Q2 2025 Dynex Capital Inc Earnings Call

Operator: At this time, I would like to welcome everyone to the Dynex Capital Inc. Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise.

Operator: 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.

Thank you for standing by. My name is Carla and I will be your conference operator. Today at this time I would like to welcome everyone to the Dynex Capital Inc. Second quarter earnings conference, call all lines have been placed on mute to prevent any background noise.

Alison Griffin: I would now like to turn the call over to Alison Griffin, Vice President, Investor Relations. You may begin. Good morning.

Speaker Change: 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 1 on your telephone keypad. If you would like to withdraw your question, press star 1 again, thank you. I will now like to turn the call over to Allison Griffin. Vice president investor relations you may begin

Alison Griffin: The press release associated with today's call was issued and filed with the SEC this morning, July 21. 2025. 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.

Good morning. The press release associated with today's call was issued and filed with the SEC this morning. July 21st.

Alison Griffin: 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 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.

2025, you may view the press release on the homepage of the Dynex website at Dynex capital.com as well as on the fcc's website at sec.gov

Speaker Change: 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.

Speaker Change: The company's actual results and timing of certain events could differ considerably from those projected and are contemplated by those forward-looking statements. As a result of unforeseen, external factors or risks.

Alison Griffin: 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.

For additional information on these factors or risks. Please refer to our disclosures filed with the SEC, which may be found on the xyx website under investor as well as on the sec's website.

Alison Griffin: 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.

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. Slide presentation, may also be referenced under quarterly reports on the investor Center Page. Joining me on the call today our buyer in Boston, chairman and co-chief executive officer Smith, the Papo co-chief executive officer and presidents, Rob Colligan Chief Financial Officer. And

Smriti Popenoe: I will now turn the call over to Smriti. Thank you, Alison, and good morning, everyone. I'd like to recognize and congratulate my colleagues, Bob Nilsen, Chief Risk Officer of Dynex, Wayne Brockwell, our Senior Vice President of Asset Liability Management and Richmond Office Executive, Alison Griffin, our Head of Investor Relations, Mark Warner, our Head of Financing, and Jeff Childress, our Chief Accounting Officer, for each completing over 20 years of service to Dynex. Their careers have evolved with the company and their contributions continue to be a significant factor in our success.

Chief Operating Officer and TJ Connelly, Chief investment officer. I will now turn the call over to SMY.

SMY: Thank you, Allison. And good morning everyone.

Speaker Change: I'd like to recognize and congratulate my colleagues Bob, Nielson Chief risk officer of dinx. Wayne Brockwell our senior vice president of asset liability management and Richmond office, executive

Speaker Change: Allyson Griffin, our head of investor relations, Mark Warner, our head of financing and Jeff Childress our chief accounting officer for each completing over 20 years of service to dinx.

Smriti Popenoe: I'm also pleased to announce the appointment of Michael Angelo as our Chief Legal Officer and Corporate Secretary. Michael brings a great attitude, outstanding credentials, and highly relevant experience from a variety of financial institutions, and I look forward to working with him closely in his new role. Last quarter saw tremendous market volatility and yet our investment opportunity set for solid long-term total return generation remains largely intact. We are growing our company in a highly dynamic macroeconomic and business environment. The breadth and scale of change, domestically and globally, across a comprehensive set of factors is enormous. Demographics are evolving to play a major role in politics and politics.

Their careers have evolved with the company and their contributions continue to be a significant factor in our success.

Speaker Change: I'm also pleased to announce the appointment of Michael Angelo as our chief legal officer and corporate secretary.

Speaker Change: From a variety of financial institutions and I look forward to working with him closely in his new role.

Speaker Change: Last quarter saw tremendous Market volatility, and yet our investment opportunity set for solid long-term total, return generation remains largely intact.

Speaker Change: We are growing our company in a highly Dynamic, macroeconomic and business environment.

Speaker Change: The breadth and scale of change domestically and globally across a comprehensive set of factors is enormous.

Smriti Popenoe: Human conflict is escalating and rapidly reshaping the world of the last 50 years. The government policies we have relied on as a backdrop to decision making are facing fundamental and foundational shifts. Technology is now poised to be a major factor in the transformation of daily life, impacting economies and societies at a global scale. As we navigate this as long term investors, the most important aspect of our process is our mindset, our approach to the environment. We are focused on keeping that clear, protecting shareholder value and taking advantage of what opportunities present themselves. We continue to execute our strategy of raising capital, deploying it into a historically cheap and liquid investment opportunity, and managing our portfolio carefully through any volatile period.

Demographics are evolving to play a major role in politics and policy.

Human conflict is escalating and rapidly reshaping the world of the last 50 years.

Speaker Change: The government policies we have relied on as a backdrop to decision-making are facing fundamental and foundational shifts.

Technology is now poised to be a major factor in the transformation of daily life. Impacting economies and societies at a global scale.

Speaker Change: As we navigate this as long-term investors, the most important aspect of our process is our mindset, our approach to the environment.

Speaker Change: We are focused on keeping that clear protecting shareholder value and taking advantage of what opportunities present themselves.

Smriti Popenoe: I'm excited about the accelerating growth of the company and our delivering of meaningful operating leverage.

Speaker Change: We continue to execute our strategy of raising Capital deploying it into a historically cheap and liquid investment opportunity and managing our portfolio carefully through any volatile periods.

Smriti Popenoe: This quarter, Dynex crossed another milestone. Our market capitalization as of June 30th is over one and a half billion dollars, representing nearly 50% growth since June 2024. The discipline, experience, and expertise of the team was on full display in April and will continue to be a differentiator for Dynex in the future.

Speaker Change: I'm excited about the accelerating growth of the company and our delivering of meaningful operating leverage. This quarter, dinx crossed another milestone.

Speaker Change: our market capitalization, as of June 30th is over 1 and a half billion dollars representing nearly 50% growth since June 2024,

Robert Colligan: Rob and TJ will now give you further details on the quarter and the outlook. I'll turn it over to Rob. Thank you, Smriti. We have several highlights to share for the quarter. First, our net interest income continues to trend upwards as we add new investments with attractive yields to our portfolio, and swaps continue to contribute to our economic net interest income. With the steepening of the yield curve, the agency RMBS market is currently offering positive carry, which doesn't require any action from the Fed or other market moves to deliver the levered yield to support our dividends.

