Dynex Capital, Inc. (DX) Earnings

Management highlights

- Strategic Rationale for Core Agency MBS Focus * Management holds high conviction that agency MBS is the optimal core asset for the firm's strategy, citing strong liquidity, 40 years of demonstrated resilience through market stress, and unmatched risk-adjusted returns for the current macro environment * Agency MBS delivered outperformance during both the 2020 market crisis and the 2022-2025 Fed rate hiking cycle, aligning with the firm's priority on liquidity and flexibility - Scale and Growth Strategy * Management is pursuing deliberate growth to drive higher valuation: larger firms generally garner better valuation multiples, and passive investing's structural growth creates a tailwind for scaled companies via index-based allocation * Growth also improves risk management, building operational and balance sheet resilience to withstand macro and market shocks * The firm has built a virtuous flywheel: strong performance from agency MBS attracts new investors, enabling accretive capital raising that is deployed into additional high-quality assets, further improving liquidity, visibility, and valuation - Q2 2026 Operational and Financial Results * The firm grew its total capital base to $3.1 billion at end of Q2 2026, up from $2.4 billion at the end of 2025, a five-fold expansion since 2022 * Q2 capital raising totaled nearly $400 million ($391 million) at prices accretive to book value, reflecting broadening investor demand * End-of-quarter liquidity of $1.6 billion (51% of total equity) increased ~5% quarter-over-quarter, remaining a core strength of the firm's risk management framework * The portfolio construction process performed as designed in Q2: substantial liquidity was maintained, and new capital was opportunistically deployed during Q1/Q2 spread widening, generating book value appreciation when spreads subsequently tightened - Portfolio Construction * The portfolio is diversified across agency MBS coupons and collateral characteristics to capture attractive current income while managing prepayment and extension risk in the higher rate environment * Management prioritizes regularly traded, transparently priced, and easily financed/liquid assets, hedged with interest rate swaps and futures to maintain flexibility

Guidance

- Operating expenses are guided to remain at 2% of total equity for full year 2026 - The 2026 net agency MBS supply forecast was revised downward to $165 billion from the prior forecast of $200 billion - Management expects long-run equilibrium for current coupon agency MBS spreads versus 7-year swaps to land in the 100-120 basis point range over the next 12 months - Management expects to maintain leverage in a comfortable target range of 7.5x to 8.5x total equity, with tactical adjustments of up to +/- 1x based on market conditions; leverage could increase if attractive opportunistic liquidity events arise - Management reaffirmed its constructive outlook for agency MBS, noting that current spreads remain in an attractive range, with solid cash flow generation and supportive technical conditions

Segment performance

Dynx Capital operates as a single-segment mortgage investment firm focused almost exclusively on agency mortgage-backed securities (MBS) as its core business. For Q2 2026, the firm recorded total economic return of 6.4%, driven by a 2.4% quarter-over-quarter increase in book value per share (from $12.60 to $12.90). Net interest income came in at $0.42 per share, up from $0.40 per share in Q1 2026. As of quarter end, the firm held $1.6 billion in cash and unencumbered securities, representing 51% of total equity. Adjusted leverage ended the quarter at 8.1x total equity, down from 8.6x at the end of Q1. The agency MBS portfolio grew by over 40% in the first half of 2026, making up nearly 100% of the firm's total investment portfolio. Total capital raised in Q2 was $391 million, all deployed into agency MBS investments.

Risks & headwinds

- Geopolitical conflict and uncertainty from rapid technological change (specifically AI) have increased overall macro risk, reinforcing the firm's focus on balance sheet resilience - The transformative AI investment boom is in its capital-intensive phase, which historically has been prone to overfinancing, eventual repricing, and bouts of market volatility - The Federal Reserve's ongoing broad review of monetary policy and balance sheet strategy creates uncertainty around the pace and magnitude of potential MBS-related balance sheet actions, which could impact market pricing and spreads - AI-driven improvements in mortgage refinancing technology are expected to increase prepayment speed for easily refinanceable loans, raising the negative convexity risk of affected agency MBS that has not yet been fully priced into the market - Headline-driven market volatility and gap risk in interest rates create ongoing uncertainty that requires active liquidity management - Potential changes to GSE MBS purchase policies approaching the US midterm elections represent an ongoing policy risk to monitor - Current market implied volatility remains above realized longer-term volatility, leaving room for unexpected spikes that could impact MBS valuations

Analyst Q&A

• Q: What is the firm's outlook for mortgage spreads over 12 months, and is the GSE $200 billion MBS purchase program expected to be extended? /

  A: Management noted that the GSE MBS backstop has acted as a consistent spread stabilizer, limiting extreme widening. The firm expects equilibrium spreads for current coupon MBS versus 7-year swaps to settle in the 100 to 120 basis point range over time.

• Q: What is the firm's target leverage range in the current spread environment, and how is AI-driven refinancing risk incorporated into portfolio construction? /

  A: Management maintains a comfortable target leverage range of 7.5x to 8.5x, and could tactically increase leverage during bouts of market volatility to capitalize on opportunities. AI will speed up refinancing, so management prioritizes selecting MBS with collateral characteristics that insulate them from faster prepayments (such as lower loan balances), a risk that management believes is not yet fully priced into the market.

• Q: How does the firm navigate current headline-driven market volatility, and what is the outlook for operating expenses? /

  A: High levels of liquidity and the agency MBS-focused portfolio give the firm flexibility to deploy accretive new capital during volatility, buying assets at wider spreads when opportunities arise. Management reaffirmed that full-year 2026 operating expenses will hold at 2% of total equity.

• Q: What is your positioning for interest rate volatility and how does the macro environment shape your target leverage range? /

  A: Management constantly prepares the portfolio for volatility spikes, but notes that implied volatility is still above realized volatility, so further declines in volatility would be supportive of agency MBS performance. Target leverage remains in a narrow range driven by elevated global macro risk (including ongoing geopolitical conflict), with only tactical adjustments within +/- 1x rather than large increases to overall leverage.