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Dynex Capital

(DX) - Get Report

shares opened sharply lower Thursday as a series of bad investments caused the mortgage real estate investment trust to lose 15% of its book value.

"With only about 1/3 of capital allocated to agency RMBS we expected Dynex to escape much of the book value pain that hit mREITs in 2Q. We were wrong," wrote Keefe Bruyette & Woods analyst Michael Widner.

Dynex shares were down 9.16% to $8.73 in early trades Thursday.

Dynex posted core earnings of 30 cents per share after the close Wednesday, roughly in line with analyst estimates. Still, the book value decline proved more significant as shares closed at 1.07 times second-quarter book, while Dynex's peers are mostly valued in the low '90s of book, according to Widner.

In hindsight, Dynex's biggest mistake was to deploy proceeds from a mid-April preferred shares offering into adjustable rate mortgages that are fixed for 10 years and then adjust to a market rate once a year thereafter. Dynex bought the securities just as valuations were peaking, according to Widner.

Other problems for Dynex in the quarter were that assets that were intended to perform as credit assets proved more sensitive to interest rates than the company had projected, Widner wrote. He also argues Dynex's hedges "were too short for portfolio duration extension."


Written by Dan Freed in New York


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