk,” which represents the potential loss to the Company if the counterparty is unable or unwilling to return collateral securing the repurchase agreement borrowing at its maturity. The counterparties with whom we have the greatest amounts of equity at risk may vary significantly during any given period due to the short-term and generally uncommitted nature of the repurchase agreement borrowings. As of September 30, 2024, we had amounts outstanding under 28 different repurchase agreements and did not have more than 10% of equity at risk with any counterparty or group of related counterparties.
Current wording
The collateral we post in excess of our repurchase agreement borrowing with any counterparty is also typically referred to by us as “equity at risk,” which represents the potential loss to the Company if the counterparty is unable or unwilling to return collateral securing the repurchase agreement borrowing at its maturity. The counterparties with whom we have the greatest amounts of equity at risk may vary significantly during any given period due to the short-term and uncommitted nature of the repurchase agreement borrowings. As of March 31, 2025, we had amounts outstanding under 27 different repurchase agreements and did not have more than 10% of equity at risk with any counterparty or group of related counterparties.
Previous wording
We have various financial and operating covenants in certain of our repurchase agreements, which we monitor and evaluate on an ongoing basis for compliance as well as for impacts these customary covenants may have on our operating and financing flexibility. Currently, we do not believe we are subject to any covenants that materially restrict our financing flexibility. We were in full compliance with our debt covenants as of September 30, 2024, and we are not aware of circumstances which could potentially result in our non-compliance in the foreseeable future.
Current wording
We have various financial and operating covenants in certain of our repurchase agreements, which we monitor and evaluate on an ongoing basis for compliance as well as for impacts these customary covenants may have on our operating and financing flexibility. We do not believe we are subject to any covenants that materially restrict our financing flexibility. We were in full compliance with our debt covenants as of March 31, 2025, and we are not aware of circumstances that could potentially result in our non-compliance in the near future.
Previous wording
the minimum margin requirement. The collateral posted as margin by us is typically in the form of cash. As of September 30, 2024, we had cash collateral posted to our counterparties of $137.3 million under these agreements.
Current wording
the minimum margin requirement. The collateral posted as margin by us is typically in cash. As of March 31, 2025, we had cash collateral posted to our counterparties of $260.6 million under these agreements.
Previous wording
As a REIT, we are required to distribute to our shareholders amounts equal to at least 90% of our REIT taxable income for each taxable year after certain deductions. When declaring dividends, our Board of Directors considers the Company’s taxable income, the REIT distribution requirements of the Tax Code, financial performance measures, and maintaining compliance with dividend requirements of the Series C Preferred Stock, along with other factors that the Board of Directors may deem relevant from time to time.
Current wording
We set our dividend based on many factors, including our view on long-term returns, yield on comparable investments, liquidity and market risk, and levels of taxable income. Among these factors, we focus on economic returns and taxable income within the context of the distribution requirements. As a REIT, we are required to distribute to our shareholders amounts equal to at least 90% of our REIT taxable income for each taxable year after certain deductions, including the separate dividend requirements of the Series C Preferred Stock.
Previous wording
We designate the majority of our derivative instruments as interest rate hedges for tax purposes. Realized gains (losses) resulting from the difference in fair value and the amount of cash received or paid upon termination or maturity of derivative instruments are included in GAAP earnings in the same reporting period in which the derivative instrument matures or is terminated by the Company but are generally not recognized in REIT taxable income until future periods. The following table provides the projected amortization of our net deferred tax hedge gains as of September 30, 2024 that will be recognized as taxable income over the periods indicated, though recognition of deferred tax hedge gains and losses may be accelerated if the underlying instrument originally hedged is terminated or paid off:
Current wording
We designate certain derivative instruments as interest rate hedges for tax purposes. Realized gains (losses) resulting from the difference in fair value and the amount of cash received or paid upon termination or maturity of designated derivative instruments are included in GAAP earnings in the same reporting period in which the derivative instrument matures or is terminated by the Company but are generally not recognized in REIT taxable income until future periods. Non-designated derivative instruments are included in GAAP earning and REIT taxable income in the same period the derivative instrument matures or is terminated by the Company. The table below
Previous wording
As of September 30, 2024, we also had $583.6 million in capital loss carryforwards, the majority of which expire before 2028, and NOL carryforwards of $8.1 million, of which $4.6 million will expire on December 31, 2024 and the remainder in 2025. Due to these amounts and other temporary and permanent differences between GAAP net income and REIT taxable income coupled with the degree of uncertainty about the trajectory of interest rates, we cannot reasonably estimate how much the deferred tax hedge gains to be recognized will impact our dividend declarations during 2024 or in any given year.
