Dynex Capital, Inc. · NYSE:DX
Dynex Capital — Q4 2020 Earnings Presentation
38 slides from Dynex Capital's earnings presentation, Feb 4, 2021
Slide 1: Fourth Quarter & Full Year 2020 Earnings Presentation
Fourth Quarter & Full Year 2020 Earnings Presentation February 4, 2021
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: Contents
Contents Market Snapshot 4 Comparative Returns 5 Performance Highlights - Full Year 2020 6 Performance Highlights - Q4 2020 7 Macroeconomic Thesis 8 Current Environment and Positioning 9 Risk Position 10 Hedge Position 11 Investment Strategy 12 Return Environment 13 Long-Term Industry Trends 14 Key
Slide 4: Market Snapshot
Market Snapshot Common Stock Preferred Stock (1) NYSE Ticker DX DXPrC Shares Outstanding (in millions) (as of 2/02/21) 26.9 4.5 4Q20 Dividends Declared $0.39 $0.43 Annualized Dividend Yield (2) 8.66% 6.92% Book Value per share (as of 12/31/20) $19.08 — Share Price (close on 2/02/2021) $18.02 $24.93
Slide 5: Superior Performance
Superior Performance Industry-leading performance versus other income-oriented vehicles for 1-, 3-, and 5-years Cumulative Total Returns (1) 64 35 36 26 22 17 19 16 8 9 3 -7 -5 -7 -7 -11 -15 -21 -36 -58 -65 1-Yr Total Return (%) 3-Yr Total Return (%) 5-Yr Total Return (%) Dynex (DX) Agency REITs (2)
Slide 6: Performance Highlights - Full Year 2020
Performance Highlights - Full Year 2020 Industry-leading Total Economic Return of 15.2% for the full year highlights our philosophy of managing for the long-term as we grew book value by 5.9% and generated solid cash income during 2020. • Comprehensive income of $2.88 per common share and GAAP net i
Slide 7: Performance Highlights - Q4 2020
Performance Highlights- Q4 2020 Total Economic Return of 6.7% for the fourth quarter reflects portfolio allocation to lower coupons. Book value per common share increased 4.6% in the fourth quarter. • Comprehensive income of $1.23 per common share and GAAP net income of $1.60 per common share • Tota
Slide 8: Macroeconomic Thesis - Long-term
Macroeconomic Thesis - Long-term Our disciplined macroeconomic thought process leads us to prepare for a transition to a steeper yield curve as one of the more probable scenarios for 2021, which we believe is also a more favorable environment for higher returns. • The global economy is evolving but
Slide 9: Current Environment and Positioning
Current Environment and Positioning The broader investment environment remains favorable with financing costs anchored well into 2022 and beyond. • Our returns for 2021 will be driven by the size of our balance sheet, realized prepayments and amount of drop income. • Leverage stands at 6.3x; our ris
Slide 10: Risk Position - Interest Rates
Risk Position - Interest Rates Our disciplined scenario planning process prepares us for navigating changes in interest rates that could impact the market value of our investments and hedges, and therefore shareholders' equity. The estimated changes in the tables below incorporate duration and conve
Slide 11: Hedge Position (as of December 31, 2020)
Hedge Position (as of December 31, 2020) Our hedge strategy is constructed to maximize liquidity and protection of the portfolio under various rate scenarios. • Futures offer hedge protection for higher rates with lower impact on liquidity and greater trading flexibility • Options based strategy cov
Slide 12: Investment Portfolio (as of dates indicated)
Investment Portfolio (as of dates indicated) Disciplined capital allocation and portfolio constructed for flexibility. December 31, 2020 September 30, 2020 December 31, 2019 3% 4% 6% 4% 6% 6% 6% 7% 51% 39% 83% 84% 1) Includes TBA dollar roll positions at their implied market value which are accounte
