Dynex Capital Q4 2025 Earnings Call - GSE Retained Portfolios Reboot Tightens MBS Spreads and Reprices Risk

Conference Operator: Good day, and welcome to the Dynex Capital Inc. fourth quarter and full year 2025 earnings conference call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Allison Griffin, Vice President, Investor Relations. Please go ahead.

Allison Griffin, Vice President, Investor Relations, Dynex Capital: Good morning. The press release associated with today’s call was issued and filed with the SEC this morning, January 26, 2026. 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 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/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 under Quarterly Reports on the Investor Center page. Joining me on the call today are Byron Boston, Chairman and Co-Chief Executive Officer, Smriti Popenoe, Co-Chief Executive Officer and President, Rob Colligan, Chief Financial Officer, TJ Connolly, Chief Investment Officer, and Mike Sartori, Head of Capital Markets. It is now my pleasure to turn the call over to Byron and Smriti.

Byron Boston, Chairman and Co-Chief Executive Officer, Dynex Capital: Good morning, and thank you for joining us today. As we start 2026, let me anchor where we are in our company’s evolution. Since I joined Dynex in 2008, the team and I have always operated and competed with a performance-first mentality and with the ethical stewardship of our shareholders’ capital at the core of our decision-making. This focus has created a repeatable and sustainable performance edge, delivering industry-leading returns for our shareholders. Our principles, risk management first, treating liquidity and reputation as a strategic asset, and a culture grounded in learning, kindness, trust, and curiosity, continue to differentiate us. What sets our approach apart is not the ability to predict every environment, but the discipline to adapt in many environments. Resilience is what ultimately enables Dynex shareholders to enjoy compounding over decades.

Our framework gives us the confidence to lean into the right moments of opportunity and endure turbulence without being forced to retreat. We can even advance during periods of dislocation while others pull back. Over time, those small behavioral advantages have compounded into meaningful performance differences, creating the foundation to propel us to this phase of Dynex at the start of this decade.

Smriti Popenoe, Co-Chief Executive Officer and President, Dynex Capital: Our strong start in 2020 gave us the springboard to create a resilient company at the intersection of capital markets and real estate finance. The decisions we made early this decade to intentionally raise capital in smaller amounts, gradually building our equity base while generating top-tier returns, set the foundation for today’s sustained value-creating growth. Our momentum continues to rise as we methodically execute our strategy, and the results speak clearly. Over this decade, through December 31, 2025, Dynex shareholders experienced a 67% total return, or nearly 9% annualized, with dividends reinvested, outperforming the REM ETF by over 8,000 basis points or 700 basis points annually. 2025 was an outstanding year.

Dynex shareholders earned a 29.4% total shareholder return, driven by both dividend income and significant share price performance in a year marked by policy complexity, shifting rate expectations, and geopolitical crosscurrents. As of the end of last week, our total equity market capitalization, including our preferred shares, was $3 billion. In just 13 months, we have almost tripled the size of our company, creating resilience, strategic flexibility, and scale for our shareholders. Delivering these results required and accelerated significant evolution across the company. We added depth and breadth across the team, building our legal team with a new Chief Legal Officer and our investments team with two senior investment professionals. We planned, commissioned, and delivered two new offices in Richmond and New York City, and we have successfully made a transition to T.J. Connolly as our Chief Investment Officer.

To reflect the needs of our growing, strategically focused enterprise, we separated the roles of Chief Financial Officer and Chief Operating Officer. Rob Culligan, who held both titles, will take on an expanded CFO function, including the building out of our corporate development capabilities.... Today, we welcome Meagan Bennett as our new Chief Operating Officer. A seasoned operator with deep financial and operational expertise from Fannie Mae, Morgan Stanley, and GE Capital, and a U.S. Navy veteran, Meagan brings leadership and discipline to strengthen our platform. She will lead the modernization of our operational backbone to enable scalable, efficient growth for the long term. Looking ahead, we are operating our business in a rapidly changing global landscape. Human conflict remains the key factor, creating surprises that result in policy and market volatility.

We have been prepared for the greater possibility of a wider range of outcomes, and for some years now, we have called this a flat, fat tail distribution. It has tilted our risk appetite towards liquidity and flexibility. Demographic trends in developed economies are reshaping growth, fiscal capacity, and the cost of capital. For years, low rates and central bank support masked the rising pressures. But in the end, fewer workers, savers, and taxpayers make growth harder to generate and debt more expensive to carry. Policymakers face increasing temptation to use inflation or manage markets as a pressure release, and this pattern is global. In such an environment, government policy can mean simultaneously increased risk and opportunity. This has been true for us since 2020.

