DYNEX CAPITAL INC Q3 FY2026 earnings call

• Market Context & Strategy: Management characterized Q3 as a pivotal period driven by rising yields (10-year Treasury >5%) and wider spreads, fueled by AI infrastructure demand, inflation concerns, and political uncertainty. Despite volatility, Dynex maintained its highest conviction positions without de-leveraging.
• Capital Structure Evolution: The company issued Series D preferred stock, raising $116 million net. This increased preferred equity’s share of the capital stack from ~3% to 7%, diversifying sources and adding accretive permanent capital. Additionally, $268 million was raised via ATM programs.
• Portfolio Dynamics: Current coupon mortgage yields rose nearly 100 bps, with spreads widening ~20 bps. Hedges were added in lockstep with rate moves to limit downside. Liquidity ($1.3B cash/unencumbered securities) absorbed book value declines and covered margin calls.
• Convexity Profile Improvement: With only ~1% of mortgages having >25 bps refinancing incentive, extension risk is minimal. Duration is stable, improving the convexity profile and reducing sensitivity to further rate hikes (modeled -0.5% equity impact for +50 bps rates).
• Operational Efficiency: G&A expenses remained disciplined at 2% of total equity annualized, down ~40% year-over-year, demonstrating operating leverage as the platform scales.

Dynex Capital operates as a single business segment focused on Agency Mortgage-Backed Securities (MBS). There are no distinct product segments reported separately. The firm’s total equity capital base was $3.1 billion at quarter-end, representing a 24% year-to-date increase. Book value per common share declined to $10.91 from $12.90 in the prior quarter, reflecting a 15.4% decrease due to market repricing. Total economic return for the quarter was negative 11.4%, including the $0.51 common dividend. Comprehensive loss was $1.49 per common share, compared to comprehensive income of $0.80 per share in Q2.

• Forward Returns: Management highlighted attractive static ROEs of ~20% for lower coupons and ~25% for current coupons on new investments hedged with interest rate swaps.
• Dividend Policy: No change to dividend policy announced; management expressed confidence that portfolio earnings power continues to support the dividend despite mark-to-market losses.
• Leverage Stance: Leverage ended at 9.0x. Management indicated willingness to operate at this level given the wide spread compensation and favorable financing environment, noting that modeled ROEs assume ~10x leverage but current positioning is robust enough to capture carry.

• Interest Rate Volatility: Significant rise in 10-year yields and implied volatility exposed floaters and drove convexity selling, though hedges mitigated most impact.
• Book Value Decline: Rapid repricing led to a 15.4% drop in book value per share, impacting shareholder equity metrics.
• Refinancing Risk: While currently low due to high rates, future declines in mortgage rates could trigger prepayment risk if not managed through hedging.
• Macro Uncertainty: Political uncertainty and rising government borrowing needs continue to exert upward pressure on yields globally.

Q: Doug Harder asked about the sustainability of higher leverage levels and how management achieves the cited 20%+ ROE targets amidst market volatility. / A: TJ Connelly attributed comfort in carrying leverage to a robust financing environment, citing $8 trillion in money market funds providing deep liquidity even during high implied volatility. He explained that levered ROEs are modeled based on current spreads, yielding ~20% on lower coupons and ~25% on current coupons, assuming approximately 10x leverage.

Q: Marissa Lobo sought details on marginal buyers supporting Agency MBS demand and the strategic rationale behind maintaining preferred equity at 7% of the capital stack. / A: Connelly identified GSEs as backstop buyers and noted growing foreign interest, such as Norges Bank potentially shifting to U.S. agency MBS for yield. Smriti Popenoe confirmed the 7% preferred ratio is opportunistic and accretive, offering flexibility to raise more capital if it remains cost-effective relative to common equity returns.

Q: Trevor Cranston questioned the macro outlook for rates and whether the portfolio is positioned for significant directional moves up or down. / A: Connelly stated the strategy is agnostic to direction, focusing instead on capturing wide spreads compensating for implied volatilities. Popenoe emphasized that extension risk is minimal because 90% of existing duration extension has already occurred; thus, further rate hikes pose limited additional downside risk to cash flows.