Current wording
As of March 31, 2025, we also had $566.3 million in capital loss carryforwards, the majority of which will expire by December 31, 2028. Due to these amounts and other temporary and permanent differences between GAAP net income and REIT taxable income, coupled with the degree of uncertainty about the trajectory of interest rates, we cannot reasonably estimate how much the deferred tax hedge gains to be recognized will impact our dividend declarations during 2025 or in any given year.
Previous wording
We generally fund dividend distributions through portfolio cash flows. If we make dividend distributions in excess of our portfolio cash flows during the period, whether for purposes of meeting our REIT distribution requirements or other reasons, those distributions are generally funded either through our existing cash balances or through the return of principal from our investments (either through repayment or sale). Please refer to "Operating and Regulatory Structure" within Part I, Item 1, "Business" as well as Part I, Item 1A, “Risk Factors” of our 2023 Form 10-K for additional important information regarding dividends declared on our taxable income.
Current wording
We generally fund dividend distributions through portfolio cash flows. If we make dividend distributions in excess of our portfolio cash flows during the period, whether for purposes of meeting our REIT distribution requirements or other reasons, those distributions are generally funded either through our existing cash balances or through the return of principal from our investments (either through repayment or sale). Please refer to "Operating and Regulatory Structure" within Part I, Item 1, "Business," as well as Part I, Item 1A, “Risk Factors” of this Form 10-K for additional important information regarding dividends declared on our taxable income.
Previous wording
The discussion and analysis of our financial condition and results of operations are based in large part upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of our consolidated financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. We base these estimates and judgments on historical experience and assumptions believed to be reasonable under current facts and circumstances. Actual results, however, may differ from the estimated amounts we have recorded.
Current wording
The discussion and analysis of our financial condition and results of operations are based in large part upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of our consolidated financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. We base these estimates and judgments on historical experience and assumptions believed to be reasonable under current facts and circumstances. Actual results may differ from the estimated amounts we have recorded.
Previous wording
Critical accounting estimates are defined as those that require management's most difficult, subjective, or complex judgments, and which may result in materially different results under different assumptions and conditions. Our critical accounting estimates are discussed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2023 Form 10-K under “Critical Accounting Estimates.” There have been no significant changes in our critical accounting estimates during the three and nine months ended September 30, 2024.
Current wording
Critical accounting estimates are defined as those that require management's most difficult, subjective, or complex judgments, and which may result in materially different results under different assumptions and conditions. Our critical accounting estimates are discussed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2024 Form 10-K under “Critical Accounting Estimates.” There have been no significant changes in our critical accounting estimates during the three months ended March 31, 2025
Previous wording
Certain written statements in this Quarterly Report on Form 10-Q that are not historical facts constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Statements in this report addressing expectations, assumptions, beliefs, projections, future plans and strategies, future events, developments that we expect or anticipate will occur in the future, and future operating results, capital management, and dividend policy are forward-looking statements. Forward-looking statements are based upon management’s beliefs, assumptions, and expectations as of the date of this report regarding future events and operating performance, taking into account all information currently available to us, and are applicable only as of the date of this report. Forward-looking statements generally can be identified by use of words such as “believe,” “expect,” “anticipate,” “estimate,” “plan,” “may,” “will,” “intend,” “should,” “could” or similar expressions. We caution readers not to place undue reliance on our forward-looking statements, which are not historical facts and may be based on projections, assumptions, expectations, and anticipated events that do not materialize. Except as required by law, we are not obligated to, and do not intend to, update, or revise any forward-looking statement whether as a result of new information, future events, or otherwise.