Our portfolio construction continues to reflect the reality of shifting policy across a variety of factors, including active government intervention in the housing market and monetary policy. On the other hand, the global demand for income continues to rise, and that creates a powerful backdrop for our capital raising strategy. Investors across the world are searching for stable, repeatable cash flows in an environment marked by demographic shifts, funding gaps, and persistent volatility. Platforms that can deliver high-quality income with stewardship, transparency, liquidity, and disciplined risk management are increasingly scarce. Dynex sits directly in that space, and our ability to generate reliable dividends, backed by a resilient portfolio, naturally attracts capital that is seeking durable income. At the same time, the continued expansion of passive investing provides an additional structural tailwind. As passive vehicles grow, they are required to own larger positions in companies with scale and liquidity.

Raising capital at accretive levels expands our equity base, improves trading liquidity, and increases Dynex’s relevance within these passive strategies. The combination of rising global demand for income and the mechanical bid from passive capital strengthens our shareholder base, lowers our cost of capital, and drives the long-term compounding that we aim to deliver. These factors support the building of Dynex for scale and strength, growing the company in ways that embed resilience into the core of our model, so we can navigate a wider set of outcomes and keep delivering long-term value. We are evolving our business steadily and will continue to fine-tune people, process, technology, and structure to stay aligned with our strategy. The company is well-positioned, and we are prepared for the next phase of our journey, grounded in our strategy, anchored by our core values, and focused on long-term value creation.

I’ll now turn it over to the team to detail more of how this strategy is being put to work and to share our results for the year. TJ?

TJ Connolly, Chief Investment Officer, Dynex Capital: Thank you, Smriti. This decade, we have emphasized that government policy is one of the most powerful forces shaping asset returns, often more influential than traditional fundamentals alone. Government policy played a large role in driving returns last year and continues to do so in 2026. In a year that began with an unusual degree of macro uncertainty, our portfolio total economic return was 10.2% in the fourth quarter and 21.7% for 2025, the highest TER this decade. We entered 2025 with mortgages at historically wide spreads to interest rate hedges and a high degree of policy uncertainty. This presented an excellent opportunity to raise and deploy capital at higher leverage and wider spreads, and the strength in our results reflects the effectiveness of this strategy.

We raised capital methodically and consistently deployed it into assets at wider spreads, supporting compelling future dividends for our shareholders. As we begin 2026, spreads have tightened further, and policy direction in the MBS markets has become far clearer. Recent actions and guidance now point toward a more stable and supportive framework for the mortgage market, creating a strong foundation for forward returns and greater confidence in the path ahead for MBS spreads. Our capital raising was led by Mike Sartori, our Head of Capital Markets, and he will give you more details.

Mike Sartori, Head of Capital Markets, Dynex Capital: Thanks, TJ. We pursue a distinctive strategic capital raising approach and partner closely with our brokerage counterparts to execute Dynex’s discipline strategy. In 2025, we executed our capital raising strategy with precision and intention. We raised capital accretively through the at-the-market program and worked hand in hand across the team to invest and hedge the capital on a real-time basis. This approach allowed us to maintain tight alignment between stronger valuations on our stock and wide mortgage spreads. Over the course of the year, we raised and invested over $1 billion as our price-to-book valuation rose. As we move into 2026, we will continue to follow the same methodical, disciplined playbook. We expect to issue when it is accretive, deploying the capital in investments, generating economic returns above our hurdle rate.

In the first few trading days of January, we raised nearly $350 million, and share count as of last Thursday was 199.6 million. TJ will further discuss the year ahead.

TJ Connolly, Chief Investment Officer, Dynex Capital: Thanks, Mike. While MBS spreads are tighter today than they were for much of last year, the overall return environment might be even better, driven by policy support for housing finance, higher liquidity, and an environment with more opportunities to tactically create value. The Trump administration’s recent announcement to increase the GSE retained portfolios by $200 billion marks a return to portfolio growth for Fannie Mae and Freddie Mac and provides a meaningful technical tailwind for spreads. For Dynex, this is a positive. It supports valuations, and it will likely reset the spread regime tighter while limiting spread widening. The impact of the GSEs is unique. The backstop bid, especially focused on spreads, allows a host of investors to reassess the amount of spread risk they are willing to take.

We believe the impact will return us to a tighter range in spreads with limited spread widening, possibly like that seen before the financial crisis, as you will see on the left-hand side of the spread chart in our earnings presentation on page 12. We expect a return to this type of spread environment would enhance the risk-return profile of the assets we own and provide attractive returns for our ongoing capital deployment. Even before the GSE buying announcement, we expected demand to overwhelm supply in 2026, led by bank demand of over $100 billion. While we expect the GSEs to be price-sensitive buyers, and even for money managers to slowly reduce their MBS overweights as spreads tighten, the supply and demand balance in agency mortgages will likely lean towards higher net demand for many quarters.