Slide 13: Current Marginal Investment Returns (as of December 31, 2020)
Current Marginal Investment Returns (as of December 31, 2020) Agency MBS Higher 15yr and 30yr RMBS (1,2) Agency RMBS offer attractive returns Return Range 7-10% • The most compelling levered risk and convexity GSE Guaranteed adjusted marginal returns are still in the highest Agency CMBS credit quali
Slide 14: Long-Term Industry Trends
Long-Term Industry Trends Positive long-term fundamental trends support our business model. • Global demand for cash yield supports long term valuations of mortgage REITs ◦ Aging global population needs cash income ◦ The debt overhang results in low to negative global yields reducing cash income ava
Slide 15: Key Takeaways
Key Takeaways • We had a great year for our shareholders with a Total Economic Return to common shareholders of 15.2% for the full year 2020, highlighting the effectiveness of our skilled risk management and disciplined capital allocation. ◦ Book value per common share increased $1.07 from $18.01 at
Slide 16: Why Dynex
Why Dynex Industry-leader with a Compelling Long-Term Track Record of Delivering Shareholder Value 16
Slide 17: Focused on the Long-Term
Focused on the Long-Term Total Return (%) January 1, 2008 - December 31, 2020 Source: S&P Global 17
Slide 18: Supplemental Information
Supplemental Information
Slide 19: Global Risk Landscape World Economic Forum Global Risk Report 2020
Global Risk Landscape World Economic Forum Global Risk Report 2020 19
Slide 20: Negative Yielding Global Debt
Negative Yielding Global Debt Source: Bloomberg 20
Slide 21: US Government Debt vs 10 Year Treasury Yields
US Government Debt vs 10 Year Treasury Yields As debt has increased it is difficult for interest rates to rise without having a negative impact on global growth, ultimately putting downward pressure on rates. US 10yr Yields % US Govt Debt to GDP % (left axis) (right axis) US 10yr Yields % US Govt De
Slide 22: Fixed Income Market Update
Fixed Income Market Update (1) Average rate for Agency MBS per 20 counterparty survey (2) Source: Bloomberg (3) Source: BlackRock 6.04 model (4) UMBS 2.0's are compared from when they were added to BlackRock 6.04 (5) Spread to swap, new issue, Source: JP Morgan Data Query 22
Slide 23: Pricing Matrix
Pricing Matrix 1. Source: JP Morgan DataQuery, Bloomberg and internal company data. Specified Pool Payups are quoted in percentage points of price above TBAs 2. UMBS 2.0/2.5 changes are compared from when Specified Pools in that coupon became available in the market. 23
Slide 24: Managing Prepayment Risk and Convexity
Managing Prepayment Risk and Convexity Asset selection, premium management, timing of reinvestments, and option hedges are strategies we use to mitigate convexity and prepayment risk • We mitigate the impact of prepayment speed changes through asset selection, premium management, timing of reinvestm
Slide 25: Dollar Rolls
Dollar Rolls • TBAs are an important part of Dynex’s actively managed Agency RMBS strategy. We use TBAs to quickly add or remove earning assets as they are among the most liquid tradeable instruments in the fixed income markets, even more than specified pools. • Dollar rolls are the financing mechan
Slide 26: Risk Position - Credit Spreads
Risk Position - Credit Spreads Changes in market credit spreads impact the market value of our investments and shareholders' equity. The estimated percentage change in these values incorporates portfolio and hedge characteristics as they existed at the dates indicated. As of December 31, 2020 As of
Slide 27: Investment Strategy
