Dynex Capital, Inc. Q1 FY2026 earnings call

Dynex continues to build at the intersection of income and housing needs, delivering differentiated performance. Global macroeconomic policy is key, with scenario planning evolving to map policy pathways. In Q1, the team managed portfolio through volatility, opportunistically raised and deployed capital, growing capital base by 18%. Welcomed Kaylin Mauritz to lead capital markets and investor relations. Evaluated growth through market opportunity, investment returns, and long-term accretion. Highlighted mortgage market fundamentals and technicals support, GSEs actively buying mortgages, financing costs declining, and repo markets functioning smoothly.

Book value ended the quarter at $12.60 per share. Economic return was negative 2.5% for the quarter, consisting of 51 cents per share of common dividends and an 85 cent per share decrease in book value. The total capital base grew by 18%, with the investment portfolio increasing by $6 billion. Net interest income rose from 28 cents per share to 40 cents per share primarily due to declining financing costs. Liquidity position remained strong with $1.3 billion in cash and unencumbered securities at quarter end, representing over 46% of total equity.

Grew total capital base by 18% during Q1, deploying funds as MBS spreads lightened. Since quarter end, MBS spreads have tightened and book value is higher. Net supply in MBS appears lower than expected. GSEs actively buying mortgages support spreads. Basel III endgame proposals may lower banks' capital costs for holding mortgages. Expect MBS spreads to trade towards 120 and long-term equilibrium closer to 100 basis points. Static ROEs for current coupon mortgages hedged with interest rate swaps in mid to high teens. Strategic reduction of exposure to TVA market.

Policy paths not always foreseeable, market volatility may impact portfolio value. Uncertainty in financing cost changes. Uncertainty in GSE buying behavior. Uncertainty in Basel III endgame proposal implementation. Geopolitical events may cause market volatility.

Q: Can we get an update on book value quarters to date?

A: As of Friday, estimated book value was $13.31 per share, net of the accrued common dividend, up 5.6% versus quarter end.

Q: You gave outlook for spreads potentially going back down to 120 basis points, is that across the curve or specific point?

A: Quoting spreads against the seven-year swap point.

Q: Follow up on commentary about spreads potentially tightening to 120 or 100 basis points as long-term equilibrium, talk about thoughts on leverage and short-term volatility?

A: Leverage increased to 8.6 times, two-thirds of increase from positioning to own more mortgages. Doing scenario analysis on leverage, remain opportunistic on spreads.

Q: Portfolio allocation to TBAs went down, talk about values of spec pools versus TBAs with incremental dollars?

A: TBA market has uncertain cash flows, callable and refinanceable, so avoiding them, strategic on owning more pools, security selection as alpha source.

Q: Speak to swap spread dynamics over quarter, impact on performance, adjust mix between Treasury futures and swaps during stress?

A: Swap spread correlates with risky assets, expect to earn additional yield spread from interest rate swaps, hedged ~70% of portfolio with swaps at quarter end, expect to be ~80% comfortable.

Q: Expectations for inflation influence tenor of interest rate swaps, moved into three and five year?

A: Market waffled with geopolitical events, swap book shortened a bit, preparing portfolio robust to inflation and growth regimes, highest conviction on mortgage yield spread.

Q: Perspective on prepayment environment as community banks incentivized to come back, driving competition among originators?

A: Competition drives refinanceability, technology is dominant force, policy shifts also watched.