Dynex Cap (NYSE:DX) held its first-quarter earnings conference call on Monday. Below is the complete transcript from the call.
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Access the full call at https://event.webcasts.com/starthere.jsp?ei=1757721&tp_key=8f7976773d
Summary
Dynex Capital Inc reported a book value of $12.60 per share, with an economic return of negative 2.5% for the quarter, due to a decrease in book value and dividend payouts.
The company increased its total capital base by 18% during the quarter, deploying $442 million as MBS spreads widened, and improved book value post-quarter as spreads tightened.
Management emphasized strategic growth in capital markets, focusing on long-term shareholder value creation through disciplined portfolio and risk management.
Net interest income increased to $0.40 per share, driven by declining financing costs following Federal Reserve rate cuts, with expectations for expenses to normalize in the upcoming quarters.
The company is leveraging its scale as the third-largest agency-focused mortgage REIT, aiming for tighter mortgage spreads and highlighting its capacity for opportunistic capital allocation amid market volatility.
Dynex Capital Inc is optimistic about future spread tightening, supported by GSE mortgage buying and a supportive policy environment, and remains focused on delivering stable valuations and solid returns.
Full Transcript
Allison Griffin (Vice President of Investor Relations)
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 20th. 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 identified 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 Papano, Co Chief Executive Officer and President, Byron Boston, Chairman and Co Chief Executive Officer Mike Sartori, Chief Financial Officer and TJ Connolly, Chief Investment Officer. I now have the pleasure to turn the call over to Smriti.
Smriti Papano (Co Chief Executive Officer and President)
Thank you, Allison and good morning everyone. We continue to build our company at the intersection of two 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’s 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 moves. More than ever, mindset and preparedness are the key factors for successful decision making because the policy paths 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 through a short burst of volatility which we used 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.
Mike Sartori (Chief Financial Officer)
Thank you and good morning everyone joining us today! I’d like to begin by welcoming Kaelyn Mauritz who joins Dynex today to lead capital markets and investor relations. Kaelyn brings deep industry experience across both functions and her background will support the continued growth of our capital and investor base while also 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 $12.60 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 of 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 raised 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 the 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 cost. Our expense structure. With that, I’ll turn it over to TJ to provide additional detail on portfolio strategy and the outlook.
TJ Connolly (Chief Investment Officer)
Thanks, Mike. 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 Ukraine, 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 one 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 as spreads widened 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, Real Estate Investment Trusts (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 improves downside liquidity, 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 retain pools they had previously been selling through 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 endgame 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. Refill 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 owns, 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 160s at quarter end and moved back toward the 150 area late last week. As geopolitical events evolve and policymakers …
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