As the GSE retained portfolios grow, it is unclear how they will hedge. We are also mindful that in past periods of high portfolio growth, the GSEs had active hedging programs, and swaps would be their most likely hedge if they chose to hedge duration. We also expect that GSE convexity hedging would impact technicals in the market for options. The administration appears clearly focused on reducing mortgage rates, and we remain focused on managing and mitigating convexity risk. The fourth quarter prepayment environment reinforced one of the clearest lessons of the year: security selection remains the most reliable and consistent source of alpha in agency MBS. In a market characterized by low but uneven turnover and periodic spikes in refinancing, avoiding the most prepayment-sensitive collateral was essential for protecting carry and reducing reinvestment risk amid the periodic interest rate volatility.

Prepayment dispersion is increasingly driven by micro-level factors that reward granular pool work. Technology-enabled optimization at originators and servicers continues to make refinance and retention outreach more targeted and efficient. The fourth quarter data reaffirms that generating alpha in agency MBS is not simply about coupon exposure, it is about owning the right pools within those coupons. Our positioning reflects that lesson, avoiding prepayment-sensitive stories and emphasizing structurally more stable collateral. Relative value will also play a larger role in tactical asset allocation, not only within coupons, but within sectors. Of course, mortgage returns are driven not just by spread risk, but also interest rate volatility risk. Given the policy dynamics in today’s markets, we expect and plan for periodic bouts of volatility. Our yield curve exposure is more balanced, as the greatest clarity on the policy front is for tighter mortgage spreads.

As policy and economic data evolves, we will continually evaluate the curve exposures in our hedges. While longer maturity yields currently offer the potential for larger dispersion than shorter maturity yields, we are mindful that changes in Federal Reserve policy or personnel could shift even shorter maturity yields meaningfully. We strategically added options positions in 2025 to reduce the portfolio’s exposure to rate volatility and expect that options will continue to be important in the coming quarters to manage risk. While policy can evolve quickly, the Agency MBS market looks likely to be supported by a strong tailwind, and the leverage returns for earning spread income in the best segments of this market remain compelling. Our team at Dynex has a long history of extracting equity-like returns from fixed income in this kind of market regime. We rely on the principle to prepare, not predict.

We operate with a flexible mindset, resisting the kind of rigid thinking that could lead us to alter portfolios at exactly the wrong moments. Our scenario planning gives us the confidence to hold exposures through stress and to stay open to opportunities when others are constrained. That flexibility gives us tremendous optionality and helps us avoid the behavioral traps that destroy value, which is why we’ve been able to deliver differentiated performance across cycles. Now I’d like to turn the call over to Rob, who will give you more details on our outstanding quarter.

Rob Colligan, Chief Financial Officer, Dynex Capital: ... Thank you, TJ. The total economic return in the fourth quarter was 10.2%, consisting of $0.51 of common dividends and a $0.78 increase in book value per share. For the year, our book value increased $0.75, and we declared $2 of dividends per common share, which are paid on a monthly basis. Comprehensive income for the quarter was $190 million and was $354 million for the year. We ended the quarter with leverage of 7.3x total equity. Our liquidity position remains very strong, with $1.4 billion in cash and unencumbered securities at the end of the quarter, representing over 55% of total equity. As mentioned earlier, we’ve raised $1.5 billion over the last 13 months at the most accretive levels in the company’s history.

Beyond the resilience and stability that a larger capital base provides, we understand that a larger, more liquid company typically earns a better valuation metric. It’s important to us, as stewards of your capital, to keep these factors in mind as we grow. The TBA and mortgage-backed securities portfolio started the year at $9.8 billion, grew to $15.8 billion at the end of September, and ended the year at $19.4 billion. We continued to add to the portfolio after year-end and currently have approximately $22 billion in TBAs and mortgages. Pools and TBAs we’ve held and added this year benefited from spread tightening in the second half of the year, which accelerated into year-end and continued into 2026.

Our current book value, which has been in the range of $13.85-$14.05 per share, net of the accrued dividend, is up 3%-4% from year-end. For our year-end tax disclosure, we’re estimating that we earned $229 million of taxable earnings, covering all of our preferred dividends and 93% of our common dividend, which will be treated as ordinary income. The remaining 7% is a non-dividend distribution. Our dividend tax reporting will be posted to our company’s website by the end of the month. Expenses for the fourth quarter were up, as our accrual for performance-related compensation increased, lining up with the strong returns delivered in 2025.

Our general and administrative expenses as a percentage of capital are down materially year-over-year, from 2.9% of total equity at the close of last year to 2.1% at the close of 2025. We continue to make investments in people and technology to ensure Dynex is built for the future, and our expense ratio may stay at the year-end 2025 levels until additional growth is delivered and new breakpoints and levels of scale are achieved. With that, I’ll turn the call back to Smriti for her closing comments.

Smriti Popenoe, Co-Chief Executive Officer and President, Dynex Capital: Thank you, Rob. As we look ahead, we remain focused on disciplined execution and delivering durable long-term value for our shareholders. We are deeply grateful for the trust you place in us. Trust is a core value at Dynex and ultimately the product we work to deliver every day. And as a management team invested alongside shareholders, our interests are aligned with yours, and we are committed to stewarding your capital with integrity, transparency, and care. I will now open the call to questions.