Rob: The discipline experience and expertise of the team was on full display in April and will continue to be a differentiator for DX in the future. Robin TJ will now give you further details on the quarter and the Outlook, I'll turn it over to Rob.

Rob: Thank you merci.

Speaker Change: We have several highlights to share for the quarter first. Our net interest income continues to Trend upwards, as we add new Investments with attractive yields to our portfolio and swaps continue to contribute to our economic net, interest income.

Robert Colligan: Mortgage spreads remain wide, and negative swap spreads add to the long-term returns of the portfolio. Any reduction in financing costs later this year or in 2026 would be an additional boost to an already strong return. Second, this year we've raised $560 million of new capital. Our stock has performed well, allowing us to continue raising capital at a premium-to-book value, which is accretive to shareholders. We raise capital above book, positioning us to grow and deploy capital into an attractive market.

Speaker Change: With a steepening of the yield curve. The agency Army has Market is currently offering positive carry, which doesn't require any action from the fed or other Market moves to deliver the levered yield to support our dividend.

Speaker Change: Mortgage spreads remain wide and negative swap spreads. Add to the long-term returns of the portfolio.

Speaker Change: And your reduction in financing costs later this year or in 20126 would be an additional boost to an already strong return.

Second this year we've raised 560 million of new capital.

Speaker Change: Our stock has performed. Well, allowing us to continue raising Capital at a premium to book value, which is a creative to shareholders.

Robert Colligan: TJ will cover the fundamentals and technicals of the portfolio in his comments. Third, our portfolio is 25% larger since the end of the first quarter and stands at $14 billion compared to $11 billion at the end of the first quarter, and is over 50% larger than this time last year. While our portfolio has grown, we continue to focus on disciplined risk management and maintaining ample levels of liquidity to weather future volatility. Our liquidity at quarter end was $891 million or 55% of total equity.

Speaker Change: We raise Capital book positioning us to grow and deploy Capital into an attractive Market.

TJ will cover the fundamentals and technicals of the portfolio in his comments.

Speaker Change: Third, our portfolio is 25% larger since the end of the first quarter and stands at 14 billion compared to 11 billion. At the end of the first quarter and is over 50% larger than this time last year.

While our portfolio has grown. We continue to focus on disciplines risk management and maintaining ample levels of liquidity to whether future volatility.

Speaker Change: Our liquidity at quarter end, was 891 million or 55% of total equity.

Robert Colligan: Finally, in keeping with our long-term strategy to build a world-class operating platform, we have brought several functions in-house to help us achieve scale, build and retain valuable institutional knowledge, and strengthen our organizational resilience. In the last year, we added key human capital to our legal IT operations and accounting team. These human assets are positioned to help us better manage our existing business partnerships while leveraging new technology tools from our partners, as well as our own internal developments in infrastructure, applications, artificial intelligence, and machine learning. The changes we are making in people and technology will keep us ahead of the curve and prepare us for a fast-changing financial and technological environment.

Speaker Change: Finally, in keeping with our long-term strategy to build a world-class operating platform. We have brought several functions in-house to help us achieve scale.

Speaker Change: Build and retain valuable institutional, knowledge, and strengthen our organizational resilience.

Speaker Change: In the last year, we added key, human capital to our legal, it operations, and accounting teams.

Speaker Change: These human assets are positioned to help us better manage our existing business Partnerships while leveraging new technology tools from our partners, as well as our own internal developments and infrastructure applications artificial intelligence and machine learning

Terrence Connelly: I'll now turn it over to T.J. Thank you, Rob. This was an important quarter for demonstrating the strength of our strategy and the structural advantages of our platform, and one in which our team executed with discipline, clarity, and conviction. The second quarter began with unusual volatility, especially in April, across mortgages, treasuries, and the swap market. The market struggled with liquidity. We saw unpredictable price action and dislocation not seen since early 2020. While the broader market contended with volatility and uncertainty, we remained focused and fully engaged. In many respects, this quarter validated the value of our proactive positioning, liquidity discipline, and long-term orientation.

Speaker Change: The changes we are making in people and Technology Will Keep Us ahead of the curve and prepare us for a fast changing financial and technological environment.

TJ: I'll now turn it over to TJ.

TJ: Demonstrating the strength of our strategy and the structural advantages of our platform and 1 in which our team executed with discipline Clarity and conviction.

The second quarter began with unusual volatility. Especially in April across mortgages treasuries and the swap Market. The markets struggled with liquidity, we saw unpredictable price action and dislocation not seen since early 2020.

Terrence Connelly: We took advantage of the significant value created by widespread and market uncertainty we executed on our strategic plan. We grew the investment portfolio by over $3 billion in the quarter. As Rob mentioned, we raised capital methodically above book value. We deployed that capital in agency MBS in a measured and strategic way. Moreover, as the policy environment became more supportive, we strategically increased our leverage from 7.4 last quarter to 8.3 in the second quarter. Our ability to be proactive with portfolio growth and leverage was directly supported by our strong cash liquidity and the continued health of the mortgage repo market.

While the broader Market contended with volatility uncertainty, we remained focused and fully engaged in many respects this quarter validated the value of our proactive, positioning liquidity, discipline and long-term orientation.

We took advantage of the significant value created by widespread and Market uncertainty we executed on our strategic plan.

TJ: We grew the Investment Portfolio by over 3 billion dollars in the quarter as Rob mentioned we raised Capital methodically above Book value and we deployed that capital and agency MBS in a measured and strategic way.

TJ: Moreover, as the policy environment became more supportive. We strategically increase our leverage from 7.4 last quarter to 8.3 in the second quarter.

