Dynex Cap (NYSE:DX) held its first-quarter earnings conference call on Monday. Below is the complete transcript from the call.

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Summary

Dynex Capital Inc reported a book value of $12.60 per share, with an economic return of negative 2.5% for the quarter, due to a decrease in book value and dividend payouts.

The company increased its total capital base by 18% during the quarter, deploying $442 million as MBS spreads widened, and improved book value post-quarter as spreads tightened.

Management emphasized strategic growth in capital markets, focusing on long-term shareholder value creation through disciplined portfolio and risk management.

Net interest income increased to $0.40 per share, driven by declining financing costs following Federal Reserve rate cuts, with expectations for expenses to normalize in the upcoming quarters.

The company is leveraging its scale as the third-largest agency-focused mortgage REIT, aiming for tighter mortgage spreads and highlighting its capacity for opportunistic capital allocation amid market volatility.

Dynex Capital Inc is optimistic about future spread tightening, supported by GSE mortgage buying and a supportive policy environment, and remains focused on delivering stable valuations and solid returns.

Full Transcript

Allison Griffin (Vice President of Investor Relations)

Thank you, operator and good morning everyone. The press release associated with today's call was issued and filed with the SEC this morning, April 20th. You may view the press release on the homepage of the Dynex website at dynexcapital.com as well as on the SEC's website at sec.gov before we begin, we wish to remind you that this conference call may contain forward looking statements within the meaning of the Private Securities Litigation Reform act of 1995. The words believe, expect, forecast, anticipate, estimate, project, plan and similar expressions identified forward looking statements that are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. The company's actual results and timing of certain events could differ considerably from those projected and or contemplated by those forward looking statements as a result of unforeseen external factors or risks. For additional information on these factors or risks, please refer to our disclosures filed with the SEC, which may be found on the Dynex website under Investor as well as on the SEC's website. This conference call is being broadcast live over the Internet with a streaming slide presentation which can be found through the webcast link on the website. The slide presentation may also be referenced on the Investors page. Joining me on the call today are Smriti Papano, Co Chief Executive Officer and President, Byron Boston, Chairman and Co Chief Executive Officer Mike Sartori, Chief Financial Officer and TJ Connolly, Chief Investment Officer. I now have the pleasure to turn the call over to Smriti.

Smriti Papano (Co Chief Executive Officer and President)

Thank you, Allison and good morning everyone. We continue to build our company at the intersection of two powerful demographic tailwinds, the need for income and the need for housing. Dynex continues to deliver differentiated top tier performance. Our track record now combined with the significant growth in our capital base over the last 15 months, propels value creation by delivering scale and resilience to our shareholders. The team is focused on methodically building durability across investments, finance, technology, risk and operations. Growing an enduring platform reinforces the value of our business meaningfully beyond the valuation of our balance sheet, further driving long term shareholder returns. Turning now to the global macroeconomic environment, government policy is squarely in the driver's seat, defining and driving outcomes. Scenario planning for us has evolved to mapping policy pathways, what policymakers could do next, how markets may transmit those decisions and how we position ourselves for those moves. More than ever, mindset and preparedness are the key factors for successful decision making because the policy paths aren't always foreseeable. Flexibility and openness in our team's mindset, something we actively teach and practice, are now essential parts of navigating the investment landscape in the first quarter we added value by executing our plan. We managed the portfolio through a short burst of volatility which we used to opportunistically raise and deploy capital. We grew the total capital base by 18%, deploying the funds during the quarter as MBS spreads widened. Since quarter end, MBS spreads have tightened and book value is higher. Mike and TJ will now review the detailed quarterly results and our outlook.

