Dynex Capital Third Quarter 2025 Earnings Call - Wide Agency RMBS Spreads Fuel Growth, Heavy Capital Raises, and a Liquidity Cushion

Lacey, Conference Operator: 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, Vice President of Investor Relations. You may begin.

Alison Griffin, Vice President of Investor Relations, Dynex Capital: 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/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 Capital 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 and Chief Operating Officer; and T.J. Connelly, Chief Investment Officer. I now have the pleasure of turning the call over to Smriti.

Smriti Popenoe, Co-Chief Executive Officer and President, Dynex Capital: Thank you, Alison. 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 platform, investing in residential and commercial mortgage-backed securities managed with Dynex’s 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 11.5% year to date reflect the disciplined 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 parsing 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. T.J. 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 to market like Dynex. Sometimes it’s not even possible to get a mark or sell those assets.

Even as cracks in this market develop, 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 T.J. will now give you further details on the quarter and the outlook. I’ll turn it over to Rob.

Rob Colligan, Chief Financial Officer and Chief Operating Officer, Dynex Capital: 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. We’ve been discussing a raise and deploy strategy all year. Pools 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. T.J. will go into more detail on our portfolio during his comments.

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 $1 billion 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 who are an important part of our current and future success. We look forward to being in New York while maintaining Glen Allen, 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 T.J. for his comments.

T.J. Connelly, Chief Investment Officer, Dynex Capital: 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 remain wide, though, and we continue 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 note rates. We’ve discussed in previous calls that prepayment speeds could be very responsive given the technological investments many mortgage bankers have made. 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 slow for at least the next few quarters. Gross 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 4.5s and 5s, and with many segments of 5.5s 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. 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.

Byron Boston, Chairman and Co-Chief Executive Officer, Dynex Capital: Thank you, T.J., 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. On that note, I’m going to turn it back over to Smriti for final comments.

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

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

Bose George, Analyst: Hey, everyone. Good morning. The first question I 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 dividend.

T.J. Connelly, Chief Investment Officer, Dynex Capital: Yeah, good morning both. It’s T.J. 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.

Bose George, Analyst: In terms of leverage, does that kind of imply your current leverage, or is that kind of the implied leverage in that number?

T.J. Connelly, Chief Investment Officer, Dynex Capital: Yeah, at the current levels, it would be right around those mid-to-high teens numbers.

Bose George, Analyst: Okay, great. Can we get an update on book value quarter to date?

T.J. Connelly, Chief Investment Officer, Dynex Capital: Yes, estimated $1,271 net of the dividend accrual as of Friday’s close.

Bose George, Analyst: $1,271. Okay, great. Thank you.

Lacey, Conference Operator: Our next question comes from the line of Doug Harter with BTIG. You may go ahead.

Thanks. T.J., in your prepared remarks, you talked about still seeing mortgage spreads as wide relative to their history. I guess when we look at it, spreads are kind of closer to or slightly tighter than their long-run average. Just hoping you could flesh out that comment and what measure you’re looking at to come to that conclusion.

T.J. Connelly, Chief Investment Officer, Dynex Capital: Yeah, the spread relative—if you look at them just versus certain components of the Treasury curve, I could certainly see what you were talking about there, 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.

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

Yeah, you know, 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 would 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? We can withstand some more negative swap spreads and still earn that carry over time. 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.

Lacey, Conference Operator: Your next question comes from the line of Trevor Cranston with Citizens 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? In particular, I’m curious, it looks like the GSEs grew their balance sheets and retained portfolios a bit in the third quarter. I’m curious what you think about the potential for the GSEs as a player on the demand side of things going forward. Thanks.

T.J. Connelly, Chief Investment Officer, Dynex Capital: Yeah, absolutely. That is a source of potential marginal demand that we have not seen in a long time. Their monthly reports show that things have been kind of the status quo for the last, let’s say, 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 billion. It’s a massive amount of potential. I see it as, I don’t think it’s a very high probability we see them use all of that capacity, but it’s certainly one of the levers that this administration can pull to impact housing markets.

Got it. Okay, on the housing side of things.

Your other points, I’m sorry, I didn’t get to all of your—I was just focused on the GSEs there. 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. 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. Those are solid marginal sources of demand.

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. 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 in spreads.

Okay, that’s helpful. On the hedging side of things, with the implied volatility coming down, it looks like your option position increased a little bit this quarter. 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 we’re inherently short in a levered mortgage position? 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. I think it’s a, you know, that remains a deep and liquid market. It’s a great way for us to continue to, you know, stabilize the duration of our portfolio.

Smriti Popenoe, Co-Chief Executive Officer and President, Dynex Capital: I think also I’d add there, Trevor, just the macro thought process of, you know, looking at what the distribution of outcomes could be. The market seems to be cutting some tails out of the process. When that type of opportunity exists, we really think long and hard about protecting our shareholders in these outsized tail events. When that protection looks cheap, we tend to jump in and make those types of decisions.

Yeah, that makes sense. Okay. Appreciate the comments. Thank you.

Lacey, Conference Operator: Our next question comes from the line of Eric Hagen with BTIG. You may go ahead.

Eric Hagen, Analyst, BTIG: Hey, thanks. Good morning. Just following up on this volatility market kind of theme. 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? Does that change the way that you think about the range for Agency MBS spreads more holistically right now?

Smriti Popenoe, Co-Chief Executive Officer and President, Dynex Capital: 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? There is more certainty, and even the passage of time gives us more certainty. 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, right? I think the market has reacted to that. One of the things that does happen is there is a short-term focus for the markets. In our long-term way of thinking and just recognizing 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 are also massive amounts of liquidity still available in the markets that are driving asset flows that are affecting options prices, right? As we look at the fundamentals, the technicals, the psychology, we’re evaluating the whole picture. 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. 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. The rest of the economy still exists. They’re still vulnerable to shocks. That part, that is really how we think about it. As you know, the big money in this sector gets lost or made during periods of extreme volatility. We have to think about those scenarios.

Even if they’re a low probability, we have to be ready. We think about when protection is cheap, we’re doing that thought process. T.J., did you have anything else to add on that?

T.J. Connelly, Chief Investment Officer, Dynex Capital: No, I think that’s the critical part there, 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 have the markets shrugged things off? We’re preparing for the day when the markets start to react in a big way.

Smriti Popenoe, Co-Chief Executive Officer and President, Dynex Capital: You’re seeing some little things that are pointing in that direction, right? You’re seeing a few things that aren’t going potentially as well. These are just indicators of the vulnerability.

Eric Hagen, Analyst, BTIG: Always appreciate your thoughtful responses. You guys noted the expectation for faster speeds. 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?

T.J. Connelly, Chief Investment Officer, Dynex Capital: Right. Great question. That has been 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, you know, largest index kind of player. 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. 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. That’s the great part about our size. We are at 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.

Eric Hagen, Analyst, BTIG: That’s really helpful. Thank you guys so much.

Lacey, Conference Operator: Again, if you would like to ask a question, please press star one on your telephone keypad. At this time, there are no further questions. I would like to turn the call back over to Smriti Popenoe, Co-CEO and President, for closing remarks.

Smriti Popenoe, Co-Chief Executive Officer and President, Dynex Capital: Thank you, operator. Thank you, everyone, for your time and attention. I look forward to updating you all again in January. We’ll now close the call.

Lacey, Conference Operator: This concludes today’s call. You may disconnect.