Terrence Connelly: When volatility spikes, we benefit from a steady stream of insights from our trusted financing partners. That helps us stay agile and well-informed. Throughout the second quarter, mortgage repo markets remain stable in both pricing and availability. Spreads to SOFR consistently held in the 15 to 20 basis point range. Similar to what we saw in the first quarter, with ample capacity across term structures out to three and six months. That constructive funding environment gave us the confidence to lean in, knowing we had the liquidity and balance sheet flexibility to take advantage of compelling opportunities as they emerged.

TJ: Our ability to be proactive with portfolio growth and leverage was directly supported by our strong cash liquidity. And the continued health of the Mortgage Repo Market,

TJ: When volatility spikes we benefit from a steady stream of insights from our trusted financing partners that helps us stay agile and well-informed throughout the second quarter Mortgage Repo, markets, remain stable in both pricing and availability.

Spreads this over consistently held in the 1520 basis, point range. Similar to what we saw in the first quarter with ample capacity across term structures out to 3 and 6 months.

That constructive funding environment. Gave us the confidence to lean in knowing we had the liquidity and balance sheet flexibility to take advantage of compelling opportunities as they emerge.

Terrence Connelly: Agency mortgage-backed securities continue to offer what we view as the best combination of liquidity, credit quality, and return potential in fixed income today. ROEs on newly acquired positions, when fully hedged with interest rate swaps, are currently ranging from the mid-teens to the low 20% earnings. That's attractive by any standard. And these are transparent, high-quality, money-good assets. While many other assets from corporate bonds to equities retrace completely, or even eclipse levels seen before the April tariff announcements, mortgages remain not far off the cheapest levels of April. Mortgages are extremely cheap relative to corporate bonds. That is primarily due to a mixed technical picture in the medium term.

Agency mortgage back Securities, continue to offer what we view as the best combination of liquidity, credit quality and return potential in fixed income today Roes on newly acquired positions. When fully hedged with interest rate, swaps are currently ranging, from the mid-teen to the low. 20% range, that's attractive by any standard, and these are transparent high-quality money. Good assets.

TJ: While many other assets from corporate bonds to equities, retrace completely or even Eclipse level seen before the April tariff. Announcements mortgages, remain not far off the cheapest levels of April.

Terrence Connelly: Net supply of agency RMBS remain low by historical standards, and demand has yet to fully materialize, creating a medium-term headwind for spread tightening. Many money managers remain overweight in the sector. And although banks did re-enter the market earlier in the year, further participation may be delayed until there is greater clarity around the Fed's rate-cutting path. Until then, technicals are supportive of spreads remaining historically wide, allowing us to execute on our raise-and-deploy strategy. For investors like us with stable capital and long investment horizons, we can continue to harvest the historic yield spread for our shareholders. Security selection continues to be a key source of value for us.

TJ: Mortgages are extremely cheap relative to corporate bonds. That is primarily due to a mixed technical picture in the medium term.

TJ: Net supply of agency, rmbs remain Low, by historical, standards, and demand has yet to fully materialize. Creating a medium-term headwind for spread tightening. Many money managers remain, overweight, the sector. And although Banks did re-enter the market earlier in the year, further participation may be delayed until there is greater Clarity around the fed's rate cutting path.

Until then technicals are supportive of spreads remaining, historically wide, allowing us to execute on our raise and deploy strategy for investors. Like us with stable capital and long investment Horizons. We can continue to harvest. The historic yield spread for our shareholders

Terrence Connelly: With over 10 active coupons in the market, we identified attractive opportunities across a wide range of agency RMVS and even in the agency CMVS. While we expect exposure to agency CMBS to remain modest as a share of the total portfolio, we added selectively in the quarter where the risk-adjusted return profile aligned with our broader strategy. In addition to offering compelling relative value, agency CMBS helped diversify and stabilize the portfolio's cash flow and total return profile, given their unique prepayment characteristics and underlying asset base. Our team brings deep expertise in analyzing and underwriting agency-guaranteed securities at the loan level, which gives us a durable advantage in identifying relative value others may miss.

TJ: Security selection continues to be a key source of value for us with over 10 active coupons in the market, we identified attractive opportunities across across a wide range of agency rmds. And even in the agency, cmbs market,

TJ: While we expect exposure to agency cmbs to remain modest as a share of the total portfolio. We added selectively in the quarter where the risk adjusted return profile aligned with our broader strategy.

In addition to offering compelling relative value agency, cmbs helped diversify and stabilize the portfolio's cash flow and Total return profile.

TJ: Given their unique prepayment characteristics and underlying asset base.

Terrence Connelly: That same strength I mentioned in terms of liquidity, risk posture, and funding also enhances our ability to take advantage of opportunities within the coupon stack and across specified pools. At present, we are carrying a deliberate bias toward lower coupons, which we believe are poised to outperform, especially when mortgage rates decline, even just modestly. The second quarter was exactly the kind of period in which our strategy shines. We stayed disciplined, stuck to our playbook, and took advantage of a window in the markets to lock in assets we believe will perform across a wide range of macro outcomes.

TJ: Our team brings deep expertise in analyzing and underwriting agency. Guaranteed Securities at the loan level which gives us a durable advantage in identifying relative value. Others May Miss

TJ: That same strength I mentioned in terms of liquidity risk posture and funding. Also, enhances our ability to take advantage of opportunities within the coupon stack and across specified pools.

TJ: At present, we are carrying a deliberate bias toward lower coupons, which we believe are poised to outperform especially when mortgage rates decline, even just modestly.

Terrence Connelly: This remains an exceptional environment for long-term capital deployment in our space, and I couldn't be more confident in our positioning as we look ahead. Current environment remains highly favorable with wide agency MBS spread supported by a technical backdrop where many traditional buyers have yet to return, allowing private capital like Dynex to extract historic return from mortgage yields relative to hedging. While policy fundamentals and technicals may remain volatile and event risk elevated, we are well prepared and well positioned to capitalize on these dynamics and generate strong risk-adjusted returns.

Outcomes.

This remains an exceptional environment for long-term capital deployment, in our space. And I couldn't be more confident in our positioning, as we look ahead.

