Dynex Capital, Inc.

Ladies and gentlemen, thank you for standing by. At this time, I would like to welcome everyone to the Dynex Capital Third Quarter 2021 Earnings Results and Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, simply press star 1 again. Thank you. I would now like to turn the call over to Alison Griffin, Vice President, Investor Relations, for opening remarks. You may proceed. Thank you. Good morning, everyone, and thank you for joining us today. The Dynex Capital Third Quarter 2021 Earnings Conference Call. The press release associated with today's call was issued and filed with the SEC this morning, October 27, 2021. 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. As 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 will, believe, expect, forecast, assume, anticipate, estimate, project, plan, continue, and similar expressions identify forward-looking statements. These forward-looking statements reflect our current beliefs, assumptions, and expectations based on information currently available to us and are applicable only as of the date of this presentation. These forward-looking statements 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 are 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 DYNAC's website under Investor Center, 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 a webcast link on the homepage of our website. The slide presentation may also be referenced on the Investor Center page. Joining me on the call is Byron Boston, Chief Executive Officer and Co-Chief Investment Officer Murphy Papano, President and Co-Chief Investment Officer, and Steve Fernandetti, Executive Vice President, Chief Financial Officer, and Chief Operating Officer. And with that, it is my pleasure to turn the call over to Byron Boston.

Good morning. Thank you. Thank you, Allison, and thank you, everyone, for joining our third quarter call. As many of you know who have followed us for a long time, we manage our shareholders' capital for the long term. One of our core strengths is understanding the environment in which we operate, positioning forward and adjusting that position as the environment changes. We believe the beginning of this decade marked a major change in the global economic and capital markets environment. It has been a great environment for Dynex to build on our solid track record of industry-leading performance, as you can see on slide 12, including a 21% cumulative shareholder total return since December 2019. As we finish the third quarter, we continue to be excited about how we have performed during this period and how we have positioned our balance sheet for the future. We're in a unique moment in history, and we believe every asset management team around the globe will be challenged by unforeseen surprises as we have already continually witnessed over the past 22 months. At Dynex, we believe this environment calls for patience, discipline, and flexibility. We also believe this is a great environment for our stakeholders, and we expect to see attractive opportunities to deploy capital. Our experience management team has proven time and again that they have the flexible mindset to successfully navigate any operating environment and to generate above average cash dividends and a solid economic return for our shareholders. And with that, I'm going to turn it over to Steve and Smurky, who will give you far more details around the specifics of the third quarter.

Thank you, Byron, and good morning, everyone. For the third quarter, we reported comprehensive income of $0.09 per common share and a total economic return of $0.06 per common share, or 0.3% for the quarter. We also reported earnings available for distribution of $0.54 per common share, a 6% increase over last quarter and well in excess of our $0.39 quarterly common stock dividend. On a year-to-date basis, through the third quarter, we have paid $1.17 in dividends. Book value per common share declined modestly to $18.42 from $18.75, or 1.8%. primarily from economic losses on the investment portfolio, principally in lower coupons relative to our hedge position. As Smriti will discuss later in her comments, we've recovered this decline post-quarter end with the curve steepening which has occurred since then. Beginning this quarter, consistent with others in our industry, we have renamed our non-GAAP earnings measure to earnings available for distribution from coordinate operating income. All prior quarters have been relabeled to earnings available for distribution. There have been no changes to the calculation of the non-GAAP measures, and the adjustments made to reconcile the comprehensive income, the earnings available for distribution, are identical to those previously used to reconcile the coordinate operating income. We believe that the caption, earnings available for distribution, more accurately reflects the principal purpose of the measure and will serve as a useful indicator, but not the only indicator, in evaluating the company's performance and its ability to pay dividends to common shareholders. Other factors that are considered in the dividends to common shareholders include our taxable income, total economic return, gains and losses, including carry-forwards for tax purposes, and our outlook for future performance. Turning back to the discussion of the performance, the increase in earnings available for distribution was driven by multiple factors. First, our earning asset yields improved three basis points while overall repo borrowing costs were down another three basis points. The improvement in asset yields was largely attributable to slower prepayment speeds during the quarter as we benefited from adjustments to the overall prepayment profile of the pass-through portfolio through asset purchases. Agency RMBS prepayment speeds were 11.3 CPR versus 19 flat CPR in the second quarter. Secondly, TBA drop income contribution improved by five basic points primarily from continued dollar roll specialists during the quarter. The funding cost benefit on dollar rolls versus repo and RMBS was approximately 60 basis points during the third quarter versus 49 basis points last quarter. And third, average earning assets increased as we deployed equity capital proceeds raised in both second and third quarters. Together, these items drove a 4 basis point increase in our adjusted integer spread to 2.1% for the quarter. Offsetting these items was an increase in G&A expense of approximately $800,000.00. The majority of the increase related to legal fees related to a contingent matter that we have previously disclosed in our SEC filings and which now has been fully briefed for the court. We do not expect these costs to repeat going forward. From a portfolio perspective, from quarter to quarter, we reduced our investment portfolio, including TBAs, by approximately $500 million, mostly through reducing our investment in TBA two-and-a-halves. This occurred towards the end of the quarter and resulted in adjusted leverage declining by nearly a full turn to 5.9 times at the end of the quarter. As noted on slide 23, our investment portfolio is approximately $4.8 billion at September 30th, with $4.3 billion invested in agency RMBS and TBAs. From a hedging perspective, we reduced the notional balance of our hedges by a similar amount. The overall notional balance of our hedges at September 30th was $4.3 billion, as indicated on slide 19, with the bulk of the hedges protecting book value from increases in rates in the long end of the curve. Overall, total shareholders' capital grew approximately $18 million during the quarter, which includes approximately $28 million in new common equity raised at the market offerings in the quarter. Year-to-date, we have raised approximately $224 million in new capital at a gross price before commissions of $18.80. Our market capitalization adjusted for all shares outstanding is $650 million today versus $420 million at the beginning of the year, substantially increasing the liquidity of our stock for our shareholders while at the same time unlocking the operating leverage in our business. Our stock price is virtually unchanged year to date, and our total shareholder return for 2021 is 6.9% through yesterday. That concludes my remarks, and I will now turn the call over to Smriti.