Dynex Capital, Inc. · NYSE:DX
Dynex Capital — Q3 2020 Earnings Presentation
42 slides from Dynex Capital's earnings presentation, Oct 28, 2020
Slide 1: Third Quarter 2020 Earnings Presentation
Third Quarter 2020 Earnings Presentation October 28, 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 Net Interest Spread Trends 8 Macroeconomic Thesis 9 Current Environment and Positioning 10 Risk Position 11 Investment Strategy 13 Return Environment 17 Long-Term Industry Trends 18 Key Takeaways 19 Lo
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 3Q20 Dividends Declared $0.39 $0.48 $0.43 Annualized Dividend Yield* 9.89% 7.69% 7.84% Book Value per share (as of 9/30/20) $18.25 — — Share Price (close on 10/26/20) $15.77 $24.80
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 Up in credit, up in liquidity investment strategy has led to a strong total economic return YTD. Book value per common share has recovered and is above the 12/31/2019 per share amount. • Comprehensive income of $1.92 per common share and GAAP net income of $1.62 per common sha
Slide 7: Business Activity
Business Activity • During the quarter, we opportunistically sold $382.3 million of Agency DUS, realizing a gain of $20.8 million as spreads tightened. Partially offsetting this gain were losses of $(2.2) million from terminated interest rate swaps. • Re-positioned the hedge portfolio by terminating
Slide 8: Net Interest Spread Trends
Net Interest Spread Trends • Net interest spread and adjusted net interest spread(1) remained elevated for the third quarter with the low funding environment and TBA dollar roll specialness • We expect funding costs to remain low for the remaining year and into 2021 Net interest spread Adj net inter
Slide 9: Macroeconomic Thesis - Long-term
Macroeconomic Thesis - Long-term • The global economy is fragile and significant uncertainties remain on the pandemic's long-term effects across economic, social and political factors. • In addition, the combination of increasing global debt, changing demographics, evolving technology, human conflic
Slide 10: Current Environment and Positioning
Current Environment and Positioning • The rate environment remains favorable to earn returns from high-quality assets. • The Federal Reserve’s asset purchase program of Treasuries and Agency RMBS continues to be a strong technical factor, keeping rate volatility contained and driving solid returns.
Slide 11: Risk Position - Interest Rates
Risk Position - Interest Rates Changes in interest rates impact the market value of our investments and hedges, and therefore shareholders' equity. The estimated changes in the tables below incorporate duration and convexity inherent in our investment portfolio as it existed as of the dates indicate
Slide 12: Hedge Position (as of September 30, 2020)
Hedge Position (as of September 30, 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 co
Slide 13: Investment Portfolio (as of dates indicated)
Investment Portfolio (as of dates indicated) Disciplined capital allocation and portfolio constructed for flexibility September 30, 2020 June 30, 2020 December 31, 2019 4% 3% 4% 6% 6% 6% 7% 15% 51% 39% 76% 83% 1) Includes TBA dollar roll positions at their implied market value which are accounted fo
Slide 14: 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 15: 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 16: Our Prepayment View
Our Prepayment View • We expect mortgage rates to decline to ~2.5-3.0%. At these levels, prepayment speeds should rise. • The potential for higher prepayments is offset by several factors: ◦ Borrower credit profiles are being increasingly impacted by temporary and permanent job losses due to the pan
Slide 17: Current Marginal Investment Returns (as of October 23, 2020)
Current Marginal Investment Returns (as of October 23, 2020) Agency MBS Higher 15yr and 30yr RMBS (1,2) Agency RMBS offer attractive returns Return Range 7-18% • The most compelling levered risk and convexity GSE Guaranteed adjusted marginal returns are still in the highest Agency CMBS credit qualit
Slide 18: 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 avai
Slide 19: Key Takeaways
Key Takeaways • Our quarterly total economic return to common shareholders was 11.7%. Our YTD total economic return to common shareholders is 8.4%, highlighting the effectiveness of our capital allocation and risk management strategies. ◦ Book value per common share increased from $18.01 at year-end
