Dynex Capital (DX) Sidoti September Small-Cap Virtual Conference summary

Fed policy and market environment

• Fed has begun an easing cycle, cutting rates by 50 basis points, signaling a shift to a proactive, risk-managed approach with retained flexibility for future actions.

• The U.S. government is stepping back from being the largest investor in agency RMBS, opening opportunities for private capital.

• Quantitative tightening and regulatory uncertainty have led banks to reduce exposure to agency RMBS, further increasing private sector opportunities.

• The yield curve is shifting to a more positive slope, creating new investment opportunities in the mortgage market.

Portfolio strategy and performance

• The portfolio is primarily composed of agency mortgage-backed securities, with credit risk borne by agencies like Fannie Mae and Freddie Mac.

• Leverage is used to amplify returns, converting a 5.5% yield into a 12% dividend yield, paid monthly.

• The company is internally managed, aligning management incentives with shareholder returns and focusing on risk-adjusted performance.

• Leverage typically ranges from 7 to 8 times capital, adjusted actively based on market opportunities and risk environment.

• The company maintains a large liquidity buffer to manage interest rate volatility and potential market shocks.

Market outlook and investment opportunity

• Financing costs are declining as rates fall, providing a tailwind for future returns; every 25 basis point drop in financing rates increases returns by about 1%.

• The risk premium between agency RMBS and Treasuries is historically wide, currently around 130 basis points, offering potential for spread tightening and higher returns.

• The ability to invest across a wide range of agency mortgage vintages and coupons enhances value creation and risk diversification.

• The mortgage REIT sector, especially agency-backed, offers double-digit yields with strong asset quality and liquidity.

• The company has a strong track record, excelling during market stress and maintaining top total economic returns among peers post-COVID.