Dynex Capital (DX) Q2 2025 Earnings Call Transcript

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DATE

• Monday, July 21, 2025, at 10 a.m. EDT

CALL PARTICIPANTS

• Chairman and Co-Chief Executive Officer — Byron Boston
• Co-Chief Executive Officer and President — Smriti Popenoe
• Chief Financial Officer and Chief Operating Officer — Rob Colligan
• Chief Investment Officer — T.J. Connelly
• Vice President, Investor Relations — Alison Griffin

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TAKEAWAYS

• Market Capitalization: Exceeded $1.5 billion as of June 30, 2025, representing approximately 50% growth since June 2024.
• Investment Portfolio Size: $14 billion as of Q2 2025, up from $11 billion at the end of the first quarter and more than 50% larger than the previous year's quarter.
• Liquidity: $891 million as of Q2 2025, equaling 55% of total equity.
• Capital Raised YTD: $560 million of new capital issued above book value in 2025.
• Leverage Ratio: Increased sequentially from 7.4 last quarter to 8.3 in the second quarter.
• Net Interest Income: Trending upward due to new investments with attractive yields and ongoing contribution from swaps.
• Return on Equity (ROE): Newly acquired, fully hedged positions are currently generating ROEs from the mid-teens to low 20% range.
• Dividend: Increased above pre-COVID levels.
• Agency RMBS and CMBS: Portfolio growth focused on agency MBS with selective additions to agency CMBS for cash flow stability and yield curve diversification.
• Funding Environment: Mortgage repo markets remained stable, with spreads to SOFR in the 15-20 basis point range and ample capacity.
• Capital Structure: Recent capital raises have focused on common equity, with preferred issuance unattractive due to market conditions.
• Book Value Update: T.J. Connelly reported book value was nearly unchanged from quarter-end after deducting the accrued dividend.
• Operating Platform: Several functions, including legal, IT, and accounting, have been brought in-house to enhance scale and institutional knowledge.
• Expense Commentary: Rob Colligan disclosed $3 million to $4 million in compensation increases in the first half of 2025; G&A expenses tend to decline in the second half.
• Technicals: Money managers remain overweight mortgages; banks could return to the market upon clear Fed rate cuts.
• Hedging Approach: Portfolio hedges focus on seven- and twenty-year swaps and maintain overall portfolio duration near-flat; interest rate swaps compose roughly two-thirds of hedges.
• Coupon Positioning: Portfolio maintains a deliberate bias toward lower coupons, emphasizing potential outperformance from declining mortgage rates.
• TBA Versus Pools: Shift toward a larger pool position, supported by favorable pool pricing relative to prepayment expectations and implied TBA financing costs.

SUMMARY

Dynex Capital (NYSE:DX) reported significant portfolio and market capitalization growth, achieving accretive capital raises and strategically scaling assets amid ongoing market volatility. The company increased leverage and grew its investment portfolio by over $3 billion while preserving ample liquidity and maintaining disciplined risk management during elevated funding stability. Management highlighted rising net interest income and reported that new investments in agency MBS are generating attractive, fully hedged ROEs, with dividends raised above pre-pandemic levels. Dynex continued a strategic emphasis on agency MBS -- with selective addition of agency CMBS -- while executing internal operational enhancements and maintaining a capital structure focused on issuing common equity at a premium to book value. Recent G&A expenses included identifiable, temporary compensation increases, and book value was reported as essentially unchanged after the dividend accrual.

• Byron Boston stated the company’s stewardship mindset and strategic vision differentiate its ongoing performance.
• T.J. Connelly described the current mortgage investment environment as presenting "historic return from mortgage yields relative to hedges," and characterized ROEs in the high teens to low twenties as "attractive by any standard."
• Management emphasized the role of dividends in shareholder value creation.
• Management added several leadership and operational roles, including appointing Michael Angelo as Chief Legal Officer and building technology and legal capabilities in-house.
• T.J. Connelly highlighted that swap spreads, down to forty-seven basis points below Treasuries, contributed incrementally to returns.
• Bank participation as buyers of agency MBS may increase only after observable Fed rate cuts, according to T.J. Connelly.
• Book value, after subtracting the accrued dividend, remained nearly unchanged from quarter-end, according to T.J. Connelly.

INDUSTRY GLOSSARY

• Agency RMBS: Mortgage-backed securities issued or guaranteed by U.S. government agencies or government-sponsored entities (e.g., Fannie Mae, Freddie Mac), carrying a guaranty of principal payment.
• Agency CMBS: Commercial mortgage-backed securities with full principal guarantee by agencies such as Fannie Mae or Freddie Mac, typically featuring prepayment protection and long-term cash flow stability.
• SOFR: Secured Overnight Financing Rate, a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities, used as a floating rate benchmark in mortgage repo and swap markets.
• TBA: "To Be Announced" securities; forward contracts for the purchase or sale of agency MBS, allowing liquidity and standardized trading in the MBS market.
• Repo Market: Market for short-term borrowing using securities as collateral; critical for funding leveraged MBS investments and determining spreads relative to SOFR.

