Dynex Capital, Inc. · NYSE:DX
Dynex Capital — Investor Presentation (December 2013)
40 slides from Dynex Capital's investor presentation, Dec 3, 2013
Slide 1: Investor Presentation December 2013
Investor Presentation December 2013
Slide 2: Safe Harbor Statement
Safe Harbor Statement NOTE: This presentation contains certain statements that are not historical facts and that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Statements in this presentation addressing expectations, assumptions, b
Slide 3: Market Snapshot
Market Snapshot Common Stock Preferred Stock NYSE Stock Ticker: DX DXPrA DXPrB Shares Outstanding: (as of 9/30/13) 54,426,049 2,300,000 2,250,000 Q3 Dividends per share: $0.27 $0.53125 $0.4765625 Dividend Yield: (annualized) 12.87% 9.26% 9.12% Share Price: $8.39 $22.95 $20.90 Market Capitalization:
Slide 4: Guiding Principles
4 Guiding Principles Our Mission Our Core Values •Generate dividends for shareholders •Manage leverage conservatively • Remain owner-operators • Maintain a culture of integrity and employ the highest ethical standards • Provide a strong risk management culture • Focus on long-term shareholder value
Slide 5: Diversified Business Model
Diversified Business Model Hybrid MREIT Commercial MREIT Agency MREIT Non-Agency MREIT DX We can deploy capital in multiple asset classes in any part of the capital structure 5
Slide 6: Investment Strategy Has Not Changed
Investment Strategy Has Not Changed • Our core investment strategy has not changed since 2008 and there is a good business opportunity to generate cash flow rolling down the short-end of the yield curve • Investment portfolio is constructed to perform in a variety of market environments – Limited ex
Slide 7: Disciplined Top-Down Investment Philosophy
Disciplined Top-Down Investment Philosophy Macroeconomic Analysis Sector Analysis Security Selection and Funding Performance and Risk Management 7
Slide 8: Risk Management
Risk Management •Duration target of 0.5 to 1.5 years •Derivatives to economically hedge interest rate risk •Invest in credit assets which should increase in value as rates rise •Emphasize short duration assets and more predictable cash flows Interest Rate/Extension Risk •CMBS investments with call p
Slide 9: Portfolio Construction
Portfolio Construction • Our fundamental portfolio construction has not changed • Portfolio is designed to generate cash flow off the short-end of the yield curve and increase in value from rolling down the curve • During 3Q, we significantly reduced sensitivity to parallel yield curve shifts up and
Slide 10: Portfolio Update (as of September 30, 2013)
Portfolio Update (as of September 30, 2013) 10 RMBS 22% CMBS 78% $162.4 Other 5.2% RMBS 39.2% CMBS 55.6% $281.9 $198.5 $26,4 ($ in millions) Credit Quality 25% 36% 38% 1% 0% 5% 10% 15% 20% 25% 30% 35% 40% Months to Maturity/Reset Investment Capital Allocation Net Premium by Asset Type Portfolio Expe
Slide 11: CMBS Portfolio
CMBS Portfolio (as of September 30, 2013) AAA, 76% AA, 4% A, 17% Below A, 3% Other 21% Multifamily 79% $99.6 $0.0 $0.0 $400.7 prior to 2000 2000-2005 2006-2008 2009 or newer Agency CMBS, $322.2 Agency CMBS IO, $475.6 Non- Agency CMBS, $374.7 Non- Agency CMBS IO, $125.5 Credit Quality Collateral Non-
Slide 12: CMBS: Why We Invest
CMBS: Why We Invest Explicit call protection: Lockout: No prepayments allowed Defeasance: Borrower cannot prepay the loan but may substitute US government collateral that replicates remaining cash flow stream Yield Maintenance: Borrower can prepay the loan by paying a penalty generally equal to pres
Slide 13: CMBS v. RMBS
CMBS v. RMBS CMBS – Explicit call protection – Short duration, predictable “bond like” cash flows – Predictably rolls down the curve – Complementary cash flow profile to our RMBS investments – Opportunity for credit spread tightening RMBS – No explicit call protection – Implicit call protection thro
Slide 14: Interest Rate Exposure Reduced