Mike Sartori (Chief Financial Officer)

Thank you and good morning everyone joining us today! I'd like to begin by welcoming Kaelyn Mauritz who joins Dynex today to lead capital markets and investor relations. Kaelyn brings deep industry experience across both functions and her background will support the continued growth of our capital and investor base while also deepening the engagement with our existing investors. We are excited to add her capabilities to our strong and growing Dynex team. Turning now to our financial results for the quarter, book value ended the quarter at $12.60 per share and economic return was negative 2.5% for the quarter consisting of $0.51 per share of common dividends and an $0.85 per share decrease in book value. We ended the quarter with leverage of 8.6x versus total equity. The majority of the increase was attributable to the growth in our investment portfolio of $6 billion reflecting the deployment of capital raised during the quarter of $442 million. Our liquidity position remained very strong with $1.3 billion in cash and unencumbered securities at the end of the quarter representing over 46% of total equity. We continue to evaluate growth through the lens of market opportunity, investment returns and long term accretion to drive shareholder value. Net interest income for the quarter rose from $0.28 per share to $0.40 per share primarily due to declining financing costs which fell 33 basis points due to the impact of the Federal Reserve's rate cuts in the fourth quarter with respect to expenses G&A increased quarter over quarter driven primarily by onetime items. As we noted in the prior first quarter earnings. We expect overall expenses to normalize in the second quarter with full year expense ratio anticipated to be flat or modestly lower versus year end as we grow our capital base. Importantly, we remain disciplined in managing cost. Our expense structure. With that, I'll turn it over to TJ to provide additional detail on portfolio strategy and the outlook.

TJ Connolly (Chief Investment Officer)

Thanks, Mike. We entered the quarter with policy attention focused squarely on housing affordability and the mortgage market. As the quarter progressed, global events, most notably the war in Ukraine, shifted market focus toward geopolitics and drove a sharp increase in volatility. As markets become more accustomed to that global backdrop, we expect both investors and policymakers to refocus on domestic priorities over the balance of the year, particularly housing and the availability of mortgage credit, a transition we believe could support tighter mortgage spreads over time. Early in the quarter, mortgage markets benefited from a strong technical tailwind. Government policy, long one of our most important inputs, had turned supportive, with policymakers emphasizing GSE mortgage buying to tighten spreads and improve affordability. As volatility rose later in the quarter, agency mortgages traded like much riskier assets, creating potential opportunities. Because we operate with strong liquidity, we navigated that volatility constructively and selectively added assets as spreads widened to more attractive levels. Fundamentals and technicals remain highly supportive and we believe the long term path toward tighter equilibrium spreads remains highly likely boosted by policy supply, demand dynamics and yield carry. Net supply is light and demand remains broad and robust across banks, Real Estate Investment Trusts (REITs), money managers and foreign investors. Last quarter I noted that we expected net supply to be $200 billion this year. So far in 2026, it appears supply could come in even lower. Returning to the demand side, the potential bid from the Fannie Mae and Freddie Mac retained portfolios improves downside liquidity, stabilizes spreads during periods of volatility, and supports broader Investor participation. The GSEs have been actively buying mortgages. They are selective on valuation, they regularly retain pools they had previously been selling through their cash window programs and there was some question about potential hedging. They are mostly hedging using interest rate swaps in parallel. Proposed changes tied to the Basel III endgame could lower the capital cost banks face to hold mortgages both in loan and securitized form and to intermediate financing more efficiently. Financing costs are declining amid the light regulatory regime. Refill markets functioned smoothly, spreads were stable and funding was readily available even during periods of heightened volatility. MBS repo spread to sofr remained in the 13 to 17 basis point range, 3 to 5 basis points below last year's averages. Structural improvements in the short term funding markets alongside elevated money market balances, standing Fed backstops and more efficient balance sheet intermediation continue to support financing for high quality mortgage assets like those Dynex owns, we have seen agency MBS spreads to 7 year interest rate swaps begin to trend tighter again after moving from the high 120s to nearly 170 basis points in March. Spreads were in the low 160s at quarter end and moved back toward the 150 area late last week. As geopolitical events evolve and policymakers refocus on domestic issues like housing, we believe spreads can trade towards 120 again with scope for long term equilibrium spreads closer to 100 basis points. Static roes for current coupon mortgages hedged with interest rate swaps were in the mid to high teens and the spread outlook I just outlined provides a further tailwind to forward returns. Moreover, the opportunity to add alpha through security selection is exceptional given the environment. Borrower prepayment behavior is increasingly heterogeneous and technology driven, creating meaningful dispersion across pools. Over the last year we have strategically reduced our exposure to the most callable agency mbs, those in what we call the TVA market, and we continue to do that. In the first quarter, To Be Announced (TBAs) declined from over 16% of our portfolio at year end to approximately 7% at the end of the quarter. The first quarter reflects the strength of the Dynex model along two dimensions. First, disciplined risk management, supported by significant financing liquidity, strategic security selection and a focus on market structure in the context of the macro headlines, allowed us to manage through elevated volatility. Second, that same volatility created the opportunity to raise and deploy capital at more attractive valuations, which we acted on during the quarter.

