Dynex Capital, Inc. · NYSE:DX
Dynex Capital — Q2 2020 Earnings Presentation
37 slides from Dynex Capital's earnings presentation, Jul 29, 2020
Slide 1: Second Quarter 2020 Earnings Presentation
Second Quarter 2020 Earnings Presentation July 29, 2020
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 Dynex Guiding Principles 5 Performance Highlights 6 Business Activity 7 Macroeconomic Thesis 8 Current Environment 9 Investment Strategy 10 Return Environment 13 Key Takeaways 14 Positive Industry Trends 15 Summary 16 Supplemental Information - Macroeconomic Environment 18
Slide 4: Market Snapshot
Market Snapshot Common Stock Preferred Stocks NYSE Ticker DX DXPrB DXPrC Shares Outstanding (in millions) 23.1 2.8 4.5 2Q20 Dividends Declared $0.43 $0.4765625 $0.431 Annualized Dividend Yield 11.28% 8.18% 7.70% Book Value per share (as of 6/30/20) $16.69 — — Share Price (close on 7/21/20) $15.25 $2
Slide 5: Dynex Guiding Principles
Dynex Guiding Principles ◦ Simple and executable strategy ◦ Strong leadership and well-defined culture of ethics and integrity that permeates all activities ◦ Internally managed to assure alignment of incentives and long-term success ◦ Disciplined top-down approach to analysis and capital allocation
Slide 6: Performance Highlights
Performance Highlights • Comprehensive income of $1.15 per common share and GAAP net income of $8.31 per common share • Quarterly economic return(2) to common shareholders of 6.5% • Net interest spread and adjusted net interest spread(1) of 1.96% and 1.96%, respectively, for the second quarter of 20
Slide 7: Business Activity
Business Activity • Realized net gains of $193.1 million from sales of $1.8 billion in Agency CMBS and $0.4 billion in Agency RMBS early in the quarter • Beginning in May, doubled investment portfolio balance to capture wider MBS spreads and returns and restructured hedge portfolio • Shifted asset a
Slide 8: Macroeconomic Thesis - Long-term
Macroeconomic Thesis - Long-term • The global economy is fragile and downside risks are increasing; this remains the core of our long-term macro economic and investment thesis. • The combination of global debt, demographics, technology, human conflict and climate change continue to impose a drag on
Slide 9: Current Environment - Short to Medium Term
Current Environment - Short to Medium Term • The world faces unprecedented uncertainty and upheaval across the social, political, economic, and financial landscape. It is too early to discern the broad based impact of the shocks across the economy. • We are still in the early stages of a health and
Slide 10: Investment Portfolio (as of dates indicated)
Investment Portfolio (as of dates indicated) • Disciplined capital allocation and portfolio constructed for flexibility June 30, 2020 March 31, 2020 December 31, 2019 Non-Agency CMBS IO: 5% Agency CMBS IO: 8% Non-Agency CMBS Agency CMBS IO: 5.9% IO: 3.8% Agency RMBS (1): 76% Agency RMBS: 25% Agency
Slide 11: Portfolio Characteristics (as of June 30, 2020)
Portfolio Characteristics (as of June 30, 2020) Par Value WAVG Unamortized 3-month Total Par Estimated % of Coupon Amortized Premium 3-month WAVG ($ in millions) Pools TBA (5) Value Fair Value Portfolio (1) cost (%) (2) Balance (2) CPR (2) yield (2) Agency RMBS 2.0% coupon $ 790,107 $ 750,000 $ 1,54
Slide 12: Interest Spreads Trends
Interest Spreads Trends • Net Interest Spread and Adjusted Net Interest Spread significantly expanded during the quarter due to the sizeable reduction in repo costs. • In addition, Adjusted Net Interest Spread experienced strong TBA drop income. • We expect funding costs to remain low for the remain
Slide 13: Return Environment (as of June 30, 2020)
Return Environment (as of June 30, 2020) Agency MBS Higher 15yr and 30yr RMBS (1,2) Agency RMBS offer attractive returns Return Range 8-16% GSE • The most compelling levered risk-adjusted Guaranteed returns are still in the highest credit quality and Agency CMBS AAA Rated FNMA DUS, FRE K-A1, A2, the
Slide 14: Key Takeaways
Key Takeaways • We view this an extremely favorable environment to earn returns from high quality assets. Our funding costs are low, and we expect them to remain low. Our net interest spread has expanded and is driving a higher level of core EPS. • Our leverage stands at 8.1x and we have the flexibi
Slide 15: Positive Industry Trends
Positive Industry Trends • Substantial 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 available to aging populations • Favorable investment envi
Slide 16: Focused on the Long-Term