Interest Rate Exposure Reduced 14 Parallel Shift in Interest Rates Percentage Change in Projected Market Value of Assets Net of Hedges (in basis points) September 30, 2013 December 31, 2012 +50 (0.27)% (0.84)% +25 (0.12)% (0.42)% – Duration risk profile reduced primarily from additional hedges – Our
Slide 15: Prepayment Speeds vs. Refinancing Index
Prepayment Speeds vs. Refinancing Index 0 5 10 15 20 25 30 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Hybrid ARMs/ARMs Total Agency Total Portfolio Dynex Portfolio CPRs MBA Refinancing Index Source: Bloomberg 15
Slide 16: Financing
Financing Hedges (Swaps and Eurodollars) as of 9/30/13 as of 6/30/13 Year Effective WAVG Notional Balance WAVG Rate WAVG Notional Balance WAVG Rate 4Q2013 $1,586,444 1.55% $1,492,000 1.55% 2014 1,583,496 1.51% 1,282,671 1.67% 2015 1,686,975 1.55% 1,085,521 1.69% 2016 2,157,582 1.89% 831,877 1.62% 20
Slide 17: Economic Fundamentals are Uncertain
Economic Fundamentals are Uncertain • Sustainability and trajectory of US economic growth is uncertain • Federal reserve policy makers are projecting accelerating growth into 2014-2015, but economic growth today is only moderate • Moderate economic activity implies a 3.0%-3.25% rate on the ten- year
Slide 18: Market Technicals/Psychology are more Important
Market Technicals/Psychology are more Important 18 • Market Technicals – Technicals have been distorted by Federal Reserve participation in the capital markets • Long term interest rates and spread volatility were artificially low • Taper talk increased both spread and interest rate volatility. This
Slide 19: Government Policy is Key
Government Policy is Key 19 • Monetary Policy – Federal Reserve expected to maintain dovish policy holding short rates low for “extended period” – Steady short term interest rates should create an environment in which we can deploy capital profitably – QE3 artificially influences long rates lower –
Slide 20: Market Environment is Uncertain
Market Environment is Uncertain • The combined factors of an uncertain economic environment, distorted monetary policy and unclear fiscal and regulatory policies has and is continuing to foster a volatile market environment – On the one hand, short-rates provide opportunity to earn net interest inco
Slide 21: Outlook and Opportunities
Outlook and Opportunities • The macro environment of lower short term rates and a steeper yield curve provides an attractive carry environment • However, market volatility is generating additional costs related to increased hedging/risk management activities • Longer term, we see opportunities for c
Slide 22: Managing for the Long-Term
Managing for the Long-Term (as of September 30, 2013) Historical Economic Return to Common Shareholders 22 -3.9% 20.8% 23.8% 45.9% 74.9% -10.0% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 1 Year 2 Year 3 Year 4 Year 5 Year
Slide 23: Appendix
APPENDIX 23
Slide 24: Our Track Record
Our Track Record $0.71 $0.92 $0.98 $1.09 $1.15 $0.85 $0.91 $1.02 $1.41 $1.03 $1.35 $0.75 $0.00 $0.20 $0.40 $0.60 $0.80 $1.00 $1.20 $1.40 $1.60 2008 2009 2010 2011 2012 9/30/2013 Dividend per Share EPS $8.07 $9.08 $9.64 $9.20 $8.59 $7.00 $7.50 $8.00 $8.50 $9.00 $9.50 $10.00 2008 2009 2010 2011 2012 Q
Slide 25: Core Net Operating Income
Core Net Operating Income 25 (1) Amount recorded as a portion of "interest expense" in accordance with GAAP related to the amortization of the balance remaining in accumulated other comprehensive loss as of June 30, 2013 as a result of the Company's discontinuation of hedge accounting. Core net oper
Slide 26: Capital Allocation
Capital Allocation (as of September 30, 2013) 26 •Associated financing for investments includes repurchase agreements and securitization financing issued to third parties (which is presented on the Company's balance sheet as “non-recourse collateralized financing”). Associated financing for derivati
Slide 27: Selected Financial Highlights
Selected Financial Highlights (as of and for the quarter ended) 27 (1) Core net operating income to common shareholders (including on a per share basis), adjusted return on average common equity and adjusted net interest spread are non-GAAP financial measures. Reconciliations of these non-GAAP finan
