Dynex Capital, Inc.

Hello, and thank you for standing by. My name is Lacey, and I will be your conference operator today. At this time, I would like to welcome everyone to the Dynex Capital, Inc. Third Quarter Earnings 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, followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the conference over to Alison Griffin, VP of Investor Relations. You may begin. Thank you, and good morning.

The press release associated with today's call was issued and filed with the SEC this morning, October 20, 2025. You may view the press release on the website of 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 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 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 under quarterly reports on the Investor Center page. Joining me on the call today are Byron Boston, Chairman and Co-Chief Executive Officer, Smriti Papano, Co-Chief Executive Officer and President, Rob Colligan, Chief Financial Officer and Chief Operating Officer, and T.J. Connolly, Chief Investment Officer. I now have the pleasure of turning the call over to Smriti.

Thank you, Allison. Good morning, everyone, and thank you for joining us today. We continue to execute our strategy to build a resilient company at the intersection of capital markets and housing finance. We believe in the long-term shareholder value creation potential of our differentiated platforms. investing in residential and commercial mortgage-backed securities managed with Dynexis through the cycle mindset, risk discipline, liquidity, and capital management expertise. Our offering is unique, and our strategy continues to generate strong returns. Year-to-date shareholder returns were 20% as of last Friday's close, 23% over the last year, In the last three years, our shareholders have seen returns of nearly 72% with dividends reinvested in Dynex. Our total economic return of 10.3% for the quarter and then 11.5% year-to-date reflect the discipline management of the generational opportunity in agency RMBS we have been talking about since 2022. Keeping book value stable, we have paid out a substantial dividend. Agency RMBS spreads continue to offer returns to support our growth and investment strategy. The strong investment environment fueled capital raising and we crossed another milestone. Our common equity market cap is now above 1.8 billion as we continue to broaden the scope of individuals who trust us with their savings and institutions who trust us with their capital. The operating environment remains highly complex. The global economy is vulnerable to persistent inflation as geopolitics shape investment at the national level. In the U.S., we are still passing through tariff-related price shocks, a labor market slowdown, and a government shutdown. Risk assets, especially equities, have shrugged off most of these concerns. We are watching for quick shifts in market sentiment as trends in the fundamental economy become more clear. The Federal Reserve appears committed to bringing rates down to more neutral levels, and even so, the uncertainty in the rate path is significant. TJ will go into more detail during his comments. Our principles of holding liquidity and investing in liquid assets are highly appropriate for this environment. I'll say a word about private credit markets. At Dynex, we have always taken the view that total system risk is like a balloon. You squeeze it on one end, and it shows up somewhere else. The private credit market is a reflection of this. The U.S. economy is highly financialized and operates on a great deal of leverage being available. In the private credit sector, much of that leverage is hidden in funds that do not mark the market like Dynex. Sometimes it's not even possible to get a mark or sell those assets. Even as cracks in this market develops, we are prepared for surprises that could prove much more persistent than they have at similar points in other cycles in history. As I've emphasized, our growth is deliberate. It's anchored in strategy, opportunistic investing, and focused value creation. The team is operating with preparedness, discipline, and tactical agility. Our results are a direct outcome of that approach. I remain focused on strengthening our market position and expanding our ability to capture future opportunities. Rob and TJ will now give you further details on the quarter and the outlook. I'll turn it over to Rob.

Thank you, Smriti.

Good morning, and welcome to everyone joining us today. To start, our net interest income continues to trend upward as we add new investments with attractive yields to our portfolio, and in the current market, swaps add to the carry value of our investments. It's important to note that this quarter's net interest income does not include the impact of the FOMC rate cut in September, and we expect the rate cut will add a tailwind to net interest margin in the fourth quarter. Second, we've been discussing a raise and deploy strategy all year. Fools and TBAs we've held and added this year have greatly benefited from the spread tightening experienced in the third quarter. We had over $130 million of gains on our portfolio in the third quarter alone. DJ will go into more detail on our portfolio during his comments. Third, this year we've raised new capital, $254 million in the quarter, and $776 million year-to-date. Our stock has performed well, allowing us to continue to raise capital at a premium-to-book value which is accretive to our shareholders. Growing our capital base is an important part of our long-term strategy to build a strong and resilient company structured to deliver compelling returns for shareholders over all economic cycles. Our portfolio is larger. 10% larger since the end of the second quarter and has grown over 50% larger since the beginning of the year. While our portfolio has grown, we continue to focus on disciplined risk management and liquidity to weather future volatility. Our liquidity at quarter end was over a billion dollars and was over 50% of total equity. Lastly, we are opening up an office in New York City. This new location will allow us to attract important talent in trading and portfolio management positions, as well as being physically closer to many of our business partners for an important part of our current and future success. We look forward to being in New York while maintaining Glenallen, Virginia as the company's headquarters. Both locations will be strategically important to us as we build a solid foundation for the future of Dynex Capital. With that, I'll turn the call over to TJ for his comments.

