Dynex (DX) Q1 2026 Earnings Call Transcript

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DATE

Monday, April 20, 2026 at 10 a.m. ET

CALL PARTICIPANTS

• Co-Chief Executive Officer and President — Smriti Popenoe
• Chairman and Co-Chief Executive Officer — Byron Boston
• Chief Financial Officer — Mike Sartori
• Chief Investment Officer — T.J. Connelly

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TAKEAWAYS

• Book Value -- Ended the quarter at $12.60 per share, with an estimated increase to $13.31 per share as of Friday’s close, representing a 5.6% gain since quarter end.
• Economic Return -- Negative 2.5% for the quarter, which includes $0.51 per share of common dividends and an $0.85 per share decrease in book value.
• Leverage -- Rose to 8.6 times total equity, mostly driven by active positioning to add mortgage assets during attractive spread conditions.
• Investment Portfolio -- Increased to $6 billion, funded by $442 million in capital raised during the quarter.
• Liquidity -- Maintained $1.3 billion in cash and unencumbered securities at quarter end, accounting for over 46% of total equity.
• Net Interest Income -- Rose to $0.40 per share from $0.28 per share sequentially, driven by a 33 basis point decrease in financing costs due to the Federal Reserve’s prior rate cuts.
• Expenses -- General and administrative costs increased sequentially due to one-time items, with management stating, "expect overall expenses to normalize in the second quarter, with the full-year expense ratio anticipated to be flat or modestly lower versus year end as we grow our capital base."
• Hedging Mix -- Approximately 70% of the portfolio was hedged with interest rate swaps on a DV01 basis at quarter end, with management targeting the 60%-80% range.
• TBA Exposure -- Reduced from over 16% of the portfolio at year end to roughly 7% by quarter end.
• MBS Spread Movement -- Agency MBS spreads to seven-year swaps tightened from the high 160s at quarter end back to the 150 basis point area by late last week.

SUMMARY

Dynex Capital (NYSE:DX) highlighted its capital deployment strategy by expanding its investment portfolio and increasing leverage during periods of spread widening, aligning execution with perceived policy-driven opportunities in the mortgage market. Management attributed spread tightening since the quarter's close to active GSE participation and market demand, contributing to an estimated book value recovery. Portfolio hedging favored interest rate swaps, which offered enhanced yield relative to Treasuries, with a stated comfort zone around 70% swap hedge allocation. Technology-driven prepayment heterogeneity and disciplined asset selection were emphasized as key levers for forward alpha, alongside ongoing reductions in TBA exposure. A focus on expense control was reiterated, with projected normalization in expenses supported by targeted growth in scale and continued opportunistic capital raises.

• Management described, "Flexibility and openness in our team's mindset—something" as essential for navigating unpredictable policy regimes, and emphasized scenario-based planning.
• Static return on equity (ROE) for current coupon mortgages hedged with swaps was cited as "in the mid- to high-teens," with spread dynamics and security selection providing a potential tailwind to returns.
• T.J. Connelly stated, "we believe the long-term path toward tighter equilibrium spreads remains highly likely, boosted by policy, supply-demand dynamics, and yield carry."
• Deployment of capital was characterized as opportunistic, with management asserting, "when we see those types of opportunities, you will see us probably raise bigger blocks of capital, put the money to work."
• Basel III endgame proposals and light net MBS supply were highlighted by management as structural supports for sustained portfolio financing and sector liquidity.

INDUSTRY GLOSSARY

• TBA Market: The "to-be-announced" market for forward-settling mortgage-backed securities, usually referencing generic, most-callable agency MBS pools.
• GSE: Government-Sponsored Enterprise, commonly referencing Fannie Mae or Freddie Mac as major buyers and backstops in agency MBS markets.
• DV01: Dollar value of a one basis point move in yield; used as a risk metric for hedge ratios in fixed-income portfolios.
• SOFR: Secured Overnight Financing Rate, the U.S. risk-free reference rate used for repo and derivatives markets.