Slide 28: Credit Spread Changes
Credit Spread Changes Assets September 30, 2013 June 30, 2013 Change 2 year vs. 10 year UST spread 230 218 12 Hybrid ARM 5/1 (2.0% coupon) spread to UST 40 45 -5 Hybrid ARM 10/1 (2.5% coupon) spread to UST 80 75 5 Agency CMBS spread to interest rate swaps 72 92 -20 ‘A’-rated CMBS spread to interest
Slide 29: Market Volatility
Market Volatility Source: Bloomberg 1 year/10 year Swaption Volatility January 1, 2006 – November 25, 2013 29 10-Year Treasury Note Yield January 1, 2011 – November 25, 2013
Slide 30: Book Value Change
Book Value Change 30 Decline in book value due to continued spread widening and additional hedges Book value per common share, June 30, 2013 $ 8.94 Impact of earnings per common share, excluding loss on derivative investments, net (1) 0.31 Dividends per common share (0.27 ) Changes in book value per
Slide 31: Non-GAAP Reconciliation
Non-GAAP Reconciliation 31 DYNEX CAPITAL, INC. RECONCILIATION OF GAAP INTEREST EXPENSE TO EFFECTIVE BORROWING COSTS AND OF GAAP NET INTEREST SPREAD TO ADJUSTED NET INTEREST SPREAD (UNAUDITED) ($ in thousands) Three Months Ended September 30, 2013 June 30, 2013 September 30, 2012 Amount Yield Amount
Slide 32: Hybrid ARM Credit Spreads
Hybrid ARM Credit Spreads (B as is P o ints ) 0 20 40 60 80 100 120 140 O c t- 1 1 N o v -1 1 D e c -1 1 J a n -1 2 Fe b -1 2 Ma r- 1 2 A p r- 1 2 Ma y -1 2 J u n -1 2 J u l- 1 2 A u g -1 2 S e p -1 2 O c t- 1 2 N o v -1 2 D e c -1 2 J a n -1 3 Fe b -1 3 Ma r- 1 3 A p r- 1 3 Ma y -1 3 J u n -1 3 J u
Slide 33: CMBS Credit Spreads
CMBS Credit Spreads Source: Company Data 33 0 200 400 600 800 1000 1200 1400 Ba si s P o in ts CMBS Spreads vs Swaps AAA CMBS DUS Freddie Credit
Slide 34: Investment Premium Allocation
Investment Premium Allocation -$100 $0 $100 $200 $300 $400 $500 $600 $700 $800 $900 2009 2010 2011 2012 1Q2013 2Q2013 3Q2013 M il li on s Premium (Discount), net - CMBS and loans Premium, net - RMBS and loans (as of end of period) 34
Slide 35: Agency CMBS Performance
Agency CMBS Performance Source: Freddie Mac Credit Volatility: Agency CMBS cash flow returns are leveraged to credit performance Agency CMBS are collateralized by multifamily cash flows Historical performance of Agency multifamily product has been exceptional Freddie 35 0.00% 0.20% 0.40% 0.60% 0.80%
Slide 36: Positive Multifamily Trend
Positive Multifamily Trend Multifamily Vacancies and Rents December 1999 – June 2013 Source: REIS, Barclays Research $0 $200 $400 $600 $800 $1,000 $1,200 0 1 2 3 4 5 6 7 8 9 Dec-99 Aug-01 Apr-03 Dec-04 Aug-06 Apr-08 Dec-09 Aug-11 Apr-13 Vacancy Rent (RHS, $ per unit) 36
Slide 37: Aggregate Agency CPRs
Aggregate Agency CPRs 0 10 20 30 40 50 60 70 Ju n - 02 Ju l-0 2 Au g- 02 Se p- 02 O ct -0 2 N ov - 02 D ec - 02 Ja n- 03 Fe b- 03 M ar - 03 Apr -0 3 M ay - 03 Ju n - 03 Ju l-0 3 Au g- 03 Se p- 03 O ct -0 3 FH ARM FN ARM FH FXD FN FXD 2002-2003 vs. 2011- 2013 Source: eMBS % % 0 5 10 15 20 25 30 35 FH
Slide 38: Extension Risk
Extension Risk (as of November 1, 2013) 0 2 4 6 8 10 12 14 16 FN 30 year FNCI 15 year FN 5/1 ARM 15 CPR/CPB 2 CPR/CPB Average Life (years) Price Coupon WAC Speed Average Life Average Life Extension FN 30yr $98-0 3.00% 3.60% 15 CPR 2 CPR 5.33 years 14.22 years ~9 years FNCI 15yr $100-23 2.50% 2.97% 1
Slide 39: What is Roll-Down?
What is Roll-Down? • The Federal Reserve is in an easing mode, intent on keeping short rates low for a considerable amount of time. As a result the Treasury yield curve is exceptionally steep, meaning short-term rates are substantially lower than long-term rates. • The combination of these factors p
Slide 40: Spread Risk
Spread Risk • An asset’s “spread” is the market premium above a benchmark rate that reflects the relative riskiness of the asset versus the benchmark. • Spread risk is the uncertainty in pricing resulting from the expansion and contraction of the risk premium over the benchmark. • Spreads (and there
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