Conference Operator: Thank you. If you’d like to ask a question, please signal by pressing star one on your telephone keypad. If you’re using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that is star one to signal for a question, and we’ll take our first question from Doug Harter with UBS. Please go ahead.

Speaker 3: Thanks. Hoping you could quantify where you see incremental investment returns today and how that compares to, you know, kind of year-end and 9/30, just given the, you know, the spread tightening that we’ve seen.

Rob Colligan, Chief Financial Officer, Dynex Capital: Yeah, absolutely. Good morning, Doug. Today we see hedged ROEs in the mid-teens with leverage around 7x, and with targeted leverage in the low 8s, we see ROEs in the mid- to high teens. So as we get even more clarity on the return environment, with the, you know, return of these native GSE balance sheets, there’s scope for modestly higher leverage, I think, in private portfolios.

Speaker 3: I guess just how that compares to, to say, three months ago, just given the spread tightening, just kind of want to make sure I understand, you know, how the dynamics changed.

Rob Colligan, Chief Financial Officer, Dynex Capital: Yeah, the dynamic is roughly, it’s, you know, depending on the coupon, between 150 and 300 basis points tighter than it was, let’s say, at the end of end of last quarter or the prior quarter, third quarter, that is.

Smriti Popenoe, Co-Chief Executive Officer and President, Dynex Capital: Yeah, I think, I think the biggest difference, Doug, is that before the GSE balance sheets were announced as being active participants, you did have the risk of spreads widening significantly, as we saw during periods of volatility in 2022, 2023, during the tariff tantrum last year. And what this does, it really takes a big part of that tail risk out. So yes, returns are lower, but also the ability for spreads to widen out a whole bunch because of the return on these balance sheets has also improved what I think of as the risk-return profile going forward, right? The other thing that this does is once you have these native balance sheets back in business, other investors, other than ourselves, begin to reevaluate the risk-reward.

If you don’t have that big downside risk from spread widening, you know, this starts to be a really compelling space, right? These are agency-guaranteed assets. You’re still earning double-digit returns. So it ends up being actually a pretty good investment environment.

Speaker 3: If, if I could just push back on the risk-reward. I mean, I think, you know, clearly, you know, what you had talked about, you know, in prior past couple calls was given the wide spreads, you know, just how attractive the risk-reward was, and, and clearly, you know, correct, given, given the spread tightening you’ve seen. So I, I guess just trying to, to square that, you know, given the amount of return that you’ve kind of already generated, you know, given the spread tightening, you know, with those comments. So just, just wanna make sure I understand that dynamic.

Smriti Popenoe, Co-Chief Executive Officer and President, Dynex Capital: Yeah. I mean, I mean, risk rewarded by upside as well as downside, right? One of the things that’s been taken out of the picture here, if this policy sticks, and if this ends up being a situation where GSE balance sheets are here, and they’re here for the duration, what that does is it limits your downside risk. So the upside risk may not be as high as it was when they weren’t around, but taking away downside risk is a meaningful difference in terms of your forward return profile. So yes, the-- you know, in twenty twenty-two to twenty twenty-five, you did have an unusual situation. I mean, we called it a generational opportunity, right?

So you had a generational opportunity to generate outsized returns, and with the return of these balance sheets, what’s happened is that your downside is much less than it was in the last three years. And that’s when I say risk-reward, it’s really the risk goes down relative to the reward.

TJ Connolly, Chief Investment Officer, Dynex Capital: Yeah, it’s. I’ll just add to that, Doug. It’s all about scenario planning. We are constantly planning for a range of scenarios, especially when it comes to the risk profile of the portfolio. And since the announcement that it’s very clear that this administration is deeply concerned about mortgage spreads, we have to talk about it as a team and say: Look, the probability of going to that wide spread again is lower than it was before. And that changes the risk-reward profile that Smriti’s talking about.

Speaker 3: All right. I appreciate the detailed answer. Thank you, guys, very much.

TJ Connolly, Chief Investment Officer, Dynex Capital: Pleasure.

Conference Operator: If you find your question has been answered, you may remove yourself from the queue by pressing star two. We go next to the line of Trevor Cranston with Citizens JMP.

Speaker 12: Hey, thanks. Good morning. Can you guys talk a little bit about, you know, how you’re thinking about the probability of other, you know, sort of politically motivated actions to attempt to improve housing affordability or lower mortgage rates, you know, potentially through things like, lowering the G fees that Fannie and Freddie are charging, and kind of how that plays into how you’re thinking about investments right now? Thanks.