Full Conference Call Transcript

Smriti Popenoe, Co-Chief Executive Officer and President; Byron Boston, Chairman and Co-Chief Executive Officer; Mike Sartori, Chief Financial Officer; and T.J. Connelly, Chief Investment Officer. I now have the pleasure to turn the call over to Smriti.

Smriti Popenoe: Thank you, Alison, and good morning, everyone. We continue to build our company at the intersection of two powerful demographic tailwinds: the need for income and the need for housing. Dynex Capital, Inc. continues to deliver differentiated, top-tier performance. Our track record, combined with the significant growth in our capital base over the last 15 months, propels value creation by delivering scale and resilience to our shareholders. The team is focused on methodically building durability across investments, finance, technology, risk, and operations. Growing an enduring platform reinforces the value of our business meaningfully beyond the valuation of our balance sheet, further driving long-term shareholder returns.

Turning now to the global macroeconomic environment, government policy is squarely in the driver's seat, defining and driving outcomes. Scenario planning for us has evolved to mapping policy pathways: what policymakers could do next, how markets may transmit those decisions, and how we position ourselves for those moves. More than ever, mindset and preparedness are the key factors for successful decision-making because the policy paths are not always foreseeable. Flexibility and openness in our team's mindset—something we actively teach and practice—are now essential parts of navigating the investment landscape. In the first quarter, we added value by executing our plan. We managed the portfolio through a short burst of volatility, which we used to opportunistically raise and deploy capital.

We grew the total capital base by 18%, deploying the funds during the quarter as MBS spreads widened. Since quarter end, MBS spreads have tightened and book value is higher. Mike and T.J. will now review the detailed quarterly results and our outlook.

Mike Sartori: Thank you, and good morning, everyone joining us today. I would like to begin by welcoming Caitlin Mowicz, who joined Dynex Capital, Inc. today to lead capital markets and investor relations. Kate brings deep industry experience across both functions, and her background will support the continued growth of our capital and investor base while deepening the engagement with our existing investors. We are excited to add her capabilities to our strong and growing Dynex team. Turning now to our financial results for the quarter, book value ended the quarter at $12.60 per share, and economic return was negative 2.5% for the quarter, consisting of $0.51 per share of common dividends and an $0.85 per share decrease in book value.

We ended the quarter with leverage at 8.6 times versus total equity. The majority of the increase was attributable to the growth in our investment portfolio of $6 billion, reflecting the deployment of capital raised during the quarter of $442 million. Our liquidity position remained very strong, with $1.3 billion in cash and unencumbered securities at the end of the quarter, representing over 46% of total equity. We continue to evaluate growth through the lens of market opportunity, investment returns, and long-term accretion to drive shareholder value.

Net interest income for the quarter rose from $0.28 per share to $0.40 per share, primarily due to declining financing costs, which fell 33 basis points due to the impact of the Federal Reserve's rate cuts in the fourth quarter. With respect to expenses, G&A increased quarter over quarter, driven primarily by one-time items. As we noted in the prior first quarter earnings, we expect overall expenses to normalize in the second quarter, with the full-year expense ratio anticipated to be flat or modestly lower versus year end as we grow our capital base. Importantly, we remain disciplined in managing costs and our expense structure.

With that, I will turn it over to T.J. to provide additional detail on portfolio strategy and the outlook.

T.J. Connelly: Thanks, Mike. We entered the quarter with policy attention focused squarely on housing affordability and the mortgage market, particularly housing and the availability of mortgage credit, a transition we believe could support tighter mortgage spreads over time. Early in the quarter, mortgage markets benefited from a strong technical tailwind. Government policy, long one of our most important inputs, had turned supportive, with policymakers emphasizing GSE mortgage buying to tighten spreads and improve affordability. As volatility rose later in the quarter, agency mortgages traded like much riskier assets, creating potential opportunities. Because we operate with strong liquidity, we navigated that volatility constructively and selectively added assets as spreads widened to more attractive levels.