The current environment remains highly favorable with wide agency, MBS spread supported by a technical backdrop, where many traditional buyers have yet to return allowing private Capital like dinx to extract historic return from mortgage yields relative to hedges.

Byron Boston: I will turn it over to Byron. Thank you, TJ. We are executing on a strategic vision that incorporates culture and core values, as well as a keen focus on macroeconomic factors. Future-oriented strategic thinking is at the core of how we operate the company. Our discipline thought process permeates from the board on down and influences all of our decisions. We believe this stewardship mindset to be the foundation of our ongoing differentiated performance.

While policy fundamentals and technicals May, remain volatile and event risk, elevated. We are well, prepared and well positioned to capitalize on these Dynamics and generate strong risk. Adjusted returns. I will turn it over to Byron.

Byron: Thank you, TJ.

We are executing on a strategic Vision, that incorporates culture and core values, as well as a keen focus on macroeconomic factors.

Byron: Future oriented strategic thinking is at the core of how we operate the company.

Our discipline thought, process permeates from the board on down and influences all of our decisions.

Byron Boston: Smriti and I are leading the company to earn investors' trust to be their choice of ethical asset manager, focused on performance, and long-term stewardship of their capital.

Smriti Popenoe: I'll now turn it back over to Smriti for closing comments. Thanks, Byron. As you've heard from my colleagues, we are laser-focused on generating long-term returns, and dividends are a big piece of how we create value for shareholders. We've now increased our dividend above pre-COVID level. Looking ahead, we see meaningful value to unlock through future growth, stronger stock liquidity, and the growing appeal of our high-quality, ethically managed, and highly liquid investment platform.

We believe this stewardship mindset to be the foundation of our ongoing differentiated performance Smithy. And I are leading the company to earn investors trust to be their choice of ethical asset manager focused on performance and long-term stewardship of their Capital. Now now, turn it back over to smear teeth for closing comments.

Thanks Byron. As you've heard from my colleagues. We are laser focused on generating, long-term returns and dividends are a big piece of how we create value for shareholders.

Byron: We've now increased our dividend above preco levels.

Operator: Operator, we will now open the call. At this time, I would like to remind everyone, in order to ask a question, press star, then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.

Byron: Looking ahead, we see meaningful value to unlock through future growth stronger, stock liquidity and the growing appeal of our high quality ethically managed and highly liquid investment platform operator. We will now open the call to questions.

At this time, I would like to remind everyone in order to ask a question. Press star, then the number 1 on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.

Bose George: Your first question comes from a Boss George with KBW. Hey, everyone. Good morning. First, just wanted to ask about leverage. You know, can you just talk about the the range you're targeting? Is this kind of the higher end of the range you're at? And also just related in terms of the the mix of capital, you know, preferred now has become a pretty small piece just as the common equity has grown. You know, could we see that being bigger?

Your first question comes from a boss storage with KBW.

Speaker Change: Hey everyone. Good morning.

First, just wanted to ask about.

Speaker Change: Um, you know, can you just talk?

Speaker Change: Targeting is this kind of the higher end of the range you're at. Um, and also just a a related in terms of the at the mix of capital. You know, preferred now has become a pretty small piece just as a common Equity has grown. Um, you know, could we see that being bigger?

Byron Boston: Hi, Bose, good morning. Thanks for the question. I'll let TJ answer the more detailed question on leverage, but in general, we have flexed the leverage down when we believe the risk environment doesn't warrant sort of that incremental risk. And one of the big shifts over the last quarter was really the removal of some tail risk events. We had May 27th, a tweet about the GSE guarantees, the one big beautiful bill act getting passed. And so in general, I think our leverage today just reflects more of a return to normal. And at this point, you're seeing the high teens, mid 20s ROEs, and we feel like that is really a great place for us to be an investor.

Speaker Change: Hi Bose. Good morning. Thanks for the question. Um, I let TJ answer answer the the more detailed question on Leverage but in general. Um, we have flexed, The Leverage down when we believe, um, the risk environment doesn't warrant um sort of that incremental risk and and 1 of the big shifts over the last quarter, um, was really the removal of some, some tail risk events. You know we had um May 27th the Tweet about the the GSE guarantees, the the 1, big beautiful, bill act getting passed. And so in general um I think our our leverage today just reflects more of a return to normal.

Byron Boston: In general, you will see us flex the leverage higher when we believe that the risk environment warrants it. So at this point, I feel like we're just getting back to where we feel like we can generate that solid total return over time.

Terrence Connelly: TJ, I don't know if you have anything to add on that. As the quarter progressed, the risk environment did improve. Over the course of the quarter, we increased leverage very methodically as policy uncertainty lifted. Initially, we focused on mortgages with a little bit more duration certainty to them, such as agency CMBS. And then over the course of the quarter, we started adding more 30-year mortgages. So it was definitely an evolution over the course of the quarter as that policy environment adjusted.

Speaker Change: And, you know, at this point, you're seeing the High Teens mid 20s Roe's and, and we feel like that is, that is really a great place for for us to be um, an investor um, in in general, you know, you will you will see us Flex The Leverage higher when we believe that, um, the, the risk environment, uh, warrants it. So at this point I feel like we're just getting back to where we feel like we can, we can generate that solid Total return over time, TJ. I don't know if you have a, a diff any anything to add on that.

Byron Boston: Okay. And then to your second question on the capital structure, look, I think the most accretive thing for our shareholders to do right now is to raise capital above book and deploy that capital. The preferred markets have generally been very spotty and perhaps not even open at this You know, we're always ready to think through, you know, when and how that structure becomes accretive. But for now, the focus is on the common. Okay, great.

TJ: Sure. Yeah, as the quarter progressed, the risk risk environment that did improve, um, as over the course of the quarter, we increased leverage, very methodically as policy uncertainty lifted. Initially, we focused on, uh, mortgages with a little bit more duration, C on duration, certainty to them, such as agency cmbs and then over the course of the quarter, we started adding more 30-year mortgages so um, it was definitely an evolution over the course of the quarter as that policy environment uh adjusted.