Smriti Popenoe, Co-Chief Executive Officer and President, Dynex Capital: Hi, Trevor. Thanks. Good morning. So yes, I mean, I think we are. You know, I’ll just zoom back a little bit here. You know, in the 1990s and the 2000s, the GSEs were very much an instrument of managing housing in the U.S., right? Like, these are entities that have been around for a long time. They’ve been active participants in facilitating liquidity in the housing market, and they’ve also been directly or indirectly asked to change the way housing gets really implemented in the U.S., right? So you can think about affordability goals back in the 1990s and the 2000s. Those existed back then as well, right? So the history of government intervention or wanting to influence where capital actually gets put, that’s not new.

This has been around for some time, and these entities have been around, and they’ve been made to do exactly this, right? So when you have that in the back of your mind, is it possible that the government does use these entities to implement housing policy that they believe is, you know, better for Americans in terms of lowering homeownership costs and so on? Absolutely, right? So this is not new. So, you know, will they do lowering of G-fees? We’ve heard that being talked about. We’ve heard about loan-level pricing adjustments being taken away. All of that is very much real and possible.

You know, I’ll let TJ talk about sort of the impact on mortgage rates and the convexity of mortgages, but we are very much anticipating and prepared for this type of intervention to happen. What you wanna do as an investor is prepare for the impacts of any and all of these, potential levers that could be pulled. TJ, why don’t you talk about just convexity impact on the mortgage rate?

TJ Connolly, Chief Investment Officer, Dynex Capital: Yeah, right. And I’ll just give you a quick sense of the, you know, day-to-day, Trevor. You know, Byron and Smriti work, and I work very closely with our partners in Washington, folks at the Mortgage Bankers Association, for instance, hearing about these potential proposals that could impact the prepayment profile of the mortgages that we own and how we bid ongoing mortgages, for the portfolio as we reinvest. And, you know, the day-to-day is that we’re hearing about these things, and then we come back, model them in our prepayment models, think about how the prepayment, both the, you know, turnover component and the prepayment component, refinance component that is, will impact the prepays in our portfolio and what we’ll do to the broader mortgage market.

And we’re taking that feedback back to folks like the Mortgage Bankers Association, who are talking with the FHFA and places like that. So it’s a very much a reflexive relationship, and we’re, you know, constantly modeling out how it might impact the mortgage market. You know, to date, I think most of the-- you know, it certainly impacts how we think about the, you know, most prepayment-sensitive mortgages that are out there. It continues to create more marginal demand and result in models valuing a lot of the prepayment protection that we already own even higher than it did before. So I would just-- you know, as I look at the proposals, it’s increasingly hard to find the kind of prepayment protected portfolio that you get with our portfolio.

Smriti Popenoe, Co-Chief Executive Officer and President, Dynex Capital: Yeah, I think the bottom line is there is gonna be more negative convexity, and there’s also the possibility that other instruments, you know, back in the day, we used to have prepayment-protected mortgages. Those are being talked about. You know, we could see the ARM market come back in favor, especially in a steep yield curve environment. So, you know, we said this in the call, but basically, like, you know, government policy can create both risk and opportunity at the same time, and you know, this is what we’re ready to be investing in.

TJ Connolly, Chief Investment Officer, Dynex Capital: Yeah.

Speaker 12: Okay, that’s very helpful. And then can you give an update on kind of where you’ve deployed the capital raised in January, sort of within the coupon stack and where you guys are finding the best value post the movement that’s happened since the GSE buying was announced? Thanks.

TJ Connolly, Chief Investment Officer, Dynex Capital: Yeah. We’re finding that the, you know, the belly of the coupon stack, primarily fives, has been the most interesting. But I will say it’s been a very dynamic market, much more... You know, I’ve talked for a long time about the breadth of coupons in which we can invest, and we’re finding pockets of opportunities on the specified pools side, across the coupon stack in coupons that, frankly, we hadn’t traded in several quarters. So it’s really across the board. If I had to point to a single coupon, I’d say it’s fives and five and a halfs to some extent. But again, seeing opportunities across the stack, for, you know, coupons that offer durable call protection on the specified pools side.

Speaker 12: Got it. Okay, thanks very much.

Conference Operator: We go next to the line of Jason Weaver with JonesTrading. Please go ahead.

Speaker 6: Good morning, guys. Congrats on capping off a very solid 2025.

TJ Connolly, Chief Investment Officer, Dynex Capital: Good morning. Thank you.

Smriti Popenoe, Co-Chief Executive Officer and President, Dynex Capital: Thank you.

Speaker 6: I want to start with, you know, effectively, you’ve grown the company by a huge leap, like you said in your prepared comments over the course of the last 13 months. What’s your thinking today around the appropriate size of the portfolio in context with, you know, what the current opportunity set is out there?

TJ Connolly, Chief Investment Officer, Dynex Capital: Yeah.

Smriti Popenoe, Co-Chief Executive Officer and President, Dynex Capital: Hi, Jason.