Byron Boston (Chairman and Co Chief Executive Officer)

Thank you tj. We are now combining our demonstrated ability to earn solid returns with the benefits of scale. Growing our company in this attractive investment environment is an important element of value creation. It distributes fixed costs, deepens liquidity and strengthens the company, especially in periods of volatility like we saw last quarter. Beyond the resilience that a bigger balance sheet provides, larger companies have also typically enjoyed higher, more stable valuations. We have grown rapidly to be the third largest agency focused mortgage REIT and we believe the market has not yet fully recognized the value we are establishing through scale. As we continue to execute our plan with discipline, we are excited about the potential for shareholders to benefit from a more scalable platform, creating meaningful upside over the medium and long term. As we look ahead, we remain centered on opportunistic capital growth alongside disciplined management of our existing portfolio and building operating resilience. Our management team is invested alongside shareholders. Our interests are aligned with yours and we are committed to stewarding your capital with integrity Transparency and care. I will now open the call to questions.

OPERATOR

Thank you. If you are dialed in via the telephone and would like to ask a question, please Signal by pressing STAR1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to properly signal. through our equipment. If you are in the event via the web interface and would like to ask a question, simply type your question in the Ask a question box and click Send. Once again, press Star one to ask a question. We'll go first to Bose George with kbw.

Bose George (Equity Analyst)

Hey everyone. Good morning. Can we get an update on book value quarters to date?

Mike Sartori (Chief Financial Officer)

Yeah. Hi, Bose. Good morning. As of Friday, Friday's closed. The estimated book value was $13.31 share net of the accrued common dividend and that's up 5.6% versus quarter end. Oh, perfect. Great.

Bose George (Equity Analyst)

Thank you. And then you gave your outlook for spreads, you know, potentially going back down to 120 basis points. Is that across the curve or like on a specific point on the curve?

Mike Sartori (Chief Financial Officer)

Yeah, I'm quoting those spreads both against the seven year swap point, which is consistent with the chart we have in our presentation there.

Bose George (Equity Analyst)

Okay, great. Thanks a lot.

OPERATOR

We'll take our next question from Trevor Cranston with Citizens jmp.

Trevor Cranston (Equity Analyst)

Hey, thanks. Good morning. Follow up on the, you know, your commentary about spreads potentially tightening to, you know, 120 or even 100 basis points as a long term equilibrium. Can you talk about your thoughts on how high you'd be willing to take leverage given that kind of outlook for tightening and how much the potential for short term bouts of volatility weigh against that?

TJ Connolly (Chief Investment Officer)

Thanks. Right. Yeah, thank you. There are several components to thinking about our leverage. Our leverage, as Mike mentioned, did increase to 8.6 times. Roughly 2 thirds of that increase was actively positioning to own more mortgages. Given that mortgages really were kind of the tail of the dog for several weeks in March, the yield spread, or mortgage basis as we referred to it, traded with risky assets. The basis was very correlated to things like the S&P 500. So we're doing a lot of scenario analysis around that to think about just how much leverage we can comfortably manage. And it was a very comfortable position for us coming into the quarter end period and looking ahead, I think we're going to remain very opportunistic. We're very resolute in our view on those spreads, moving from down to as much as 100 basis points. Given the GSE backdrop, we think we are on the verge of a significant regime Change. So we are going to actively be opportunistic in keeping our exposures so investors can capitalize on this opportunity.