Full Conference Call Transcript

Operator: Thank you for standing by. My name is Carly, 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. After the speakers' remarks, there will be a question-and-answer session. Press star, followed by the number one on your telephone keypad. Thank you. I would now like to turn the call over to Alison Griffin, Vice President, Investor Relations. You may begin.

Alison Griffin: Good morning. 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. Before we begin, we wish to remind you that this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words believe, expect, forecast, anticipate, estimate, project, plan, and similar expressions identify forward-looking statements that are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified.

The company's actual results and timing of certain events could differ considerably from those projected and/or contemplated by those forward-looking statements as a result of unforeseen external factors or risks. For additional information on these factors or risks, please refer to our disclosures filed with the SEC, which may be found on the Dynex website as well as on the SEC's website. This conference call is being broadcast live over the Internet with a streaming slide presentation, which can be found through the webcast link on the website. The slide presentation may also be referenced under the quarterly report on the Investor Center page.

Joining me on the call today are Byron Boston, Chairman and Co-Chief Executive Officer; Smriti Popenoe, Co-Chief Executive Officer and President; Rob Colligan, Chief Financial Officer and Chief Operating Officer; and T.J. Connelly, Chief Investment Officer. I will now turn the call over to Smriti.

Smriti Popenoe: Thank you, Alison, and good morning, everyone. I'd like to recognize and congratulate my colleague, Bob Nelson, 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 twenty years of service to Dynex. Their careers have evolved with the company, and their contributions continue to be a significant factor in our success. 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 policy. Human conflict is escalating and rapidly reshaping the world of the last 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 periods.

I'm excited about the accelerating growth of the company and our delivering a meaningful operating leverage. This quarter, Dynex crossed another milestone. Our market capitalization as of June 30 is over $1.5 billion, representing nearly 50% growth since June 2024. The discipline, experience, and expertise of the team was on full display and will continue to be a differentiator for Dynex in the future. Rob and T.J. will now give you further details on the quarter and the outlook. I'll turn it over to Rob.

Rob Colligan: 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 dividend. 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 raised capital above book, positioning us to grow and deploy capital into an attractive market. T.J. 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. 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 teams.

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. I'll now turn it over to T.J.

T.J. Connelly: Thank you, Rob. This was an important quarter for demonstrating the strength of our strategy, 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. We took advantage of the significant value created by widespread market uncertainty and 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. 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 remained 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 emerge. 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% range. 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 announcement, 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. Net supply of agency RMBS remained 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 reenter 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 a long investment horizon, we can continue to harvest the historic yield spread for our shareholders. Security selection continues to be a key source of value for us. With over ten active coupons in the market, we identified attractive opportunities across a wide range of agency RMBS and even in the agency CMBS market.

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.

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 towards 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 market to lock in assets we believe will perform across a wide range of macro outcomes. This remains an exceptional environment for long-term capital deployment in our space.

I couldn't be more confident in our positioning as we look ahead. The current environment remains highly favorable with wide agency MBS spreads 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 hedges. 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 Boston: Thank you, T.J. 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 disciplined 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. 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. I'll now turn it back over to Smriti for closing comments.

Smriti Popenoe: 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 levels. 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.

Operator: Your first question comes from Bose George with KBW.

Bose George: Hey, everyone. Good morning. Can I first, just wanted to ask about leverage. You know, can you just talk about the range you're targeting? Is this kind of the high end of the range you're at? And also just related in terms of 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?

Smriti Popenoe: Hi, Bose. Good morning. Thanks for the question. I'll let T.J. 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 last quarter was really the removal of some tail risk events. You know? We had May 27, the 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, you know, at this point, you're seeing the high teens mid-twenties ROEs.

And we feel like that is really a great place for us to be an investor. 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. T.J., I don't know if you have anything to add on that.

T.J. Connelly: Sure. Yeah. As the quarter progressed, the risk environment did improve. As 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. So as agency CMBS, and then over the course of the quarter, we started adding more thirty-year mortgages. So it was definitely an evolution over the course of the quarter as that policy environment adjusted.

Bose George: 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 point. 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.

Bose George: Okay. Great. And then could I just get an update on book value quarters today?

T.J. Connelly: Sure. Yeah. As of Friday, book value was nearly unchanged from quarter end after taking out the accrued dividend to date.

Bose George: Great. Thanks a lot.

Smriti Popenoe: Sure.

Operator: Your next question comes from Doug Harter with UBS.

Doug Harter: Great. Thank you. In your prepared remarks, you know, you were talking about, you know, kind of some of the other investors in the mortgage-backed space. 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 vice versa if they went the other way and, you know, what potential catalysts you see for changes in spreads?

T.J. Connelly: Very good morning, Doug. You know, the banks are the big player that could potentially return. They were in agency CMOs, for instance, off of thirty-year collateral. 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 hedging with interest rate swaps, things of that nature. But for the 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. 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 stock, which was a very interesting fund flow. 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. Broadly speaking, those players are overweight mortgage.