Fundamentals and technicals remain highly supportive, and we believe the long-term path toward tighter equilibrium spreads remains highly likely, boosted by policy, supply-demand dynamics, and yield carry. Net supply is light, and demand remains broad and robust across banks, REITs, money managers, and foreign investors. Last quarter, I noted that we expected net supply to be $200 billion this year. So far in 2026, it appears supply could come in even lower. Returning to the demand side, the potential bids from the Fannie Mae and Freddie Mac retained portfolios improves downside liquidity, stabilizes spreads during periods of volatility, and supports broader investor participation. The GSEs have been actively buying mortgages. They are selective on valuation.

They regularly retain pools they have previously been selling through their cash window programs. And with respect to potential hedging, they are mostly hedging using interest rate swaps. In parallel, proposed changes tied to the Basel III endgame could lower the capital cost banks face to hold mortgages, both in loan and securitized form, and to intermediate financing more efficiently. Financing costs are declining amid the light regulatory regime. Repo markets functioned smoothly, spreads were stable, and funding was readily available even during periods of heightened volatility. MBS repo spread to SOFR remained in the 13 to 17 basis point range, three to five basis points below last year's averages.

Structural improvements in the short-term funding markets alongside elevated money market balances, standing Fed backstops, and more efficient balance sheet intermediation continue to support financing for high-quality mortgage assets like those Dynex Capital, Inc. owns. We have seen agency MBS spreads to seven-year interest rate swaps begin to trend tighter again. After moving from the high 120s to nearly 170 basis points in March, spreads were in the low 160s at quarter end and moved back toward the 150 area late last week. As geopolitical events evolve and policymakers refocus on domestic issues like housing, we believe spreads can trade towards 120 again, with scope for long-term equilibrium spreads closer to 100 basis points.

Static ROEs for current coupon mortgages hedged with interest rate swaps are in the mid- to high-teens, and the spread outlook I just outlined provides a further tailwind to forward returns. Moreover, the opportunity to add alpha through security selection is exceptional given the environment. Borrower prepayment behavior is increasingly heterogeneous and technology-driven, creating meaningful dispersion across pools. Over the last year, we have strategically reduced our exposure to the most callable agency MBS—those in what we call the TBA market—and we continued to do that in the first quarter. TBAs declined from over 16% of our portfolio at year end to approximately 7% at the end of the quarter.

The first quarter reflects the strength of the Dynex model along two dimensions. First, disciplined risk management—supported by significant financing liquidity, strategic security selection, and a focus on market structure in the context of the macro headlines—allowed us to manage through elevated volatility. Second, that same volatility created the opportunity to raise and deploy capital at more attractive valuations, which we acted on during the quarter.

Byron Boston: Thank you, T.J. We are now combining our demonstrated ability to earn solid returns with the benefits of scale. Growing our company in this attractive investment environment is an important element of value creation; it distributes fixed costs, deepens liquidity, and strengthens the company, especially in periods of volatility like we saw last quarter. Beyond the resilience that a bigger balance sheet provides, larger companies have also typically enjoyed higher, more stable valuations. We have grown rapidly to be the third-largest agency-focused mortgage REIT, and we believe the market has not yet fully recognized the value we are establishing through scale.

As we continue to execute our plan with discipline, we are excited about the potential for shareholders to benefit from a more scalable platform, creating meaningful upside over the medium and long term. As we look ahead, we remain centered on opportunistic capital growth alongside disciplined management of our existing portfolio and building operating resilience. Our management team is invested alongside shareholders, our interests are aligned with yours, and we are committed to stewarding your capital with integrity, transparency, and care. We will now open the call for questions.

Operator: Thank you. If you are dialed in via the telephone and would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal. If you are in the event via the web interface and would like to ask a question, simply type your question in the ask a question box and click send. Once again, press star 1 to ask a question. We will go first to Bose George with KBW.

Bose George: Hey, everyone. Good morning. Can we get an update on book value quarter to date?

Mike Sartori: Hi, Bose. Good morning. As of Friday's close, the estimated book value was $13.31 per share, net of the accrued common dividend, and that is up 5.6% versus quarter end.