Trevor Cranston (Equity Analyst)

Got it? Okay, that's helpful. And then just looking at the portfolio this quarter, you know, it looked like the allocation to TBAs went down some. Can you talk about how you're, how you're thinking about, you know, the values of spec pools versus versus TBAs with incremental dollars? Thanks.

TJ Connolly (Chief Investment Officer)

Yeah. The TBA market, by definition, for those who don't know TBA is to be announced market that is the cheapest to deliver segment of the mortgage market. That is to say, the pools that are, or the loans that are most callable and potentially have the most duration uncertainty typically will get delivered into a TBA transaction. And we want to avoid those. We think those get cheaper and cheaper. They have tremendous amount of uncertainty around their cash flows. They're very, very refinanceable and callable on even the slightest move in mortgage rates. So we're trying to avoid those. We are very strategic and have been, as I mentioned in my prepared remarks, positioning for owning significantly more pools. I think we've got a long history of security selection. This is a tremendous source of alpha for us and it's unique to this model. It's very hard for investors to go out and find mortgage pool and do the deep dive that we do. And you have to be in the institutional world. So it's a great opportunity for retail investors, for instance, to be able to access security selection like we can offer them. Okay, makes sense. Thank you. My pleasure.

OPERATOR

We'll go next to Jason Weaver with Jones Trading.

Jason Weaver (Equity Analyst)

Hi, good morning, guys. I was wondering if you could speak to the phasing of capital deployment over the quarter and beyond.

Mike Sartori (Chief Financial Officer)

Yeah, absolutely. In terms of the capital. And I'll let Smriti to comment a little bit. But it is very opportunistic and methodical. We are thinking a lot about multiple components that go into that optimization for our shareholders. One of the things I think that the market often misses is total shareholder return is driven by the portfolio returns and the valuation. And one thing is very clear, larger companies receive a larger valuation in this sector. And that's very important part of our calculus as we think about phasing up the capital raising. And it was a significant quarter for us. I'll turn it over to Smriti, who will comment a little bit more.

Smriti Papano (Co Chief Executive Officer and President)

Hi, Jason. One of the things that we think about actively is what is the agency MBS market and what are the moves telling us about the inherent risk in that particular sector. One of the things that happened in the first quarter is that agency MBS widened, but it wasn't because there was something wrong with agency MBS per se. It wasn't a fundamental reason. They widened because the risk assets in general were weaker. And we view those types of opportunities to be really significant in terms of the ability to raise and deploy capital. So when we see that type of move, that's a signal to us to go put accretive capital that we're raising to work. So that's really the opportunistic nature of what we're talking about in general, when we see those types of opportunities, you'll see us probably raise bigger blocks of capital, put the money to work, and then over time, I think that criterion that we've always abided by, you know, just making sure that the cost of capital is lower than the return on the capital that we're deploying, that remains sort of the gold standard in terms of our willingness to raise and deploy capital over time.

Jason Weaver (Equity Analyst)

Got it. That's helpful. And, you know, just so I have this correct, you know, obviously Ford Roe is going to be the genuine biggest consideration here, but is there a downside, sort of multiple on valuation that you want to avoid or you would underwrite to price above there, like on your book value multiple?

Byron Boston (Chairman and Co Chief Executive Officer)

Look, we're always going to want the shares to trade at a premium to book value. I think as a business, we've now proven two things. One is the ability to deliver strong returns in some of the more challenging environments that the market's had in the last 10 years. So that's thing number one. And then thing number two, I think it's this idea that as we grow, you know, we are delivering significant benefits of scale to our shareholders. So at this point, we feel like the markets haven't necessarily taken that into account. I mean, having now firmly placed ourselves as the third largest company that's doing what we're doing, I think that part is not yet fully reflected in the share price. And for us to continue to tell that story, I think that's the goal here. But all else being equal, not only do we think the shares deserve to trade at book, I think we actually deserve to trade at a significant premium. All right, well, I appreciate that. Thanks again for the answers and congrats on the quarter. Thanks, Jason. Thanks, Jason.

