On Friday, Compass Point initiated coverage on shares of Dynex Capital (NYSE:DX), a mortgage real estate investment trust (mREIT), with a Buy rating and set a price target of $14.50. The firm's analysis highlights Dynex Capital's agility due to its smaller size, with a portfolio approximately valued at $7 billion. This nimbleness has allowed the company to transition its investment portfolio from TBAs to higher coupon specified pools throughout 2023, which resulted in the highest portfolio weighted average coupon (WAC) at the end of the year.
The firm also noted Dynex Capital's strategic shift in its hedging approach, moving from pay-fixed interest rate swaps to embracing Treasury futures. This move is seen as a proactive strategy to manage higher borrowing costs and potential declines in portfolio valuations, especially given the inverted yield curve situation. The utilization of short positions in U.S. Treasury 10-year bonds to finance agency mortgage-backed securities (MBS) and mitigate market volatility was characterized as a "gutsy move" due to the inherent basis risk, yet it has proven effective so far.
Despite the potential negative impact on valuation from Dynex Capital's routine tapping of its at-the-market (ATM) offering to issue common equity, Compass Point's outlook remains positive. The firm believes that Dynex Capital's strategic maneuvers could enable the company's book value per share (BVPS) to recover to its December 31, 2022, level of $14.73. This figure had declined to $13.31 by the end of 2023 due to adverse market conditions.
The price target of $14.50 represents a discount to the projected forward BVPS. This discount reflects both the company's stated intention to issue common equity slightly below book value and the risks associated with its hedging strategy. Compass Point's coverage initiation and price target suggest confidence in Dynex Capital's ability to navigate the complexities of the mortgage REIT market.
InvestingPro Insights
As Compass Point launches coverage on Dynex Capital with a Buy rating, a glance at the latest metrics from InvestingPro provides a deeper financial perspective on the company. With a market capitalization of approximately $693.59 million, Dynex Capital presents a unique case in the mREIT sector. Notably, the company's commitment to rewarding shareholders is evident through its substantial dividend yield of 12.87%, a testament to its 17 years of consistent dividend payments. This aligns with Compass Point's positive outlook on the company's strategic financial maneuvers.
Despite a challenging revenue growth environment in the last twelve months, with revenue shrinking by nearly 85%, Dynex Capital has maintained a gross profit margin of 100%. This indicates that while the top-line growth has been under pressure, the cost of generating revenue remains well managed. However, investors should be aware of the company's negative P/E ratio of -46.47, reflecting that it has not been profitable over the last twelve months. This is further underscored by the analyst's anticipation that the company will not be profitable this year, reinforcing the importance of Dynex Capital's hedging strategies and portfolio adjustments.
For readers seeking to delve deeper into the financial health and future prospects of Dynex Capital, additional InvestingPro Tips are available. These tips provide insights into the company's financial stability and market position, such as the concern that short-term obligations exceed liquid assets, which could be crucial for investors considering the inherent risks in the mREIT sector. To access these insights and more, consider using the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription. With 5 more InvestingPro Tips available, investors can gain a comprehensive understanding of Dynex Capital's financial landscape.
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