Investment Strategy Diversified investment approach that performs in a variety of market environments • Dynamic and disciplined capital allocation model enables capturing long-term value • Invest in a high quality, liquid asset portfolio of primarily Agency investments • Diversification is a key ben
Slide 28: Portfolio Characteristics (as of December 31, 2020)
Portfolio Characteristics (as of December 31, 2020) Par Value WAVG Unamortized 3-month Total Par Estimated % of Coupon Amortized Premium 3-month WAVG ($ in millions) Pools TBA (5) Value Fair Value Portfolio (1) cost (%) (2) Balance (2) CPR (2) yield (2) Agency RMBS 1.5% coupon $ — $ 250,000 $250,000
Slide 29: Prepayment Protection on Unamortized Premium
Prepayment Protection on Unamortized Premium (as of December 31, 2020) Investment Premium by Asset Type ($ in millions) CMBS IO: $378.9 , 2020) 100% of investment premium exposure in CMBS has structural prepayment protection Agency CMBS: $3.2 Agency RMBS: $58.0 Unamortized Premium $ in Millions % of
Slide 30: Funding Strategy (as of December 31, 2020)
Funding Strategy (as of December 31, 2020) ($s in thousands) Weighted • Weighted average repo rate for the Average Fair Value of Collateral Type Balance Rate Collateral fourth quarter of 2020 was 0.35%, a Agency RMBS $1,874,176 0.23 % $1,973,608 decline of 3 basis points compared to Agency CMBS 237,
Slide 31: Performance Statistics Overview
Performance Statistics Overview Net Interest Spread Adjusted Net Interest Spread (1) 1.96%1.96%1.94% 1.96%2.00%1.98% 1.52%1.51% 1.53% 1.47% 1.34% 1.32% 1.41% 1.24% 1.19% 1.14% 1.07%1.08% 1.10% 1.03% 0.93%0.84% 0.76% 0.82% Q1- Q2- Q3- Q4- Q1- Q2- Q3- Q4- Q1- Q2- Q3- Q4- Q1- Q2- Q3- Q4- Q1- Q2- Q3- Q4
Slide 32: Financial Performance - Comparative Quarters
Financial Performance - Comparative Quarters 4Q20 3Q20 Per Per Income Common Income Common ($ in thousands, except per share amounts) (Expense) Share* (Expense) Share* Interest income $16,705 $0.72 $20,088 $0.87 Interest expense 2,289 0.10 3,375 0.15 GAAP net interest income 14,416 0.62 16,713 0.72
Slide 33: Book Value Rollforward
Book Value Rollforward Quarter Ended Year Ended December 31, 2020 December 31, 2020 Per Per Common $ in Common $ in thousands Share thousands Share Common shareholders' equity, beginning of period (1) $422,345 $18.25 $413,280 $18.01 GAAP net income to common shareholders: Core net operating income t
Slide 34: Reconciliation of GAAP Measures to Non-GAAP Measures
Reconciliation of GAAP Measures to Non-GAAP Measures ($ in thousands except per share data) 4Q20 3Q20 2Q20 1Q20 2020 Comprehensive income (loss) to common shareholders $28,725 $44,471 $26,538 ($33,262) $66,472 Adjustments: Change in fair value of available for sale investments (888) (27,844) (28,052
Slide 35: Mortgage REIT Business Model
Mortgage REIT Business Model ASSETS CAPITAL Agency MBS Repo/Dollar Rolls Higher Government Issued AAA RMBS, CMBS, CMBS-IO Rated Short Committed Repo Term Non-Agency MBS Warehouse Lines AAA CMBS-IO, RMBS, RMBS- Rated IO, CMBS Unsecured Notes Medium AA – BBB Non-Agency MBS Term Convertible Notes Rated
Slide 36: MREIT Glossary of Terms
MREIT Glossary of Terms Commercial Mortgage-Backed Securities (CMBS) are a type of mortgage-backed security that is secured by the mortgage on a commercial property. CMBS can be Agency issued and issued by a private enterprise (non-Agency). Credit Risk is the risk of loss of principal or interest st
Slide 37: MREIT Glossary of Terms
MREIT Glossary of Terms Repurchase Agreements are a short-term borrowing that uses loans or securities as collateral. The lender advances only a portion of the value of the asset (the advance rate). The inverse of the advance rate is the equity contribution of the borrower (the haircut). Residential
Slide 38: Dynex Capital Inc.
X DYNEX CAPITAL INC.