OPERATOR

We'll go next to Marissa Lobo with ubs.

Marissa Lobo (Equity Analyst)

Good morning and thank you for taking my questions today. Of course. Could you speak to Swap Spread Dynamics over the quarter, how that impacted performance. And did you adjust the mix between treasury futures and swaps during the stress period?

TJ Connolly (Chief Investment Officer)

Thanks for the question, Marissa. The swap spreads. So the interest rate swap rate relative to Treasuries is what most people are quoting there. And that does tend to correlate with risky assets much as I mentioned about the basis. So when stocks trade lower, for instance, the swap spread will trade more negative and vice versa. When risky assets are doing well, the swap spread will trade less negative. We think, and we've said for several quarters now actually probably pushing up on two years now, that we expect to be able to earn the additional yield spread that interest rate swap hedges offer relative to Treasuries. So that is to say there is more yield spread available when hedging mortgages with interest rate swaps than there is when we hedge with Treasuries. As a result, I've mentioned on the last couple calls we expected things to be in the 60 to 80% of the portfolio hedged with interest rate swaps. We were right around 70% on a DV01 basis at quarter end. And I expect that to be roughly, that's roughly where we're comfortable in terms of the liquidity of hedges and being able to stay nimble with futures that trade practically 24 7, at least 24/6. And I think there's a little bit of scope we could get closer if the opportunity presents itself to be closer to 80%. But again, I think that's a really compelling spread for us to continue to earn over time. And it has worked fairly well.

Marissa Lobo (Equity Analyst)

Appreciate that. And just Moving to the GSEs, you talked about the purchase directive as resetting the spread regime tighter. How has the pace of their buying met with your expectations? And did the March spread widening test that backstop thesis in a meaningful way?

TJ Connolly (Chief Investment Officer)

Yes, it did to some extent test the backdrop in a they have proven to be very value based, so I wouldn't say it's time based so much, which that's really important for the understanding the backstop. Right. So at wider spread they will be more aggressive and all indications suggest they were more aggressive at wider spread they are fairly methodical in terms of their pool selection. So they are buying or retaining rather more pools than they have in the past relative to in the cash windows. And I'd say overall it is, it is playing out roughly as, as we expected. There's, you know, periods of volatility. They wait, they put their hands up, say okay, we'll, we'll see where value shakes out and then they step in much as they did when, you know, Smurthy and Byron and I sat at the Freddie Mac portfolios 25 years ago. They're operating in a very similar manner at this point.

Marissa Lobo (Equity Analyst)

Got it. Thanks so much for taking my questions.

OPERATOR

Pleasure. We'll take our next question from Mel Ross with Compass Post Point.

Mel Ross

Thank you. Kind of follow up on the previous question, but how your expectations for inflation have influen a tenor of your interest rate swaps, noting that you moved more into three to five year and does that reflect your expectations for a steeper 210 spread?

TJ Connolly (Chief Investment Officer)

Yeah, great question. You know, the market, I'd say in the course of the quarter waffled a lot, especially with the war in Ukraine. The market narrative shifted very quickly at points from one focused on inflation to one focused on growth. Right. And we don't know the answer. We don't predict. We prepare. So we're preparing and building this portfolio to be robust to both of those regimes, potentially. I think that's really important. So you saw the swap book shorten slightly a little bit in that three to five year tenor. Most of that's just aging of the swap book. We're very comfortable with how it is positioned because the view that we have here and the risk exposures that we think are the most compelling for our shareholders to earn over time is that mortgage spread relative to the interest rate curve. So we are trying to position this to achieve the yield spread and hold our book value as steady as possible. And I think that is, given the way the portfolio is constructed currently for this regime, it's appropriate. So I'd say overall, our highest conviction is that mortgage yield spread is what we're here to earn and we are hedging across the curve for that reason.

Mel Ross

And to follow up on the asset side, it seems like you added more in the current and lower coupons and avoided the higher coupons. Assuming that is following on with CPR expectations.