TJ: Markets, have generally been been very spotty and perhaps not even open at this point. Um, you know, we're always ready to to, to Think Through um, you know, when and and how that that structure becomes a creative. But for now, the the focus is on the common.

Robert Colligan: And then can I just get an update on book value quarters? Sure, yeah, as of Friday, book value was nearly unchanged from quarter end after taking out the accrued dividend today. Thanks a lot. Sure.

Okay, great. And then can I just get an update on Book value courses today?

Sure. Yeah, as of Friday Book value was nearly unchanged from quarter end after taking out the accrued dividend date.

Great. Thanks a lot.

TJ: Sure.

Doug Harter: Your next question comes from Doug Harter with UBS. Great, thank you.

TJ: Your next question comes from. Doug harder with UPS.

Doug Harter: In your prepared remarks, you know, you were talking about, you know, kind of, you know, some of the other investors in the mortgage backed space, you know, can you just give us your updated thoughts around, you know, kind of if when or what conditions might require them to kind of be more active or, or vice versa, if they went the other way, and you know, what, what potential catalysts you see for for changes and spread? Good morning, Doug. You know, the banks are the big player that could potentially return. They were active in the first two months of the year, especially in agency CMOs, for instance, off of 30-year collateral.

Doug Harder: Great. Uh, thank you. Um, in in your prepared remarks, you know, you were talking about, you know, kind of uh, you know, some of the other investors in in the mortgage back space, you know, can you just uh, give us your your updated thoughts around, you know, kind of if when or what conditions might require them to kind of be more active or or vice versa if they went the other way. And you know what, what potential catalysts do you see for for changes in spreads?

Terrence Connelly: I think for a lot of those banks, they will return when they actually see more Fed rate cuts. So, to some extent, you need to see the actual rate cut happen before they'll be active. Certainly, there are some large players that are highly sophisticated and can act before that or edging with interest rate swaps, things of that nature. But for the bank... Bank community broadly, I think you need to see those funding rates come down on the front end of the yield curve. So that's one of the, you know, major players. The other money managers have been very active.

Doug Harder: Sure. Yeah, good morning Doug. Uh, you know, the banks are, are the big, um, the big player that could potentially return. They were active in the first 2 months of the year, especially in, uh, agency. CMOS, for instance, off of 30-year collateral. Uh, I think for a lot of those Banks, they will return when they actually see more Fed rate Cuts. So to some extent, you need to see the actual rate cut happen, um, before they'll be active, certainly there are some large players that are are highly sophisticated and and uh can act before that or edging with interest rate swaps, things of that nature. But for the bank,

Doug Harder: Bank community. Broadly, I think you need to see those funding rates, come down on the front end of the yield curve. So that's 1 of the you know, major players.

Terrence Connelly: Mortgages are extremely cheap relative to corporates. These are historic cheaps versus corporate bonds. So money managers have broadly been on that and overweight mortgages relative to corporates. And the story over the course of the quarter was simply one where money managers had outflows early in the quarter, mostly actually to buy stocks, which was a very interesting fund flow. So the money management community just had to sell mortgages as they got outflows from their bond funds. Those fund flows returned later in the quarter, and they were back finding mortgages again. But broadly speaking, those players are overweight mortgages.

Terrence Connelly: So those are the two big players.

Doug Harder: The other money managers have been a very active. Their mortgages are extremely cheap relative to corporates. These are historic cheaps versus Corporate bonds. So money managers have broadly been on that and overweight mortgages relative to corporates and the story over the course of the quarter was simply 1, where money managers had outflows early in the quarter? Mostly actually, to buy stocks which was a very interesting fund flow. So the money management Community just had to sell mortgages as they got outflows from their bond funds. Those fund flows returned later in the quarter and they were back buying mortgages again. But broadly speaking those players are overweight mortgages so those are the

Terrence Connelly: You know, increasingly, there's a need for more private capital in the agency mortgage market, and we are it. The mortgage REIT community is a huge marginal player. So outside of those two big ones, we're next. And on many days during the quarter, mortgage REITs were the marginal buyer, and we're continuing to raise capital to deploy it. In my mind, we're the manager of choice for the agency mortgage market, we the mortgage REIT community. So that's a big one.

Doug Harder: the 2, big players, um, you know, increasingly

Terrence Connelly: Overseas would be another. You know, Japan remains a significant holder. They were actually a buyer. We have data through May. They were actually a buyer in May, which I thought was very interesting. In my calculus for supply and demand, I've assumed almost nothing on net from overseas demand. But on net, that's been a surprise to the upside.

There's a need for more private capital in the agency mortgage market and we are it. The mortgage rate Community is a huge marginal player. So outside of those 2 big ones, we're we're next. And on a many days during the quarter mortgage rates were the marginal buyer. And we're you know, continuing to raise Capital um to deploy it. We're the in my mind we're the manager of choice for the agency mortgage Market. We the mortgage rate community. So um that's a big 1 overseas. Um, would be another, you know, Japan remains a significant holder. They were actually a buyer, we have data through May.

Terrence Connelly: So those are the major players. I'd emphasize again, you know, the mortgage REITs are continuing to grow as a marginal source of demand for the agency mortgage market as the market starts to realize that we're a fantastic vehicle from which to do this trade. Great, thanks, TJ.

Doug Harder: They were actually a buyer in May, which I thought was very interesting in my calculus for, uh, supply and demand. I've assumed almost nothing on net from, uh, overseas demand. But on that, that's been a um, a surprise to the upside. So those are the major players I'd emphasize again, you know, the mortgage rates are are continuing to grow as a, as a marginal source of demand for the agency mortgage Market. Uh, as the market starts to realize that we're a fantastic vehicle um, from which to do this trade,

Doug Harter: And kind of also, can you give us your updated thoughts on swap spreads and you know, kind of how you see those playing out over the coming months? Yeah, swap spreads, you know, I'll use the seven-year points as an example, down to, you know, 47 basis points below, this morning anyway, below where treasuries were trading. That is incremental return that we can extract. So the, you know, the kinds of ROEs that we're going to produce in those, you know, as I mentioned in my prepared remarks in the high teens and even low 20s reflect that.