Bose George: Perfect. Great, thank you. And then you gave your outlook for spreads potentially going back down to 120 basis points. Is that across the curve or on a specific point on the curve?

T.J. Connelly: We are quoting those spreads against the seven-year swap point, which is consistent with the chart we have in our presentation.

Operator: We will take our next question from Trevor Cranston with Citizens JMP.

Trevor Cranston: Morning. Follow-up on your commentary about spreads potentially tightening to 120 or even 100 basis points as a long-term equilibrium. Can you talk about how high you would be willing to take leverage given that outlook for tightening, and how much the potential for short-term bouts of volatility weighs against that? Thanks.

T.J. Connelly: Thank you. There are several components to thinking about our leverage. Our leverage, as Mike mentioned, did increase to 8.6 times. Roughly two-thirds of that increase was actively positioning to own more mortgages given that backdrop. Mortgages really were kind of tail of the dog for several weeks in March. The yield spread, or mortgage basis as we refer to it, traded with risky assets. The basis was very correlated to things like the S&P 500. We are doing a lot of scenario analysis around that to think about just how much leverage we can comfortably manage, and it was a very comfortable position for us coming into the quarter-end period. Looking ahead, we will remain very opportunistic.

We are resolute in our view on those spreads moving down to as much as 100 basis points. Given the GSE backdrop, we think we are on the verge of a significant regime change. So we are going to actively be opportunistic in keeping our exposures so investors can capitalize on this opportunity.

Trevor Cranston: Got it. Okay. And then just looking at the portfolio this quarter, it looked like the allocation to TBAs went down. Can you talk about how you are thinking about the values of spec pools versus TBAs with incremental dollars?

T.J. Connelly: The TBA market, by definition—the to-be-announced market—is the cheapest-to-deliver segment of the mortgage market. That is to say, the pools or the loans that are most callable and potentially have the most duration uncertainty typically will get delivered into a TBA transaction. We want to avoid those. We think those get cheaper and cheaper. They have a tremendous amount of uncertainty around their cash flows. They are very refinanceable, callable on even the slightest move in mortgage rates. So we are trying to avoid those. As I mentioned in my prepared remarks, we have been positioning for owning significantly more pools. We have a long history of security selection.

This is a tremendous source of alpha for us, and it is unique to this model. It is very hard for investors to go out and find mortgage pools and do the deep dive that we do; you have to be in the institutional world. It is a great opportunity for retail investors, for instance, to be able to access security selection like we can offer them.

Trevor Cranston: Makes sense. Thank you.

Operator: We will go next to Jason Weaver with Jones Trading.

Jason Weaver: Hi. Good morning, guys. I was wondering if you could speak to the phasing of capital deployment over the quarter and beyond.

Byron Boston: In terms of the capital, and I will let Smriti comment a little bit, it is very opportunistic and methodical. We are thinking a lot about multiple components that go into that optimization for our shareholders. One of the things I think the market often misses is total shareholder return is driven by the portfolio returns and the valuation. One thing is very clear: larger companies receive a larger valuation in this sector, and that is a very important part of our calculus as we think about phasing up the capital raising. It was a significant quarter for us. I will turn it over to Smriti, who will comment a little bit more.

Smriti Popenoe: Hi, Jason. One of the things that we think about actively is what the agency MBS market and the moves are telling us about the inherent risk in that particular sector. One of the things that happened in the first quarter is that agency MBS widened, but it was not because there was something wrong with agency MBS per se. It was not a fundamental reason. They widened because risk assets in general were weaker, and we view those types of opportunities to be really significant in terms of the ability to raise and deploy capital. So when we see that type of move, that is a signal to us to put accretive capital that we are raising to work.

That is really the opportunistic nature of what we are talking about. In general, when we see those types of opportunities, you will see us probably raise bigger blocks of capital, put the money to work, and then over time, the criterion that we have always abided by—making sure that the cost of capital is lower than the return on the capital that we are deploying—remains the gold standard in terms of our willingness to raise and deploy capital over time.