So those are the two big players. 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, you know, continuing to raise capital to deploy it. We're the, 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. 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. 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.

Doug Harter: Great. Thanks, T.J. And, you know, kind of also you give us your updated thoughts on swap spreads and, you know, kind of how you see those playing out over the, you know, coming months?

T.J. Connelly: Yeah. Swap spreads, you know, I'll use the seven-year points as an example, down to, you know, forty-seven 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 gonna produce in those, you know, as I mentioned in my prepared remarks, in the high teens and even low twenties, reflect that. So minus, you know, at minus forty-seven, I think it's quite attractive, has a large margin of safety. So we can take an even larger widening.

So it moved to, let's say, minus fifty, even minus fifty-five, on a mark-to-market basis, is fine given the carry that you're enjoying over the course of the year relative to treasuries.

Smriti Popenoe: And I would just add to that, Doug. It's, you know, in the medium to long term, we feel like this is an instrument that really incrementally benefits our shareholders 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 these spreads will end up. I think we feel that is still a very good long-term risk-return trade-off.

Doug Harter: Great. Appreciate it. Thank you.

Smriti Popenoe: Sure.

Operator: Your next question comes from Eric Hagen with BTIG.

Eric Hagen: Hey, thanks. Good morning, guys. Looks like there's currently fifty basis points of rate cuts priced into the forward curve. That's through year-end. 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?

T.J. Connelly: Right. The way I approach that question is really through the supply and demand lens. Supply will remain very low if we, which is a continued to be. So if we don't have rate cuts, the supply picture remains very muted. On the demand front, you know, banks, 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 spreads. 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. Value would go up.

We don't need that in order to make the kinds of returns our investors are expecting. The spread at today's level is compelling in and of themselves. 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 to the team's view here at Dynex is that we will probably get fifty 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: That's good color. I appreciate that. The current thinking behind the coupon allocation between pools versus TBAs? Like, if your allocation to TBAs was lower, 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?

T.J. 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, SOFR plus fifteen to twenty-five 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 that in and of itself favors owning some pools, and the pools pricing is very fair relative to current expectations for prepayment.

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.

Eric Hagen: Good color from you guys. Thank you.

Smriti Popenoe: Great. Thanks, Eric.

Operator: Your next question comes from Trevor Cranston with JMP Securities.

Trevor Cranston: Hey. Thanks. Good morning. You guys mentioned, you know, opportunistically adding some agency CMBS to the portfolio this quarter. 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, you know, how big relative to the RMBS position they could get over time? Thanks.

Smriti Popenoe: Great. Thanks, Trevor. 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 ten-year instruments that are locked out from prepayment for nine and a half years or seven-year instruments locked out for six and a half years. Or five-year instruments locked up 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. 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 I'll let T.J. give you the thought process between sort of RMBS versus CMBS returns. But that's the philosophy behind it.

T.J. Connelly: Yeah. The positions, Trevor, that we've been focused on the five-year part of the agency CMBS market. As Smriti mentioned, it is a very stable economic return profile. These bonds are trading around swaps plus ninety 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.

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, thirty-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 thirty years.

Smriti Popenoe: I mean, 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's the place where there's either Fed activity or less volatility. So it's a nice stabilizer for the book.

Trevor Cranston: Got it. Yeah. That makes sense. Okay. Thank you.

Operator: Again, if you would like to ask a question, your next question comes from Jason Stewart with Jones Trading.

Jason Stewart: Okay. Hi. Thanks. It's Jason with Janney. One follow-up on the hedge questioning. T.J., 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?

T.J. Connelly: Sure. Yeah. Our hedges have remained focused on, you know, the longer part of the curve. Sevens and twenties are a big part of where our hedges are focused. We are, you know, 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, you know, looking for those kinds of assets that are in the front end of the yield curve, and hedging with some longer maturities, especially as we own some of the lower coupon thirty-year makes sense. In terms of treasury versus swaps, to your question there, the book has been roughly two-thirds interest rate swaps.

Certainly, we have room to strategically increase or decrease that at any, you know, 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 mix.

Jason Stewart: Okay. So on the longer side, so thirty-year and ten-year futures treasury futures, stick with that strategy. You're not gonna go too much farther than ten to fifteen-year swaps. Is that what I'm hearing?

T.J. Connelly: 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, you know, certainly adjust our curve position if and when our views change. But I think the end of the quarter was a good baseline.

Jason Stewart: Fair enough. And then, Rob, 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?

Rob Colligan: Sure. Thanks for the question. You know, the first half of the year, we tend to be a little bit higher with annual meetings and then a couple of queues. We did have some compensation increases, probably in the range of three or four million dollars in the first half. And for us, you know, it's interesting. We're 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 see how that adjusts out throughout the rest of the year. But, yeah, we do tend to trend down Q3 and Q4. I'd expect that to continue.

Jason Stewart: Okay. Thank you.

Operator: There are no further questions at this time. We will now turn the conference back over to Smriti Popenoe for closing remarks.

Smriti Popenoe: 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.

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