Focused on the Long-Term Total Return (%) January 1, 2008 - June 30, 2020 Source: S&P Global 16
Slide 17: Supplemental Information
Supplemental Information
Slide 18: Global Risk Landscape World Economic Forum Global Risk Report 2020
Global Risk Landscape World Economic Forum Global Risk Report 2020 18
Slide 19: Negative Yielding Global Debt
Negative Yielding Global Debt The global stock of negative-yielding debt is now in excess of $14 trillion as rising market volatility lends extra force to this year’s unprecedented bond rally. Source: Bloomberg 19
Slide 20: 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 21: Japan Government Debt % to GDP vs 10 Year Yields
Japan Government Debt % to GDP vs 10 Year Yields (December 31, 1989 - June 30, 2020) As debt has risen, Japanese 10yr yields have remained below 2% for over 20 years (%) (%) Source: Bloomberg 21
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 6.0 model (4) Spread to swap, new issue. Source: JP Morgan DataQuery 22
Slide 23: Pricing Matrix
Pricing Matrix *Source: JP Morgan DataQuery, Bloomberg and internal company data. Specified Pool Payups are quoted in percentage points of price above TBAs **Source: Internal company estimates from trading and marketing information 23
Slide 24: Risk Position - Interest Rates
Risk Position - Interest Rates Changes in interest rates impact the market value of our investments, net of hedges, and shareholders' equity. The estimated percentage change in these values incorporates duration and convexity inherent in our investment portfolio as it existed as of the dates indicat
Slide 25: Risk Position - Credit Spreads
Risk Position - Credit Spreads Changes in market credit spreads impacts 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 June 30, 2020 As of Mar
Slide 26: 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 27: Prepayment Protection on Unamortized Premium
Prepayment Protection on Unamortized Premium (as of 6/30/20) Investment Premium by Asset Type ($ in millions) CMBS IO: $435.3 , 2020) 100% of investment premium exposure in CMBS has structural prepayment protection Agency CMBS: $6.5 Agency RMBS: $67.6 Unamortized Premium $ in Millions % of Total Exp
Slide 28: Hedge Position (as of June 30, 2020)
Hedge Position (as of June 30, 2020) Interest Rate Swaps Notional Amount WAVG WAVG Life Remaining Years to Maturity ($ in ‘000s) Pay-Fixed Rate (in years) 5 year pay-fixed $ 50,000 1.35% 0.3 10 year pay-fixed 425,000 0.69% 9.9 Total $ 475,000 0.76% 9.0 Futures and Options Notional Amount ($ in ‘000s
Slide 29: Funding Strategy (as of June 30, 2020)
Funding Strategy (as of June 30, 2020) ($s in thousands) Weighted Average Fair Value of • Weighted average repo rate as of Collateral Type Balance Rate Collateral June 30, 2020 declined 133 basis Agency RMBS $2,308,446 0.27 % $2,427,267 points to 0.38% compared to 1.71% Agency CMBS 654,001 0.28 % 69
Slide 30: Performance Statistics Overview
Performance Statistics Overview (1) Net Interest Spread Adjusted Net Interest Spread 1.96% 1.96% 1.52% 1.51% 1.53% 1.47% 1.34% 1.32% 1.41% 1.24% 1.19% 1.07% 1.08% 0.93% 0.84% 1.10% 1.03% 1.14% 0.76% 0.82% Q1- Q2- Q3- Q4- Q1- Q2- Q3- Q4- Q1- Q2- Q1- Q2- Q3- Q4- Q1- Q2- Q3- Q4- Q1- Q2- 18 18 18 18 19
Slide 31: Financial Performance - Comparative Quarters
Financial Performance - Comparative Quarters 2Q20 1Q20 Income Per Common Income Per Common ($ in thousands, except per share amounts) (Expense) Share (Expense) Share Interest income $19,853 $0.86 $39,822 $1.73 Interest expense 4,850 0.21 22,101 0.96 GAAP net interest income 15,003 0.65 17,721 0.77 T
Slide 32: Book Value Rollforward Q2 2020
Book Value Rollforward Q2 2020 Per Common ($ in thousands, except per share amounts) Share Common shareholders' equity, March 31, 2020 (1) $369,398 $16.07 GAAP net income to common shareholders: Core net operating income to common (2) 8,406 Realized gain on sale of MBS, net 193,099 Change in fair va
Slide 33: Reconciliation of GAAP Measures to Non-GAAP Measures
Reconciliation of GAAP Measures to Non-GAAP Measures ($ in thousands except per share data) 2Q20 1Q20 4Q19 3Q19 2Q19 Comprehensive income (loss) to common shareholders $26,538 ($33,262) $8,570 $15,250 ($11,064) Adjustments: Change in fair value of available for sale investments (28,052) (157,755) 43
Slide 34: 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 35: 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 36: 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 37: Dynex Capital Inc.
X DYNEX CAPITAL INC.