Jason Weaver: Got it. That is helpful. And just so I have this correct, obviously forward ROE is going to be the biggest consideration here. But is there a downside sort of multiple in valuation that you want to avoid, or you would underwrite to price above, like your book value multiple?

Smriti Popenoe: We are always going to want the shares to trade at a premium to book value. I think as a business we have now proven two things. One is the ability to deliver strong returns in some of the more challenging environments that the market has had in the last 10 years. The second is this idea that as we grow, we are delivering significant benefits of scale to our shareholders. At this point, we feel like the markets have not necessarily taken that into account. Having now firmly placed ourselves as the third-largest company that is doing what we are doing, I think that part is not yet fully reflected in the share price.

For us to continue to tell that story, that is the goal here. But all else being equal, not only do we think the shares deserve to trade above book, we actually believe they deserve to trade at a significant premium.

Jason Weaver: Alright. I appreciate that. Thanks again for the answers, and congrats on the quarter.

Smriti Popenoe: Thanks, Jason.

Operator: We will go next to Analyst with UBS.

Analyst: Good morning, and thank you for taking my questions today. Could you speak to swap spread dynamics over the quarter and how that impacted performance? And did you adjust the mix between Treasury futures and swaps during the stress period?

T.J. Connelly: Thanks for the question, Marissa. Swap spreads—so the interest rate swap rate relative to Treasuries—is what most people are quoting there, and that does tend to correlate with risky assets, much as I mentioned about the basis. When stocks trade lower, for instance, the swap spread will trade more negative, and vice versa when risky assets are doing well, the swap spread will trade less negative. We have said for several quarters now—pushing up on two years—that we expect to be able to earn the additional yield spread that interest rate swap hedges offer relative to Treasuries. There is more yield spread available when hedging mortgages with interest rate swaps than there is when we hedge with Treasuries.

As a result, I have mentioned on the last couple calls, we expected 60% to 80% of the portfolio hedged with interest rate swaps. We were right around 70% on a DV01 basis at quarter end, and I expect that to be roughly where we are comfortable in terms of the liquidity of hedges and being able to stay nimble with futures that trade practically 24/7, at least 24/6. There is a little bit of scope to get closer to 80% if the opportunity presents itself, but that is a really compelling spread for us to continue to earn over time, and it has worked fairly well.

Analyst: Appreciate that. And just moving to the GSEs, you talked about the directive as resetting the spread regime tighter. How has the pace of their buying met your expectations? And did the March spread widening test that backstop thesis in a meaningful way?

T.J. Connelly: Yes, it did to some extent test the backstop. They have proven to be very value-based, so I would not say it is time-based so much, which is really important for understanding the backstop. At wider spreads, they will be more aggressive, and all indications suggest they were more aggressive at wider spreads. They are fairly methodical in terms of their pool selection, so they are buying—or retaining rather—more pools than they have in the past relative to the cash windows. Overall, it is playing out roughly as we expected.

There are periods of volatility; they wait, they put their hands up and say, “We will see where value shakes out,” and then they step in, much as they did when Smriti, Byron, and I sat at the Freddie Mac portfolios 25 years ago. They are operating in a very similar manner at this point.

Analyst: Got it. Thanks so much for taking my questions.

T.J. Connelly: Pleasure.

Operator: We will take our next from Analyst with Compass Point.

Analyst: Thank you. A follow-up on the previous question: how have your expectations for inflation influenced the tenor of your interest rate swaps, noting that you moved more into three- and five-year, and does that reflect your expectations for a steeper 2s/10s?

T.J. Connelly: Great question. Over the course of the quarter, the market waffled a lot—especially with the war in Iran—the market narrative shifted very quickly at points from one focused on inflation to one focused on growth. We do not know the answer. We do not predict; we prepare. We are preparing and building this portfolio to be robust to both of those regimes. That is really important. You saw the swap book shorten up a little bit in that three- to five-year tenor. Most of that is just aging of the swap book.