Thank you, Rob. Entering the quarter, agency mortgages offered wide spreads to treasuries and interest rate swaps. We maintained one of our highest exposure levels in recent years to capitalize on these high-quality yields. Implied volatility started to decline early in the quarter as markets got more comfortable with the policy outlook. Nominal spreads remained wide, though, and we continued to raise and deploy more capital. As Rob noted, we raised $254 million in new common equity capital in the third quarter. bringing the year-to-date new capital growth to $776 million. We raised and deployed capital at levels well above the average share price and price-to-book ratios during the quarter. As I noted last quarter, we carried a deliberate bias towards lower coupons, which we believe were poised to outperform, especially when mortgage rates declined, even just modestly. By mid-September, mortgage rates hit the lowest levels of the last year. The agency current coupon yield declined from nearly 5.75% to nearly 5%. That was enough to generate a sharp increase in the refinance index, as many high-quality borrowers briefly saw 6.25% or lower no-point 30-year fixed-rate mortgages, and mortgage bankers started to issue adjustable-rate mortgages with even lower no-rate. We've discussed in previous calls that prepayment speeds could be very responsive given the technological investments many mortgage bankers have made. And indeed, the latest report may only mark the beginning of this trend. Security selection in the specified pool market remains a source of potential alpha, and the dislocations created by this latest prepay wave are proving to offer opportunities for us. September's prepayment report, released just over a week ago, showed fast prepayments for higher coupon mortgages, and we expect that most of the increase in speeds won't be seen until the October report, due in early November. Of course, with faster prepayments comes an acceleration in gross supply as borrowers take out new, lower loan rate mortgages. Markets ultimately clear based on net supply of new mortgage production, which we expect to remain muted with the housing market flow for at least the next few quarters. But growth supply matters in the short term, as investors react differently with respect to the timing of prepayments. Moreover, prepayments shift the composition of the market across coupons. Late in the quarter, as refis increased, we saw more supply in coupons like four and a half and five. And with many segments of 5.5% and even 6% pools notably cheaper, we had a slight bias to move back up in coupon to take advantage of the dislocation. Longer term, we expect there will be growing opportunities across the mortgage market as the policy environment evolves. While specific policies are likely still to be developed, the regulatory tone from Washington is towards policy that supports housing and a liquid market for mortgages, both residential and commercial. Longer term, the supply outlook for agency RMBS could evolve more favorably. The volume of loans that are guaranteed by Fannie Mae or Freddie Mac has fallen slightly in 2025. Production of Ginnie Mae and non-QM MBS backed by loans ineligible for agency MBS securitization have grown relative to that of Fannie and Freddie. And while policy directives from the Federal Housing Finance Agency have been fluid, the initial policy shifts under the current administration tilted towards reducing the GSE footprints with actions like the elimination of special credit programs. Overall, the longer-term outlook favors tighter agency mortgage spreads, and the potential for developing opportunities outside of agency RMBS looks increasingly interesting. For now, credit spreads remain tight. while agency spreads remain notably wide relative to their own history and most credit products. We are watching for more potential cracks in consumer credit. Auto loan delinquencies, for instance, are starting to creep higher, and with labor markets showing hints of weakness, we are watching the consumer closely. We observe that most private and public credit markets offer very little, if any, margin of safety for weaker credit performance. That makes agency paper look very attractive for many traditional fixed income investors and new investors that may realize the value in liquid assets after carrying too much exposure to private credit. Agency securities continue to offer strong risk-adjusted returns. As investors realize the potential returns in agency RMBS, we expect that spreads will compress. We also increased our exposure to agency CMBS, modestly in the last quarter as that sector lagged the performance of RMBS. Over time, we expect to increase our exposure to agency CMBS relative to RMBS as RMBS spreads tighten. Today's portfolio remains extremely attractive. Our shareholders gain exposure to a cheap asset class and a unique platform in which to leverage these assets. Thank you for your focus on our work. I will now turn the call over to Byron Boston.

Thank you, TJ, and good morning to all. I want to make just one very important point. As significant shareholders, the executive team stays focused on durable, shareholder-first decisions. Dependable yield is front and center, and Dynex's disciplined approach supports a competitive dividend. And on that note, I'm going to turn it back over to Smirky for final comments.