Great. Thanks TJ. And you know, kind of also can you give us your updated thoughts on Swap spreads? And you know, kind of uh, how you see those playing out over the, you know, coming months.

Doug Harter: So minus, you know, at minus 47, I think it's quite attractive, has a large margin of safety. So we can take an even larger widening. So a move to, let's say, minus 50, even minus 55 on a mark to market basis is fine, given the carry that you're enjoying over the course of the year relative to trade. And I would just add to that, Doug, you know, in the medium to long term, we feel like this is an instrument that really incrementally benefits our shareholders from from a return on equity perspective, capital adjusted and everything else.

Doug Harder: Yeah, swap spreads, you know, I'll use the 7-year Point as an example down to, you know, 47 basis points below this morning. Anyway, below where treasuries were trading, um, that is incremental return that we can, uh, extract. So the, you know, the kinds of roles that we're going to produce and those, you know, as I mentioned, in my prepared remarks in the high teens and even low 20s reflect that. So minus you know, at minus 47, I think it's it's quite quite attractive has a large margin of safety so we can take an even larger widening. So a move to let's say, minus 50, even minus 555. Um on a mark to Market basis is fine, given the carry that that you're enjoying over the course of the uh of the Year relative to treasuries.

Doug Harter: So our willingness to take that short term spread fluctuation relative to where we ultimately believe these spreads will end up, I think I think we we feel that is still a very good long term risk return trade off. Great. Appreciate it. Thank you.

Doug Harder: To that dog. It you know, in the medium to long term. We feel like this is an instrument that really incrementally benefits our shareholders from from a return on Equity perspective, Capital adjusted and everything else. So our willingness to take that short-term spread fluctuation relative to where we ultimately believe um, be spreads will end up. I think, I think we we feel that is still a very good. Uh, long-term risk return trade-off

Doug Harder: Great. Appreciate it. Thank you, sure.

Eric Hagen: Your next question comes from Eric Hagen with BTIG. Hey, thanks. Good morning, guys. Looks like there's currently 50 basis points of rate cuts pressed into the forward curve. That's through year-end.

Your next question comes from Eric Haugen with btig.

Eric Haugen: Good morning, guys.

Speaker Change: Uh, looks like there's currently 50 basis points of rate Cuts pressed into the

Eric Hagen: If the Fed doesn't cut rates or it cuts fewer than the two cuts that are currently embedded in there, what do you think the response is for both rates and MBS spreads? How much risk do you think is, like, embedded in that? scenario where they cut fewer than two times. Right.

Speaker Change: OR it cuts fewer than the 2 cuts that are currently embedded in there. What do you think the response is for both rates and MBS spreads? How much risk do you think these like embedded in that?

Scenario where they cut fewer than 2 times. Yeah.

Terrence Connelly: The way I approach that question is really through the supply and demand lens. Supply will remain very low, which it's continued to be. So if we don't have rate cuts, the supply picture remains very muted. On the demand front, we're sitting at these spreads basically without a bank bid for the better part of the last several months. So I think there's very little impact on spread. Certainly, you know, just allows for investors like us to earn more spread over time. You know, it's a significant yield spread that we're earning today. Sure, spread tightening would be great.

Right. The way I approached that, that question is, is really through the supply and demand lens. Um, Supply will remain very low if we, which is its continued to be. So if we don't have rate cuts to the supply picture remains very muted on the demand front. Um, you know, thanks, we're, we're sitting at these spreads, basically, without a bank bid for the better part of the last, uh, several months. So, um, I think there's

Terrence Connelly: Book value would go up. We don't need that in order to make the kinds of returns our investors are expecting. The spreads at today's level are compelling in and of themselves.

Terrence Connelly: So certainly, I think there's a chance that we don't get any rate cuts. The data is very volatile. You know, at the margin, my personal view, the team's view here at Dynex is that we will probably get 50 basis points of rate cuts this year. And the risks to that view are actually probably towards more cuts late in the year as we see the consumer potentially start to slow.

Speaker Change: Is very little impact on, on spreads, um, certainly, um, you know, just allows for investors like us to earn more spread over time, you know. It's a significant yield spread that we're earning today. Um, sure spread tightening would be great Book value would go up. We don't need that. In order to, um, to make the kinds of returns. Our investors are expecting the spread that today's level are compelling in and of themselves. So, um, certainly I think there's a

Speaker Change: There's a chance that uh, that we don't get any rate cuts, the data is, is very volatile. Um, you know, at the margin, my personal view, the team's view here at DX is that, um, we will probably get 50 basis points of rate Cuts this year and the risks to that view are actually probably towards more Cuts late in the year as we see the consumer potentially, start to slow.

Eric Hagen: What's the current thinking behind the coupon allocation between pools versus TBAs? Like, if your allocation to TBAs was lower, would that presumably maybe drag down the yield in the portfolio a little bit? Or how should we think about the flexibility in adjusting the TBA position and still running above, like, eight times leverage?

That's a good color. I appreciate that.

Speaker Change: Um, what's the current thinking behind the coupon allocation between pools versus tbas? Like if you're allocation to tbas was lower, would that presumably maybe drag down the yield on the portfolio a little bit? Or how should we think about the flexibility and adjusting the TBA position and still running above like 8 times Leverage?

Terrence Connelly: Yeah, certainly, you know, the TBA position certainly impacts, you know, the accounting flows and how that flows through. And I'd let Rob comment on that, but specifically for the economic returns, the TBA rolls have been trading, you know, so for plus 15 to 25 late in various monthly cycles, they've been going out rolls for the current coupon have been going out a bit above actually the implied, I should say the implied financing on the TBAs has been going out a bit above where we can repo mortgages. So I really like, so that in and of itself favors owning some pools and the pools pricing is very fair relative to current expectations for free payments.

Terrence Connelly: We don't think in terms of today's prepayments. We need to think much more dynamically as mortgage investors. And so in a rally, some of these scenarios where we could have very fast prepayments on certain segments of the market, to me it really favors a larger pool position. So we have been working into a larger pool position and expect to continue to do so.

