Dynex Capital

DX Details

Dynex Capital, Inc. (NYSE: DX) is a real estate investment trust, or REIT, which invests in mortgage loans and securities on a leveraged basis.

Quarter Performance (Q3FY21 Ended 30 September 2021)

• The company’s comprehensive income to common shareholders for the third quarter period stood at $2.97 million, or $0.09 per common share, compared to loss of $(31.4) million, or $(0.98) per common share in Q2FY21.
• Net interest income for the third quarter stood at $14.394 million, benefitting from a higher average balance of interest-earning assets due to Agency RMBS purchases late in the Q2FY21. This increase in net interest income was partially offset by an increase in general and administrative expenses.
• There was an increase in Earnings available for distribution to $0.54 per common share in Q3FY21, an increase of $0.03 over prior quarter.

Source: Company Reports, Analysis by Kalkine Group

Outlook:

The company is expecting an uneven transition of the global economy and central bank strategies beyond the immediate impacts of the pandemic, creating new risks and new opportunities. However, these events can be navigated with the long experience which the company management has garnered for decades. Moreover, the company believes that due to high level of liquidity and low portfolio leverage, it is in a strong position to continue to generate returns more than its dividend and to deploy capital accretively.

Key Risks:

The company is susceptible to certain risks such as credit, interest rate volatility, liquidity, and market value risk.

Valuation Methodology: Price to Cash Flow Multiple Based Relative Valuation (illustrative)

Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation:

The company’s stock has delivered a negative return of 8.16% and 3.68% in the period of six months and one year, respectively. It is currently trading below the average of its 52-week price range of $15.3200-$20.5075. The stock has been valued using a Price to Cash Flow multiple-based illustrative relative valuation and arrived at a target price with a downside of low single-digit (in percentage terms). The company can trade at a slight premium to its peers’ median Price to Cash Flow multiple, considering the improved performance in Q3FY21 as compared to previous quarter. Considering the aforesaid facts, we recommend “Watch” rating on the stock the current market price of US$17.000 per share as on 24 December 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary:

One-Year Technical Price Chart (as on December 24, 2021). Source: REFINITIV, Analysis by Kalkine Group

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices.

Two Harbors Investment Corp.

TWO Details

Two Harbors Investment Corp. (NYSE: TWO) is an internally managed real estate investment trust, or REIT, focused on investing in, financing, and managing Agency residential mortgage-backed securities (Agency RMBS), mortgage servicing rights (MSR), and other financial assets, which we collectively refer to as our target assets.

Quarterly Performance (Q3FY21 Ended 30 September 2021)

• The company’s book value for the three months period stood at $6.40 per common share, representing a 2.3% quarterly return on book value.
• Comprehensive Income for the third quarter stood at $45.2 million, representing an annualized return on average common equity of 9.1%.
• The Board of Directors declared third quarter common stock dividend of $0.17 per share.

Source: Company Reports, Analysis by Kalkine Group

Outlook:

As per the reports, Federal Reserve is expected to reduce its monthly purchases of U.S. Treasury securities by $10 billion and Agency RMBS by $5 billion beginning in November and expects to complete the process by mid-2022. Demand for RMBS from banks is expected to continue given tepid loan growth and ample deposit balances.

MSR paired with TBA continues to offer low- to mid-teen returns and remains our primary focus for deploying capital. High coupon specified pool spreads tightened in the quarter, bringing expected returns to mid- to high-single digits.

Risk Positioning:

The company’s interest rate and curve exposure remain low and in line with historical positioning. For an instantaneous parallel shift in rates, the estimated change in book value would be -1.2% for a 25-bps decline, and -0.7% for a 25-bps increase.

Valuation Methodology: Price to Book Value Multiple Based Relative Valuation (illustrative)

 Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation:

The company’s stock has delivered a negative return of 21.65% and 9.37% in the period of six months and one year, respectively. It is currently trading below the average of its 52-week price range of $5.430-$8.150. The stock has been valued using a Price to Book Value multiple-based illustrative relative valuation and arrived at a target price with a upside single-digit (in percentage terms). The company can trade at a slight premium to its peers’ median Price to Book Value multiple, considering the improved performance in Q3FY21 as compared to previous quarter.

Considering the aforesaid facts, we recommend “Watch” rating on the stock the current market price of US$5.90 per share as on 29 December 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached. 

Technical Analysis Summary:

One-Year Technical Price Chart (as on December 24, 2021). Source: REFINITIV, Analysis by Kalkine Group

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices.

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