TJ Connolly, Chief Investment Officer, Dynex Capital: As far as the opportunity set, I’ll start there, and Smriti can talk more about just the benefits of the scale as a company. But when I think about the opportunity set, it’s growing dramatically for us in terms of, you know, like I just said to Trevor’s question, the market dynamics are such that there’s more and more opportunities across the coupon stack. This team has operated. We have a team that’s actually many of us were actually at the agencies in the 1990s. We’ve operated in this environment for a long time, so it’s pretty exciting. The amount of alpha that we can produce, beyond just a classic spread trade, which is still compelling. The amount of alpha that’s available is significant.

So when I think of this, this portfolio relative to the size of the market, we can be significantly bigger and still have tremendous opportunities to generate alpha. But I’ll let Smriti talk to some of the benefits of the scale as well.

Smriti Popenoe, Co-Chief Executive Officer and President, Dynex Capital: Yeah, I mean, one of the, one of the things that we’ve been able to do is go, you know, lean on the back of our performance track record, which came without the benefit of scale, and now, you know, investors are getting the larger equity base as, as, as something that’s a real benefit coming straight down to the bottom line. I, I still think there’s a lot of sense for the company to keep growing. You know, in, in terms of, resilience, in terms of being able to withstand the types of scenarios that we think are coming up in, in the future, it makes a lot of sense for us to keep growing. The investment environment, again, it shifts all the time.

We might be moving from, you know, what we think of as like a beta environment, where it was just—I’m not gonna say easy, but, you know, you could own mortgages, and spreads tightened, and you’d win. Now we’re getting in an environment where, yes, you have tighter mortgage spreads. You have to be cleverer in your portfolio management skills to earn that return. And having said that, look, our, you know, dividend yields are down, right? Like, a year ago, you were being asked to generate 17% return by the market, and we’re down to close to 14. So that also helps in that—in this situation.

Speaker 6: Got it. Thank you for that. And then just one more, maybe for Rob. We saw the G&A run rate bumped up in the fourth quarter. I’m assuming that has to do with incentive comp. What would we think about the forward run rate here?

Rob Colligan, Chief Financial Officer, Dynex Capital: ... Yeah, good question. Thanks. You’re exactly right. Good performance sometimes leads to increased incentive compensation accruals, and that’s exactly what happened in the fourth quarter. As I mentioned in the prepared comments, we are building scale, so we’re thinking of our expenses in the 2% of capital range for now. And, you know, obviously, as we go through the quarters, we’ll give you some updates. We do plan on hiring some additional people, adding to the team. The timing of those hires could impact the run rate. But that’s what we’re thinking at the current moment. And then, as we grow, I do think we’ll have opportunities to hit other layers or levels of scale and reduce a little bit further, but we’re not thinking about that immediately in 2026.

Speaker 5: All right, thanks again. That’s good color.

Conference Operator: Our next question comes from the line of Bose George with KBW.

Speaker 1: Hey, everyone. Good morning. Just going back to the earlier discussion with Doug on returns. In terms of returns going forward, do you see room for more upside from spread tightening, or is it really more of a stable dividend, just given the volatility, should be more muted going forward?

TJ Connolly, Chief Investment Officer, Dynex Capital: Yeah, I think that, you know, when we talk about the spread regime, I’d point you to page 12, Bose. I think there’s a really good case to be made that you can return to a tighter spread regime, much more like we saw throughout the late 1990s and into the early 2000s. It, you know, and it’s not just because of the GSEs. It’s really, or their buying, that is, it’s really about the backstop and the support from, you know, from the government that you’re potentially getting allows all investors to take more risks. So yeah, I think there’s, you know, you know, on a standalone basis, the ROEs are compelling.

The yield profile that we can garner from this portfolio remains compelling, and there’s the potential for significant spread tightening back to that kind of regime.

Speaker 1: And then just to follow up on, you know, the GSEs, what do you think happens once the GSEs get closer to that $200 billion cap? Do you think it gets extended, or how do you see their longer-term role in the market?

TJ Connolly, Chief Investment Officer, Dynex Capital: It certainly seems to me... I’ve never seen before tweets from someone like the FHFA or, you know, a report from someone like the FHFA or any entity like that in history that focused on mortgage spreads. Not just mortgage rates, but on mortgage spreads. That is a very different thing, and to me, indicates that we are in a unique environment. To your question, so it’s hard for me to see how $200 billion is necessarily the cap. I think it could be significantly more, and we know that it can be changed quite easily by the FHFA and/or Treasury pretty quickly.

Speaker 1: Okay, great. Thank you.

Conference Operator: We’ll move next to Jason Stewart with Compass Point.

Speaker 5: Hey, good morning. Thanks. One more follow-up on levered returns. TJ, just so I’m clear, the mid-teens and high teens at 7 and 8 times, that’s a carry return. It doesn’t incorporate this new spread regime moving tighter, correct? And then just to follow up on that, if you could address, when you’re thinking about that context of ROEs, how are you thinking about hedging that book?