Current wording
Certain written statements in this Quarterly Report on Form 10-Q that are not historical facts constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Statements in this report addressing expectations, assumptions, beliefs, projections, future plans and strategies, future events, developments that we expect or anticipate will occur in the future, and future operating results, capital management, and dividend policy are forward-looking statements. Forward-looking statements are based upon management’s beliefs, assumptions, and expectations as of the date of this report regarding future events and operating performance, considering all information currently available to us, and are applicable only as of the date of this report. Forward-looking statements generally can be identified by the use of words such as “believe,” “expect,” “anticipate,” “estimate,” “plan,” “may,” “will,” “intend,” “should,” “could,” or similar expressions. We caution readers not to place undue reliance on our forward-looking statements, which are not historical facts and may be based on projections, assumptions, expectations, and anticipated events that do not materialize. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise.
Previous wording
•Our business and investment strategy including our ability to generate acceptable risk-adjusted returns and our target investment allocations, and our views on the future performance of MBS and other investments;
Current wording
•Our business and investment strategy, including our ability to generate acceptable risk-adjusted returns, our target investment allocations, and our views on the future performance of MBS and other investments;
Previous wording
•The impact of recent bank failures, potential new regulations and the potential for other bank failures this year;
Current wording
•The impact of bank failures, potential new regulations, and the potential for other bank failures this year;
Previous wording
•The impact of debt ceiling negotiations on interest rates, spreads, the U.S. Treasury market as well as the impact more broadly on fixed income and equity markets:
Current wording
•The impact of debt ceiling negotiations on interest rates, spreads, the U.S. Treasury market and the impact more broadly on fixed income and equity markets:
Previous wording
•The financial position and credit worthiness of the depository institutions in which the Company’s MBS and cash deposits are held;
Current wording
•The financial position and creditworthiness of the depository institutions in which the Company’s MBS and cash deposits are held;
Previous wording
•Our reliance on a single service provider for our trading, portfolio management, risk reporting and accounting services systems;
Current wording
•Our reliance on a single service provider for our trading, portfolio management, and risk reporting systems;
Previous wording
•Possible future effects of the COVID-19 pandemic or any global health crisis.
Current wording
•Possible future effects of any global health crisis.
Showing the first 40 of 42 pairs. Open the source sections for the rest.
Rearranged current paragraphs (4)
Current report — wording carried from elsewhere
Net Interest Income for the Three Months Ended March 31, 2025 Compared to the Three Months Ended December 31, 2024
Current report — wording carried from elsewhere
Net Interest Income for the Three Months Ended March 31, 2025 Compared to the Three Months Ended March 31, 2024
Current report — wording carried from elsewhere
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 EAD 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, drop income/loss doesnot represent the total realized gain/loss from the Company’s investments in TBA securities.
Current report — wording carried from elsewhere
Management also includes net periodic interest from its interest rate swaps, which is included in "gain (loss) on derivatives instruments, net," in EAD and economic net interest income because interest rate swaps are used by the Company to economically hedge the impact of changing interest rates on its borrowing costs from repurchase agreements, and including net periodic interest from interest rate swaps is a helpful indicator of the Company’s total financing cost in addition to GAAP interest expense.
Rearranged previous paragraphs (5)
Previous report — wording carried elsewhere
Three Months Ended September 30, 2024 Compared to the Three Months Ended June 30, 2024
Previous report — wording carried elsewhere
Gains (Losses) on Investments and Derivative Instruments
Previous report — wording carried elsewhere
The following provide details on realized and unrealized gains and losses within our investment and interest rate hedging portfolios for the periods indicated:
Previous report — wording carried elsewhere
1)Realized and unrealized gains (losses) on TBA securities are recorded within “gain on derivative instruments, net” on the Company’s consolidated statements of comprehensive income.
Previous report — wording carried elsewhere
Our liquidity fluctuates based on our investment activities, our leverage, capital raising activities, and changes in the fair value of our investments and derivative instruments. Our measurement of liquidity includes unrestricted cash and cash equivalents and unencumbered Agency MBS, which are recognized as assets on our