TJ Connolly (Chief Investment Officer)

Yeah, you know, it's a great question because there were some really good opportunities in the initial days. It feels like a long time ago now, but in mid January, after the Trump administration's announcement that the GSE would be more active in buying, certain coupons really outperformed. So you'll see in our press release there that the 4% coupon is significantly lower than it was at year end. And that was because we took advantage of that alpha. Right. There was a significant outperformance in those coupons and we moved away from those coupons as they outperformed to diversify the book up into we added some Fannie 2s even, and then some of the higher coupons. Again, it's all more and more this market is about pool selection even than it is about coupon selection. So when you have these kind of real quick moves and things we're watching very closely to say, hey, this is out of line. The Fannie force, for instance, got significantly richer and we were able to sell into that and buy pools and other coupons that were much more compelling cash flows for us.

Mel Ross

Yeah, that's a great answer. Thank you very much.

OPERATOR

We'll take our next question from Eric Hagan with btig.

Eric Hagan (Equity Analyst)

Hey, thanks. Good morning, guys. Maybe following up a little bit on this conversation around capital raising, Just looking at the timing of the capital raising, even just the broader philosophy around raising capital, is there anything fundamental that you'd identify in the current environment which has maybe changed the level at which you're prepared to raise capital relative to where you've raised in the past? By level, I mean the level of your stock, your valuation.

Smriti Papano (Co Chief Executive Officer and President)

Yeah, we disclosed already, Eric, that the bulk of the capital that was raised was raised early in the quarter when valuations were more supportive towards issuing capital versus investing. And then the investing environment kind of played itself out over the quarter, as everybody saw with spreads wider as the war in Iran progressed. So in general, I don't think the principles have changed when it is a good idea for us to raise, we raise when it's a good idea to invest, reinvest. The raising and deploying don't necessarily have to be simultaneous in nature. Sometimes they are and sometimes they're not. But the, but the real principle, which I've said now, I think you can go back and check on earnings calls for three plus years. It's really this idea of, you know, is my cost of capital lower than the return that I can earn on that capital over time? And I think that is what makes this investment environment so unique. A, that it's lasted as long as it has, B, that the forward returns in agency MBS still continue to support active raising and deploying of capital because over time we believe the cost of capital is going to be lower than the return on that capital, or vice versa, the return on the capital we're raising right now is actually going to be higher than the marginal cost. So that has always been our operating principle. You know, as we see the share price go up relative to book, we talked about price to book here, a fair amount today, I think we're more conscious about the idea of delivering total shareholder return to our shareholders. TJ talked about, you know, TSR being comprised of two things. One is the actual return on our portfolio and secondly, the price to book. We know that those are two different components and there's a trade off between the two. But that also is a factor in how much we raise and how much we deploy. So a lot of what we're thinking through right now is just number one, performance. Performance is the beginning, ending and final arbiter of everything that we. That's always number one. And then number two, delivering value through these other ways. But those are all factors in how we think about the pace of capital raising, deploying, et cetera.

Eric Hagan (Equity Analyst)

That's really helpful. Thank you. If I could sneak in one more here. What's your perspective on the prepayment environment as community banks are given maybe more incentive to come back into the market? Do you see that driving a lot of competition among originators?

TJ Connolly (Chief Investment Officer)

Certainly competition drives the refinance ability, right? That is very important construct. I think more than anything, though, as we've talked about for many, many quarters now, it's all about the technology, right? That is making it easier and easier to refinance the marginal borrower. And I think that will be the dominant force over time. But to the extent you have certain incent, you know, you're bringing it back to something we've talked about for a long time. That's policy, right? So to the extent that policy shifts incentives for the players in the mortgage market, that's something we're watching very, very closely. Great.

Eric Hagan (Equity Analyst)

Thank you guys so much.

OPERATOR

At this time, there are no further questions. I'd now like to turn the call back to Smerdy Papineau for any additional or closing remarks.

Smriti Papano (Co Chief Executive Officer and President)

I thank you all for your attention and we look forward to updating you on our quarterly results in the second quarter.

Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.