DYNEX CAPITAL INC Q3 FY2024 earnings call

• Dividend increase: Board voted to increase common dividend by $0.02 per share per month, from $0.13 to $0.15 per share (15% increase).
• Investment strategy: Strategically focused on capital allocation, growing the company for operating leverage, balancing equity capital, and being reliable stewards of capital.
• Macro environment: Favorable return environment with funding costs declining and steeper yield curves; Fed moving to a less restrictive regime offering opportunity to earn positive carry from yield curve.
• Portfolio management: Managing existing portfolio, optimizing capital structure, raising equity, investing capital at accretive ROEs; shifted hedge book from treasury futures to SOFR swaps to take advantage of spread differentials.
• Leverage and drop income: Potential to increase total leverage 1-2 times opportunistically within macro risk context; drop income driven by steep yield curve, favorable asset yields, and potential specialness in dollar-roll markets.

The economic return for the quarter was 7%. Book value ended the quarter at $13 per share. Leverage was slightly down from the second quarter due to increased book values. Interest income increased from the active addition of higher-yielding assets, while borrowing rates on repurchase agreements began to trend down with the Fed's first rate cut in September. Revenue contribution details by product segment were not specifically broken down in the transcript.

• Dividend increase reflects confidence in future returns.
• Potential to increase total leverage 1-2 times opportunistically.
• Expect favorable environment for asset and hedge sides of portfolio, generating alpha from dollar rolls and relative value; more compelling yields on hedges to allow greater mix of assets for robust returns.

• Near-term event risk from U.S. Elections and broader geopolitical developments.
• Volatility in repo markets, especially around quarter-end due to Fed's quantitative tightening program and regulatory capital constraints.
• Unforeseen external factors that could cause actual results to differ from forward-looking statements.

Q: Can I just get an update on mark-to-market book value?

A: Mark-to-market book value is down about a percent since quarter-end.

Q: In terms of taking up the leverage, what kind of factors are you focused on?

A: Near-term event risk (e.g., election season and market volatility), macro environment, marginal ROE, spread levels.

Q: From the NIM standpoint, the piece that you're switching, does that incrementally get that sort of the 40 basis point differential between the treasury spread versus the swap spread?

A: It does; switching to swaps locks in forward financing costs and earns the 40 basis point differential.

Q: If we saw prepayment speeds pick up more meaningfully, how would that change approach to leverage or hedging?

A: Relative value opportunities in different coupons remain ample; specified pool holdings have muted prepayment impact; also looking at agency CMBS and other parts of mortgage capital structure.

Q: Talk a little bit about how you're thinking about the rates market and risk positioning ahead of election?

A: Fed is less restrictive, terminal Fed funds rate expected between 3%-4%, mortgage rates between 5%-7%; focus on yield curve shape; prepared for increased volatility around election with liquidity and capacity to add leverage.

Q: Talk about capital raising decisions and dividend increase?

A: Good investment environment, ability to generate returns in excess of dividend, wide MBS spreads, ability to hedge and lock in lower financing costs; ATM and block trades possible for capital raising, with stock price close to book value.