Yeah, it certainly you know the TVA position certainly impacts, you know, the the the accounting flows and how that flows through and I'd let Rob comments on that. But specifically for the economic returns, um the TBA roles have been trading, you know? So for plus 15 to 25 Leon Laden, various monthly Cycles, they've been going out roles for the current coupon have been going out a bit, uh, above actually the implied. I should say the implied. Financing on the TBA has been going out a bit where we can repo mortgages. So, I really like, so that in, and of itself, saves owning some pools. And the pools pricing is very fair relative to current expectations for prepayments.

We don't think in terms of today's, um, today's prepayments, we need to think much more dynamically as mortgage investors. And so, in a rally, some of these scenarios where, um, where we could have very fast prepayments on certain segments of the market, to me, it really favors a larger pool position. So we have been working into a larger pool position and expect to continue to do so.

Trevor Cranston: Good color from you guys, thank you. Great. Thanks, Eric.

Speaker Change: Good caller from you guys. Thank you.

Eric Haugen: Great. Thanks. Eric.

Trevor Cranston: Your next question comes from Trevor Cranston with JMP Securities. Hey, thanks. Good morning. You guys mentioned opportunistically adding some agency CMBS to the portfolio this quarter.

Your next question comes from Trevor Cranston with JMP securities.

Trevor Cranston: Hey, thanks. Good morning.

Trevor Cranston: Can you just kind of give us an overview of where you're seeing returns on agency CMBS right now relative to RMBS and kind of how in general you think about those fitting into the portfolio and how big relative to the RMBS position they could get over time? Thanks. Great. Thanks, Trevor.

Trevor Cranston: Um, good morning, you guys mentioned, you know, opportunistically adding some agency, cmbs to the portfolio, uh, this quarter. Um, can you just kind of give us an overview of where you're seeing Returns on agency cmbs, uh right now relative to RMS and kind of how in general you think about those fitting into the portfolio and and you know how how how big relative to the RMS position they could get over time? Thanks.

Smriti Popenoe: I'll just give you sort of the big picture thought process behind it. You know, agency CMBS, obviously these are instruments guaranteed by Freddie Mac and Fannie Mae. They have a very different risk profile in that these instruments, you know, they're locked out from prepayments depending on the structure. You have 10-year instruments locked out for six-and-a-half years or five-year instruments locked out for four-and-a-half years. So they have a very stable economic return profile. And what at this point we're thinking through is, you know, where this return profile is coming from, where on the yield curve it makes sense for us to deploy some capital.

Speaker Change: They have a very different risk profile in that.

These instruments, you know, they're locked out from prepayments, depending on the structure, you have tenure instruments that are locked out from prepayments for 9 and a half years, or 7, year, instruments locked out for 6 and a half years or 5 year, instruments, locked up for 4 and a half years. So they have a very stable, um, economic return profile.

Terrence Connelly: And really one of the main reasons for us driving into this space is our ability to hedge these and lock up that return with interest rate swaps, which currently have negative spreads to Treasury. So the overall return profile really, really looks good and solid, you know, in terms of our long-term, you know, total return thinking. So, you know, call protected assets, agency guaranteed, more stable cash flows. They've always been a part of Dynex's portfolio and Dynex's thinking. And returns at this point are really starting to be where, as we think about where long-term total returns will eventually end up, they're starting to be compelling.

And what at this point we're thinking through is, you know, where this return profile is coming from where on the yield curve, it makes sense for us to to deploy some Capital um, and really 1 of the, the the the main reasons for us driving into this space is our ability to hedge these and lock up that return with interest rates swaps, which currently have negative, spreads to treasury. So the overall return profile really, really looks good and solid, you know, in terms of our, our long-term, um, you know, total return thinking. So you know, call protected assets, agency guaranteed, more stable, cash flows. They've always been a part of Dix's portfolio and dicks is thinking

Terrence Connelly: And I'll let T.J. give you the thought process between sort of RMBS versus CMBS returns, but that's the philosophy behind it. Yeah.

Speaker Change: And returns at this point, are, are really starting to be where as we think about, where long-term total returns, uh, will eventually end up? They're starting to be compelling. And I'll let TJ give you the thought process between sort of

TJ: R&B s versus versus cnbs returns. Um, but that's the philosophy behind it.

Terrence Connelly: And the positions, Trevor, that we've been purchasing are focused on the five-year part of the agency CMBS market. As Smriti mentioned, it's a very stable economic return profile. These bonds are trading around swaps plus 90 basis points. I think what's probably the most compelling about this space is really the technical picture. When you think about those players I mentioned in terms of the supply and demand picture, this is a mature market now that is finally getting large enough to attract some of those large players. So it's trading remarkably well, banks as well as insurance companies.

Terrence Connelly: You look at annuity fund flows have been huge over the last several years, and those players are starting to look more and more at this market. So I think there's a scenario where the total economic return profile of these bonds ends up every bit as attractive or every bit as compelling as you see on, say, 30-year RMBS. So you can add these to the portfolio and get a little bit more certainty in terms of the cash flows. And I think ultimately the total return profile is every bit as good as those ROEs I mentioned on the slide.

Yeah, the and the positions Trevor that we've been purchasing are focused on the the 5-year part of the agency cmbs market as mentioned. It's a very stable economic return profile. Uh, these bonds are trading around swaps Plus 90 basis points. I think, what's probably the most compelling about the space is is really the technical picture. When you think about those players, I mentioned in terms of the supply and demand picture. This is a mature market. Now that is finally getting large enough to attract some of those large players. So it's trading a remarkably, well Banks, as well as insurance companies, you look at annuity fund flows, uh, have been huge over the last several years and those players are starting to look more and more at this market. So, I think there's a scenario where the total economic return profile of these bonds and up, um, every bit as attractive, uh, or every bit as compelling as you see on say, 30 year rmbs,

Operator: I think one other piece in here is, you know, thinking about curve positioning. This is a great way for us to add durable yields in the front end of the yield curve to the extent that that's the place where there's either fed activity or less volatility. So it's a nice stabilizer for the book. Got it. Yeah, that makes sense. Okay. Thank you. Again, if you would like to ask a question, press star then the number 1 on your telephone keypad.