Thanks, Byron. As the quarter came to a close, Rob and I increased our personal investments in the company, strengthening our alignment with shareholders through the purchase of additional shares. I'm genuinely excited about what the future holds for Dynex and look forward to updating you all again on our progress in January. That ends our prepared remarks, and I'll turn it over to the operator to build the Q&A pipeline.

If you would like to ask a question, please press star on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line, Bose George. You may go ahead.

Hey, everyone. Good morning. Actually, first question, just wanted to ask about, you know, where you see incremental spreads and current ROEs. and how that compares to the ROE that's implied in your current gift end.

Yeah, good morning, both. It's TJ. The ROEs in agency RMBS remain in the high teens net of hedging costs, and really you can get to gross in the mid-20s on a large percentage of the coupon stack.

And that, in terms of leverage, does that kind of imply your current leverage or, yes, is that kind of the implied leverage in that number?

Yeah, at the current levels, it would be right around those mid-teen, mid-to-high-teens numbers.

Okay, great. And then, can we get an update on book value quarter to date?

Yes, estimated $1,271 net of the dividend accrual as of Friday's close.

Okay, great. Thank you.

Our next question comes from the line of Doug Harder with . You may go ahead.

Thanks. TJ, in your prepared remarks, you talked about, you know, still seeing mortgage spreads as wide relative to their history. I guess when we look at it, you know, spreads are kind of closer to or slightly tighter than their long run average. So just hoping you could kind of flesh out that comment and, you know, kind of what measure you're looking at it to come to that conclusion.

Yeah, the spread, if you look at them just versus certain components of the Treasury curve, I could certainly see what you're talking about there both. However, excuse me, sorry, Doug. I'd say versus interest rate swaps, though, if you look at them versus interest rate swaps, mortgage spreads are still in that top quartile of the widest levels we've seen over the long term.

And then I guess just on that, how are you thinking about swap spreads here? What could be any catalyst to get them to change and risk of kind of moving against you?

Yeah, we continue to see the federal deficit as a major factor. We've talked a lot about that in the past. Certainly as treasury supply increases relative to expectations, and that's an important construct that we think about it relative to expectations, which are obviously very high for treasury supply at this point. To the extent that you were to outperform those expectations, you were to see treasury supply come in more than expected, then spreads could certainly go more negative. It's important to note, though, that at today's spread levels, you have a nice buffer there, right? So we can withstand some more negative swap spreads and still earn that carry over time. And that's really the beauty of this model with permanent capital and holding the kind of liquidity that we do, that we're able to hold on to these positions and ultimately capture that spread. I think it's really the best vehicle in which to do that.

Thank you.

Your next question comes from Trevor Cranston with JMP Securities. You may go ahead.

Hey, thanks. Good morning. You guys talked a little bit about the supply side of the equation for agencies over the next year or so. Can you talk a little bit about what you're seeing on the demand side of things? And in particular, I'm curious, you know, it looks like the GSEs grew their you know, their balance sheets and retained portfolios a bit in the third quarter. I'm curious what you think about the potential for, you know, the GSEs as a player on the demand side of things is going forward. Thanks.

Yeah, absolutely. That is a source of potential marginal demand that we have not seen in a long time. Their, you know, monthly reports show that things have been kind of in status quo for the last, let's say, you know, well, several years. I think GSE holdings of agency MBS could certainly increase. So far, their activity looks much like it has for the last several years, but they have the capacity to add as much as $450 billion under the current stock purchase agreements with Treasury, and they only hold about 194. So it's a massive amount of potential for I don't think it's a very high probability we see them use all that capacity, but it's certainly one of the levers that this administration can pull to impact housing markets. Got it.

Okay.

Your other point, I'm sorry, I didn't get to all of your, I just focused on the GSEs there. You know, I'll just touch on the supply and demand outlook broadly on the demand side in particular from the other major institutions. Bank deposit growth, should continue to support demand. We're continuing to see solid deposit growth. The banks have been relatively quiet since the first quarter. I suspect that they'll be back in in a reasonably big way, especially in the first quarter of 2026. Institutional investors, foreign governments, I continue to see them as net sellers of a small amount of mortgages. And then domestic bond funds and annuities have continued to see very strong performance. Last week was actually one of the strongest weeks of inflows that we've seen in domestic bond funds in some time. So those are solid marginal source of demand. And lastly, the mortgage REIT community. We continue to be a preferred method, at least of some of the top mortgage REITs out there. I think we are the preferred manager of mortgages on a levered basis in the marketplace. And we are a marginal source of demand too. So overall, I think there's plenty of moving parts. It's created some nice opportunities for us on the demand front as these different sources of demand kind of ebb and flow and create a little bit more volatility and spreads. Yeah. Okay. That's helpful.

