Dynex Capital, Inc. ($DX)

Good day, and welcome to the Dynex Capital, Inc. First Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Ms. Alison Griffin, Vice President of Investor Relations. Please go ahead.

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 20, 2026. 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 identify 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 Popenoe, Co-Chief Executive Officer and President; Byron Boston, Chairman and Co-Chief Executive Officer; Mike Sartori, Chief Financial Officer; and T.J. Connolly, Chief Investment Officer. I now have the pleasure to turn the call over to Smriti.

Thank you, Alison, and good morning, everyone. We continue to build our company at the intersection of 2 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 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 mods. More than ever, mindset and preparedness are the key factors for successful decision-making because the policy pads 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 to a short burst of volatility, which we use 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.

Thank you, and good morning, everyone, joining us today. I'd like to begin by welcoming [ Calin More ] who joined Dynex Day to lead Capital Markets and Investor Relations. Kate brings deep industry experience across both functions, and our background will support the continued growth of our capital and investor base while 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 $12.6 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 at 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 raise 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 a 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 costs in our expense structure. With that, I'll turn it over to T.J. to provide additional detail on portfolio strategy and the outlook.

Thanks, Mike. SP999 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 Iran, 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 1 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 that spreads widen 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, 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 improved downside liquidity and 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 retained pools. They have previously been selling to 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 end game 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. Repo 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 ones. 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 $160 at quarter end and move back toward the 150 area late last week. As geopolitical events evolve and policymakers refocus on domestic issues like housing, we believe spreads can trend 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 TBA market, and we continue to do that in the first quarter. 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 2 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.

Thank you, T.J. 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 Instructions] We will go first to Bose George with KBW.

Can we get an update on book value quarter-to-date?

Yes. As of Friday, Friday's close, the estimated book value was $13.31 per share, net of the accrued common dividend and that's up 5.6% versus quarter end.

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

Yes, I'm quoting those spreads, both against the 7-year swap point, which is consistent with the chart we have in our presentation there.

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

Follow up on your commentary about spreads potentially tightening to 120 or even 100 basis points as a long-term equilibrium. Can you talk about kind of 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 sort of short-term bouts of volatility sort of way against that?

Right. Yes. Thank you. There are several components to thinking about our leverage. Our leverage, as Mike mentioned, did increase to 8. roughly 2/3 of the increase was actively positioning to own more mortgages given that backdrop. 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 -- 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 this is -- 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.

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

Yes. The TBA market, by definition, for those who don't know, the 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 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, right? It's very hard to -- for investors to go out and find mortgage pools 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.

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

I was wondering if you could speak to the phasing of capital deployment over the quarter and beyond.

Yes, absolutely. In terms of the capital, and I'll let Laxman 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 a 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.

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 those put the money to work. And then over time, I think that criterion that we've always abided by 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.

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

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 2 things. One is the ability to deliver strong returns in some of the most challenging environments that the markets 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, 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 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. Congrats on the quarter.

We'll go next to at Marissa Lobo with UBS.

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.

The spot 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, we actually probably pushing up on 2 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, mentioned on the last couple of 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 staying nimble with futures that trade practically 24/7, -- 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.

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

Yes, it did, to some extent, test the backdrop in 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 of the backstop, right? So at wider spreads, they will be more aggressive and all indications suggest they were more aggressive about 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 playing out roughly as we expected. There are periods of volatility. They wait, they put their hands up and say, "Okay, we'll see where value shakes out. and then they step in, much as they did when Smriti and Byron and I sat at the Freddie Mac portfolio 25 years ago. They're operating in a very similar manner at this point.

We'll take our next question from [ Mal Ross with Compass Post ].

Kind of follow-up on the previous question. but how your expectations for inflation have influenced a tenor of your interest rate swaps noting that you moved more into a 5 year? And does that reflect your expectations for a steeper to [indiscernible]?

Yes, great question. The market I'd say, in the course of the quarter, waffle lot, especially with the Warren and run the market narrates 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 up a little bit in that 3- to 5-year tenor. Most of that's just aging of the swap book. We're very comfortable with how this position 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.

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

Yes. 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 GSEs would be more active in buying certain coupons really outperform. 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 of 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.

We'll take our next question from Eric Hagen with BTIG.

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, I mean, 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. And by level, I mean, the level of your stock valuation?

Yes. I mean 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 raised when it's a good idea to invest -- we invest the raising and deploying don't necessarily have to be simultaneous in nature. Sometimes they are, and sometimes they're not. But the real principle, which I've said now, I think you can go back and check on earnings calls for 3-plus years, it's really this idea of -- 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 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. 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. T.J. talked about TSR being comprised of 2 things. One is the actual return on our portfolio; and secondly, the price to book. We know that those are 2 different components, and there's a trade-off between the 2, 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 is the beginning, ending and final arbiter of everything that we do. So 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.

That's really helpful. If I could sneak in 1 more here. I mean what's your perspective on the prepayment environment as community banks are given maybe more incentives to come back into the market? Do you see that driving a lot of competition among originators.

Certainly, competition drives the refinanceability right? That is a 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 incentives that you're bringing it back to something we've talked about for a long time as 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.

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

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

This does conclude today's conference. We thank you for your participation.