We are very comfortable with how this is positioned because the view we have here—and the risk exposures that we think are the most compelling for our shareholders to earn over time—is that mortgage spread relative to the interest rate curve. We are trying to position this to achieve the yield spread and hold our book value as steady as possible. Given the way the portfolio is constructed currently for this regime, it is appropriate. Our highest conviction is that mortgage yield spread is what we are here to earn, and we are hedging across the curve for that reason.

Analyst: And to follow up on the asset side, it seems like you added more in the current and lower coupons and avoided higher coupons, assuming that follows on with CPR expectations?

T.J. Connelly: It is a great question because there were some really good opportunities in the initial days. It feels like a long time ago now, but in mid-January, after the administration’s announcement that the GSEs would be more active in buying, certain coupons really outperformed. You will see in our press release that the 4% coupon is significantly lower than it was at year end, and that was because we took advantage of that alpha. There was significant outperformance in those coupons, and we moved away from those coupons as they outperformed to diversify the book up and down the stack. We added some Fannie 2s, even, and then some of the higher coupons.

Again, this market is increasingly about pool selection even more than coupon selection. When you have these quick moves, we are watching very closely to say, “This is out of line.” The Fannie 4s, for instance, got significantly richer. We were able to sell into that and buy pools in other coupons that offered much more compelling cash flows for us.

Analyst: That is a great answer. Thank you very much.

Operator: We will take our next question from Eric Hagen with BTIG.

Eric Hagen: Hey, thanks. Good morning, guys. Following up a little bit on this conversation around capital raising, looking at the timing of the capital raising and the broader philosophy around raising capital, is there anything fundamental that you would identify in the current environment which maybe changed the level at which you are prepared to raise capital relative to where you have raised in the past? And by level, I mean the level of your stock, your valuation.

Smriti Popenoe: As you know, Eric, we disclosed that the bulk of the capital that was raised was raised early in the quarter, when valuations were more supportive toward issuing capital versus investing, and then the investing environment played itself out over the quarter as everyone saw with spreads wider as the war in Iran progressed. In general, I do not think the principles have changed. When it is a good idea for us to raise, we raise. When it is a good idea to invest, we invest. The raising and deploying do not necessarily have to be simultaneous in nature. Sometimes they are, and sometimes they are not.

The real principle—I have said this for three-plus years—is this idea of whether the cost of capital is lower than the return that we can earn on that capital over time. That is what makes this investment environment so unique: (a) that it has lasted as long as it has, and (b) that the forward returns in agency MBS still continue to support active raising and deploying of capital because, over time, we believe the return on the capital we are raising right now is going to be higher than the marginal cost. That has always been our operating principle.

As we see the share price go up relative to book—we talked about price-to-book a fair amount today—I think we are more conscious about the idea of delivering total shareholder return to our shareholders. T.J. talked about TSR being comprised of two things: the actual return on our portfolio and the price-to-book. We know those are two different components, and there is a trade-off between the two, but that also is a factor in how much we raise and how much we deploy. A lot of what we are thinking through right now is, number one, performance. Performance is the beginning, ending, and final arbiter of everything that we do. That is always number one.

Number two is delivering value through these other ways. Those are all factors in how we think about the pace of capital raising and deploying.

Eric Hagen: That is really helpful. Thank you. If I could sneak in one more here: what is your perspective on the prepayment environment as community banks are given more incentives to come back into the market? Do you see that driving a lot of competition among originators?

T.J. Connelly: Certainly, competition drives refinanceability. That is a very important construct. More than anything, though, as we have talked about for many quarters now, it is all about the technology. That is making it easier and easier to refinance the marginal borrower, and I think that will be the dominant force over time. To the extent that you have certain incentives, you are bringing it back to something we have talked about for a long time—that is policy. To the extent policy shifts incentives for the players in the mortgage market, that is something we are watching very closely.

Operator: At this time, there are no further questions. I would now like to turn the call back to Smriti Popenoe for any additional or closing remarks.

Smriti Popenoe: I thank you all for your attention, and we look forward to updating you on our quarterly results in the second quarter. [inaudible]

Operator: This does conclude today's conference. We thank you for your participation.

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