TJ Connolly, Chief Investment Officer, Dynex Capital: Great. Yeah. To answer your question, yes, that is a carry ROE that assumes no additional spread tightening. That’s absolutely correct, those numbers that I quoted. And then the second part of your question was thinking about the hedge book. Two things. One, on the composition of the hedge book, you know, swaps offer a significant amount of carry relative to Treasuries by hedging in swaps, that is, relative to Treasuries. So two-thirds, one-third has been our mix, roughly for quite some time. I expect that that will be the case to maybe be slightly biased more towards swaps at points, you know, potentially in the 60%-80% range as a percent of our total hedge book on the interest rate swap side of things.

Interest rate swaps do tend to be a very natural hedge for the portfolio, and when the environment we’ve talked in the past about, you know, the macro factors that impact swaps relative to Treasuries, and I think those, those factors remain supportive of us hedging with, well, with interest rate swaps. In terms of curve positioning, I’ll note that our curve position is, you’ll see it in our scenario analysis, the risk profile slides that are in the deck, much closer to, closer to, to home, in terms of a little bit less of a steepening bias. Longer term, I do expect we will have a, a steepening bias in the portfolio.

But, you know, as the yield curve has kind of found a new equilibrium around these levels, we’ve found it prudent to allow the portfolio to be more balanced.

Speaker 5: Okay, thank you for that.

Rob Colligan, Chief Financial Officer, Dynex Capital: Hey, hey, Jason. Can I just add something, just because it seems like there’s just a shock value component of this in terms of how much spreads have tightened in the last year, you know, over the last two or three years. One of the things I just want to remind everyone is that the environment that we are coming from, that we’ve just come from, is the unusual environment. To see agency MBS spreads at those levels, 150, 160, 180 over Treasuries-

Smriti Popenoe, Co-Chief Executive Officer and President, Dynex Capital: ... I mean, those are unusual environments, and we have gone out and raised capital and put capital to work, and as I said, we’ve called this a generational opportunity, right? What we’re coming back to is really how things have been for most of the time in this, in the housing finance system. What we’re coming back to is a more normal, quote, unquote, "normal world", where you have some type of native balance sheet that’s owning these mortgage assets, acting as a buffer, right?

Spreads are now in a much more, quote, unquote, "normalized range," and you have the opportunity to earn returns, not just from owning MBS versus a hedge, but you have opportunities from relative value, you can do curve positioning, and this idea as that this is more normal, and we’re coming from an unusual environment, okay? So that’s a perspective I think, you know, it’s the unusual environment is, quote, unquote, "over," but we are just coming back to what we see as a very normalized environment. You know, for the GSEs, a lot of people on this team were there when they were public. We understand and know this structure.

To your question about, you know, what happens when the $200 million runs out, they can issue debt, they can do lots of things to grow the size of their balance sheet. We, we know very well how that process works. So it-- for us to, to be-- to make money in that environment is actually, there are opportunities for us to do that. So that’s, that’s something I don’t want people to miss out on, is that, you know, we’re just coming back from an unusual period to what is a more normal period.

Speaker 5: Yeah, good color. Thank you for adding that.

Smriti Popenoe, Co-Chief Executive Officer and President, Dynex Capital: Sure.

Speaker 5: I, I just have one other question. You mentioned corporate development capabilities, in your prepared remarks, and I was just wondering-

Smriti Popenoe, Co-Chief Executive Officer and President, Dynex Capital: Yeah

Speaker 5: ... if you could elaborate on that and whether that had anything to do with potential policy changes, or, or maybe you could just take one more step on that comment?

Smriti Popenoe, Co-Chief Executive Officer and President, Dynex Capital: Absolutely. Yeah, look, I think a big part of delivering scale to shareholders and strategic flexibility to shareholders, we have to have the capability to evaluate all types of opportunities. You know, Dynex has been a company that, over time, we’ve delivered to shareholders a lot of different, clever, diversified strategies through the history of the company. And our job is to always have the ability to evaluate those options so that if such options exist, and they should be exercised, we’re ready to do that, right? So that is, that’s a big part of, you know, thinking more strategically about the balance sheet, about the investment opportunities that we have versus others that come up.

All of that is in the spirit of creating options for our shareholders, which I believe is one of the jobs that I have.

Speaker 5: Just one. Okay, great. Thank you.

Smriti Popenoe, Co-Chief Executive Officer and President, Dynex Capital: Yeah. Thanks.

Conference Operator: Once again, that is star one to signal for a question. We turn to Eric Hagen with BTIG. Please go ahead.

Speaker 4: Hey, thanks for sneaking me in. I appreciate you. So this emphasis on lower interest rates and lower mortgage rates is very real. I mean, do you think this pressure on the Fed to cut rates is good and supportive of the market right now? Do you think it will be effective? And do you think it eventually just creates maybe a situation where there’s just more interest rate volatility and well, the volatility is more one directional anyway. Thank you, guys.