Slide 20: Focused on the Long-Term
Focused on the Long-Term Total Return (%) January 1, 2008 - September 30, 2020 Source: S&P Global 20
Slide 21: Why Dynex
Why Dynex • Excellent track record with Comparative Total Returns Over Trailing 12 Months (1) attractive total return opportunity • Attractive dividend yield at a discounted price-to-book valuation on Agency focused strategy • Strong and liquid balance sheet positioned to weather market volatility a
Slide 22: Supplemental Information
Supplemental Information
Slide 23: Global Risk Landscape World Economic Forum Global Risk Report 2020
Global Risk Landscape World Economic Forum Global Risk Report 2020 23
Slide 24: Negative Yielding Global Debt
Negative Yielding Global Debt The global stock of negative-yielding debt is now in excess of $15 trillion as rising market volatility lends extra force to this year’s unprecedented bond rally. Source: Bloomberg 24
Slide 25: 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 26: Japan Government Debt % to GDP vs 10 Year Yields
Japan Government Debt % to GDP vs 10 Year Yields As debt has risen, Japanese 10yr yields have remained below 2% for over 20 years. (%) (%) (%) (December 31, 1989 - September 30, 2020) Source: Bloomberg 26
Slide 27: 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 27
Slide 28: 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. 3. Source: Internal company esti
Slide 29: Share of Refinancing with Cash Out
Share of Refinancing with Cash Out Source: Bloomberg/FHFA 29
Slide 30: 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 September 30, 2020 As of
Slide 31: 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 32: Portfolio Characteristics (as of September 30, 2020)
Portfolio Characteristics (as of September 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 $ 778,329 $ 1,125,000
Slide 33: Prepayment Protection on Unamortized Premium
Prepayment Protection on Unamortized Premium (as of September 30, 2020) Investment Premium by Asset Type ($ in millions) CMBS IO: $405.7 , 2020) 100% of investment premium exposure in CMBS has structural prepayment protection Agency CMBS: $3.4 Agency RMBS: $65.1 Unamortized Premium $ in Millions % o
Slide 34: Funding Strategy (as of September 30, 2020)
Funding Strategy (as of September 30, 2020) ($s in thousands) Weighted • Weighted average repo rate for the Average Fair Value of Collateral Type Balance Rate Collateral third quarter of 2020 was 0.38%, a Agency RMBS $1,975,736 0.24 % $2,069,035 decline of 38 basis points compared Agency CMBS 275,47
Slide 35: Performance Statistics Overview
Performance Statistics Overview Net Interest Spread Adjusted Net Interest Spread (1) 1.96% 1.96% 1.96% 2.00% 1.52% 1.51% 1.53% 1.47% 1.34% 1.32% 1.41% 1.24% 1.19% 1.14% 1.07% 1.08% 1.10% 1.03% 0.93% 0.84% 0.76% 0.82% Q1- Q2- Q3- Q4- Q1- Q2- Q3- Q4- Q1- Q2- Q3- Q1- Q2- Q3- Q4- Q1- Q2- Q3- Q4- Q1- Q2-
Slide 36: Financial Performance - Comparative Quarters
Financial Performance - Comparative Quarters 3Q20 Per 2Q20 Per Income Common Income Common ($ in thousands, except per share amounts) (Expense) Share (Expense) Share Interest income $20,088 $0.87 $19,853 $0.86 Interest expense 3,375 0.15 4,850 0.21 GAAP net interest income 16,713 0.72 15,003 0.65 TB
Slide 37: Book Value Rollforward Q3 2020
Book Value Rollforward Q3 2020 Per Common ($ in thousands, except per share amounts) Share Common shareholders' equity, June 30, 2020 (1) $386,261 $16.69 GAAP net income to common shareholders: Core net operating income to common (2) 14,175 Realized gain on sale of MBS, net 20,846 Change in fair val
Slide 38: Reconciliation of GAAP Measures to Non-GAAP Measures
Reconciliation of GAAP Measures to Non-GAAP Measures ($ in thousands except per share data) 3Q20 2Q20 1Q20 4Q19 3Q19 Comprehensive income (loss) to common shareholders $44,471 $26,538 ($33,262) $8,570 $15,250 Adjustments: Change in fair value of available for sale investments (27,844) (28,052) (157,
Slide 39: 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 40: 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 41: 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 42: Dynex Capital Inc.
X DYNEX CAPITAL INC.