And on the hedging side of things, with the implied volatility coming down, you know, it looks like your option position increased a little bit this quarter, but is there any real sort of impact on how you guys are thinking about the hedging strategy overall with a lower volatility priced in right now?

Yeah, when vol is lower, that is what we spend a lot of time thinking about. Where should we look to repurchase some of the options that were inherently short in a levered mortgage position, and there are pockets of cheap volatility. We continue to look at those, and you can see the positions that we've added modestly in the third quarter. So I think that remains a deep and liquid market. It's a great way for us to continue to stabilize the duration of our portfolio.

I think also I'd add there, Trevor, just the macro thought process for You know, looking at what the distribution of outcomes could be and, you know, the market seems to be cutting some tails out of the process. And, you know, when that type of opportunity exists, you know, we really think long and hard about protecting our shareholders in these outsized tail events. And when that protection looks cheap, we tend to jump in and, you know, make those types of decisions.

Yeah, that makes sense. Okay, appreciate the comments.

Thank you. Next question comes from the line of Eric Hayden with BTIG. You may go ahead.

Hey, thanks. Good morning. Just following up on this volatility market kind of theme, I mean, why do you think the market has shrugged off all these themes, which would maybe ordinarily kind of drive more volatility, especially over these last few weeks? I mean, does that change the way that you think about the range for MBS spreads more holistically right now?

So at a big picture, I think there have been events that have narrowed sort of the market's opinion of what the outcomes could be, right? So there's more certainty, and even the passage of time gives us more certainty. So policy-wise, we're sitting here with the Fed looking like they're firmly committed to some level of eases over the next two to three meetings. You've also seen a lot of policy outcomes from the administration becoming more clear. So I think the market has reacted to that. But one of the things that does happen is there's a short-term focus for the markets. And in our long-term way of thinking and just recognizing that everything that we talk about in the global environment, demographics, migration, geopolitics, all of that, that doesn't take away the probability for tail events, right? There's also like massive amounts of liquidity still available in the markets that are driving asset flows that are affecting options prices, right? So as we look at the fundamentals, the technicals, the psychology, we're evaluating, you know, the whole picture of, We like the idea of buying out of the money protection here because the environment isn't as calm as it looks. That's kind of our opinion. So that's the thought process. I mean, the market has shrugged off a lot. I think there's one particular sector in the market that's driving a lot of the thought process, and that's the advent of AI. But, you know, the rest of the economy still exists. They're still vulnerable to shocks. And that part, that is really how we think about it. And as you know, you know, the big money in this sector gets lost or made during periods of extreme volatility. And so we have to think about, you know, those scenarios. And even if they're a low probability, we have to be ready. And we think about when protection is cheap, we're doing that thought process. TJ, did you have anything else to add on that?

No, I think that's, you know, the critical part there is that you're constantly preparing for the unexpected when you run this kind of portfolio. That is what we do. In some ways, I don't know the answer to your question, why has the markets, you know, shrugged things off. we're preparing for the day when the markets start to react in a big way.

And you're seeing some little things that are pointing in that direction, right? Like you're seeing a few things that aren't going potentially as well. So these are just indicators of the vulnerability.

Always appreciate your thoughtful responses. You know, you guys noted the expectation for faster speeds. And so as you guys do reinvest that, Do you feel like there's opportunities to pick up alpha within the coupon stack, or are you pretty much driven into the current coupon in order to support your return on capital, or is there really more flexibility to pick spots?

Great question. That is something we've identified as a potential source of alpha for several quarters now, not just taking what the current coupon gives you, not acting like the largest index kind of player. And we had that deliberate lower coupon bias, and that was very, very strategic and intentional for the last several quarters. I think it's really starting to pay off. So yes, you're right. As we reinvest some of the paydowns on the book, the opportunities across the capital, across the coupon stack are tremendous. And that's the great part about our size. We are at a a great scale and can continue to grow while not being so large that we can't move outside the current coupon and remain very nimble.

It's really helpful. Thank you guys so much.

Again, if you would like to ask a question, please press star 1 on your telephone keypad. At this time, there are no further questions. I would like to turn the call over to Smirthy Papano, co-CEO and president, for closing remarks.

Thank you, operator, and thank you, everyone, for your time and attention. I look forward to updating you all again in January. We'll now close the call.

This concludes today's call. You may disconnect.