Smriti Popenoe, Co-Chief Executive Officer and President, Dynex Capital: Sure. Hi, hi, Eric. So one of the things we’ve been ready for for some time is this idea that there’s more and more government intervention in the market, right? And in my prepared remarks, I had talked about, you know, when you have fewer savers, fewer taxpayers, it’s harder to carry the amount of debt that we have in the U.S. and other places in the world, you know, debt to GDP, et cetera, et cetera. So it’s much, it’s not unusual in these types of situations for there to be explicit efforts to influence monetary policy and other policy, including, you know, what mortgage rates are gonna be. So that’s not unusual for us. And that’s what we’ve been expecting, and that’s what we plan for, right?

Now, how it actually comes to pass in terms of whether, you know, whether it’s through personnel changes or whatever else, that the, that the actual rate gets pegged or, or lowered or whatever that is, I don’t know, and we can’t predict that. But we are prepared for this idea that, you know, front-end rates could be influenced by something other than just fundamentals, right? And you guys have heard us talk about this, this idea of fundamentals, technical psychology. Now we talk about fundamentals, technical psychology, and policy. And a lot of times, fundamentals and policy could be divergent, and when you’re sitting in that environment, you have to really be ready for a lot of different things.

So, you know, just from the perspective of can it happen, we believe there’s a high probability of that happening, and we are preparing for that. Will it happen? How it happens? Very hard to tell. And there are, you know, there are benefits, obviously, to the Agency MBS market to the extent that, you know, front-end rates are lower. I mean, that makes them more attractive to hold. But that’s really not... We’re not counting on that happening for any of our strategies to work out. I’ll let TJ talk about the mortgage piece because these guys have been really focused on how just-...

Having the mortgage rate move independently of other rates, that really creates an interesting dynamic in the portfolio, and these guys have been working on, you know, mitigating that risk for some time now.

TJ Connolly, Chief Investment Officer, Dynex Capital: Sure, absolutely. Yeah, as you know, Smriti mentioned, we have four arrows in our analytics quiver: policy, fundamental, technicals, and psychology. That those are the four lenses through which we look at the markets. And as we look at each component of the yield curve, we’re thinking a lot about, okay, the mortgage rate in isolation, the Fed funds policy rate, SOFR rates in isolation, those sorts of things. So as we isolate those and think about you know the volatility profile for each component of the yield curve, as well as you know each every coupon of the mortgage coupon stack, all policy could implement you know could impact any one of those components. So it’s something we spend a lot of time thinking about in terms of our hedge book and the volatility profile of the portfolio.

Smriti Popenoe, Co-Chief Executive Officer and President, Dynex Capital: You know, one of the other pieces here, Eric, is that we’ve been in an environment where the markets sometimes don’t know how to price a lot of this uncertainty, and so it’s it ends up looking calm, right? And then when there is some kind of announcement, you have a bout of volatility, right? So it’s a very different type of strategy. During the moments of calm, you’re able to earn the OAS, you’re able to earn, you know, sort of like the carry from shorting options. During the moments of volatility, you’d better have enough liquidity, right, to be able to manage yourself through that scenario. So that is another way to think about it.

Speaker 4: Thank you guys very much.

TJ Connolly, Chief Investment Officer, Dynex Capital: Our pleasure.

Speaker 4: Sorry, I was gonna ask one more, just really quickly here. I mean, the move for your book value up 4% since year-end, I mean, that’s a good move, but maybe we expected it to be up a little bit more. I mean, has your leverage been stable? And maybe just, like, the immediate reaction on that, on the back of that 20 or 30 basis points of spread tightening on the back of the announcement, like, how was that - how did that unfold for you guys?

TJ Connolly, Chief Investment Officer, Dynex Capital: Yeah, obviously, you know, on an immediate reaction, when book value increases, leverage goes down mathematically. And, you know, I mentioned the 7-8 kind of range when I discussed the ROEs, and that’s generally where we expect this portfolio will land for the better part of the next several quarters. As the opportunities arise, we take it up and down from there. So, you know, our we feel very comfortable that we can earn the kind of spreads that we are seeking to earn and that our shareholders are expecting to support the dividend with these ROEs that leverage between 7 and 8.

Speaker 4: Great. Thank you guys for the color. Appreciate it.

Smriti Popenoe, Co-Chief Executive Officer and President, Dynex Capital: Thanks, Eric.

Conference Operator: At this time, we have no further signals. I’d like to turn the floor back to our speakers for any additional or closing remarks.

Smriti Popenoe, Co-Chief Executive Officer and President, Dynex Capital: Thank you. Thanks everyone for joining us today, and we look forward to updating you on our first quarter results in April.

Conference Operator: This concludes today’s conference. We thank you for your participation. You may disconnect at this time.