So you can add these to the portfolio and get a little bit more certainty in terms of the cash flows and I think ultimately the total return profile is is every bit as good as Oz. I mentioned on 30 years

TJ: I think, I think 1 other piece in here is, you know, thinking about curved positioning. Um, this is a great way for us to add durable yields in the front end of the yield curve, to the extent that that's the place, um, where there's either fed activity or less volatility. So it's, it's a nice stabilizer for the book.

Speaker Change: Got it. Yeah, that makes sense. Okay, thank you.

TJ: Okay.

Again, if you would like to ask a question, press star, then the number 1 on your telephone keypad,

Jason Stewart: Your next question comes from Jason Stewart with Jones Trading. One follow-up on the hedge questioning, TJ, in terms of duration, any thoughts on adding longer duration as you go down in coupon on the hedge side? And if you do go longer duration, treasuries versus swaps, I mean, how are you thinking about that at the longer end of the curve?

Speaker Change: Your next question comes from Jason Stewart with Jones trading.

Jason Stewart: Okay. Hey thanks. It's Jason with uh, Jenny. Um, 1 follow up on the uh, hedge questioning, uh, TJ in terms of duration. Um, you know, any thoughts on adding longer duration, as you go down in coupon on the Hedge side, and if you do go longer duration, um, treasuries versus swaps, I mean, how are you thinking about that at the longer end of the Curve?

Terrence Connelly: Sure, yeah, our hedges have remained focused on, you know... The longer part of the curve, 7s and 20s are a big part of where our hedges are focused. We are targeting a duration that is generally flat in terms of the overall duration profile of the portfolio with that yield curve steepening bias, as Smriti mentioned, looking for those kinds of assets that are in the front end of the yield curve and hedging with some longer coupon 30 years. make sense. In terms of treasury versus swaps to your question there, the book has been roughly in two-thirds interest rate swaps.

Jason Stewart: Sure. Yeah, our Hedges have remained focused on, you know,

Terrence Connelly: Certainly, we have room to strategically increase or decrease that at any given time. But I generally expect this to be kind of the way things looked at the end of the second quarter to be broadly a baseline for how we're thinking about the next.

Speaker Change: the longer part of the curve 7 20s are a big part of where our Hedges are focused. Um, we are, you know, targeting a duration that is, um, generally flat, uh, in terms of the overall duration, profile of the portfolio, um, with that yield curve, steepening bias, as mighty mentioned, you know, looking for those kinds of assets that are in the front end of the yield curve and hedging with some longer materials, especially as we own some of the lower coupon. 30 years makes the makes sense in terms of treasuries versus swaps to your question there. Um, the book has been roughly, you know, 2/3, interest rates swaps. Certainly, we have room to strategically increase or decrease that at any, you know, any given time. I but I generally expect this to be kind of a the way things looked at the end of the second quarter to be broadly a baseline for for how we're thinking about the mix.

Terrence Connelly: Okay, so on the longer side, so 30-year and 10-year futures, treasury futures, stick with that strategy. You're not going to go too much farther than 10 to 15-year swaps, is that what I'm hearing? Yeah, the book at the end of the quarter looked broadly how I would expect things to look going forward. Obviously, you know, yield curve positioning is a very dynamic market. So let me be clear on that. So we could certainly adjust our curve position if and when our views change, but I think the end of the quarter was a good baseline. Fair enough.

Speaker Change: No longer slides to 30 year and 10 year Futures treasury. Futures stick with that strategy. You're not going to go too much farther than 10 to 15 years swaps is, is that what I'm hearing?

Speaker Change: Yeah. The the book in the um at the end of the quarter looked broadly, how I would expect things to to look going forward. Obviously you know, you'll curve positioning. Is this is a very Dynamic market, so let me be be clear on that. Um, so we could, uh, you know, certainly adjust our curved position um, if and when our views changed but uh, I think the end of the quarter was a good Baseline.

Robert Colligan: And then, Rob, on the on the G&A expense line item, anything one time in nature there, how should we think about that line item as you bring these functions that you discussed in-house? Sure, thanks for the question. The first half of the year always tends to be a little bit higher with annual meetings and a couple of queues. We did have some compensation increases, probably in the range of. We are one of the first companies in our sector to report, which is good, but also some of our compensation is on a relative basis, so we'll see how that adjusts out throughout the rest of the year.

Speaker Change: Fair enough. And then Rob, um, on the, on the GNA expense line item. Anything 1 time in nature there, you know, how should we think about that line item as you bring these functions that you discussed, uh, in-house.

Speaker Change: Sure, thanks for the question. Um you know, the first half of the Year always tends to be a little bit higher with annual meetings and a couple cues. Um, we did have some compensation increases uh, probably in the range of

Speaker Change: 3 or 4 million dollars in the first half. Um, and for us, you know, it's interesting, we're

Robert Colligan: But yeah, we do tend to trend down 2, 3, and 4. I'd expect that to continue.

Speaker Change: 1 of the first companies in our sector to report, which is good. But also some of our compensation is on a relative basis. So we'll see how that adjusts out throughout the rest of the year. Um,

Speaker Change: But yeah, we do tend to Trend down uh, Q3 and 4. I I'd expect that to continue.

Robert Colligan: Okay, thank you.

Speaker Change: Okay, thank you.

Operator: There are no further questions at this time.

Smriti Popenoe: I will now turn the conference back over to Smriti Popenoe for closing remarks. Great, thank you everyone for your time this morning and I look forward to updating you all on our progress next quarter. Have a great day.

SMY. Pompano: There are no further questions at this time. I will now turn the conference back over to SMY. Pompano for closing remarks. Great thank you everyone for your time this morning and I look forward to updating you all on our progress. Next quarter, have a great day.

Operator: This concludes today's conference call. You may now disconnect. Thank you.

SMY. Pompano: this concludes today's conference call, you may now disconnect

SMY. Pompano: Thank you.

Please wait the conference will begin shortly.