Dynex Capital: A Lower Risk Mortgage REIT (DX)

Dynex Capital (ticker: DX) is a real estate investment trust (REIT), which invests in mortgage securities and loans on a leveraged basis. It invests in a diversified portfolio of:

–          Mortgage-backed securities (MBS) issued or guaranteed by a federally chartered corporation such as Fannie Mae and Freddie Mac

–          Mortgages backed by an agency of the US government (Ginnie Mae)

–          Commercial mortgage backed securities (CMBS)

–          Non-Agency residential mortgage-backed securities

–          Securitized residential and commercial loans

Dynex is paying a quarterly $0.25 dividend and has a current yield of 9.43%.

Dynex finances its investments using a combination of repurchase agreements, securitization financing and equity capital.

DX uses an interesting hybrid multi-strategy approach. They construct a portfolio of high grade securities with minimal default risk and shorter-term duration.

Strategy 1- Agency bonds: The company invests in Hybrid Agency ARMS which are MBS collateralized by hybrid adjustable mortgage loans. These loans have a fixed-rate of interest for a specified period (typically three to ten years) and then reset their interest rates at least annually to an increment over a specified interest rate (such as CMT or LIBOR). They also own some Agency ARMS and to a lesser extent fixed-rate Agency MBS.

Strategy 2- Non Agency bonds: High rated CMBS mainly rated AAA.

If interest rates start to increase, DX should hold up better than other mortgage REITs like NLY which are more leveraged and have higher duration. CIM is another mortgage REIT with low duration, but CIM has much higher credit risk than DX and owns many lower rated securities.  

Another reason I like DX, when compared to other mortgage REITS like NLY or CIM, is that DX is smaller, more nimble and can cherry pick among smaller less liquid mis-priced securities.

DX has had steady insider buying and the executive compensation expense is an order of magnitude less than for NLY. It also has good sponsorship. Art Lipson’s Western Investment LLC is a stockholder. Other respected investors in DX include Renaissance Technologies and David Shaw & Co. The Dynex CEO, Thomas Akin, owns over 800,000 shares and has been a periodic buyer.

The last reported book value is 9.80. At its current price of 1.08 times book value, DX is reasonably valued. Below book value, it is an excellent buy. Dynex management has recently reduced overall leverage to 3.8 shareholders’ equity as of September 30, 2010 from 4.7 times as of December 31, 2009.

Full disclosure: Long Dynex Capital.


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