Dynex Capital, Inc. · NYSE:DX
Dynex Capital — JMP Securities Financial Services and Real Estate Conference 2013
39 slides from Dynex Capital's conference presentation, Sep 30, 2013
Slide 1: JMP Securities Financial Services and Real Estate Conference
JMP Securities Financial Services and Real Estate Conference October 1, 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 6/30/13) 55,173,392 2,300,000 2,250,000 Q3 Dividends per share: $0.27 $0.53125 $0.4765625 Dividend Yield: (annualized) 12.30% 8.66% 8.47% Share Price: $8.78 $24.53 $22.50 Market Capitalization:
Slide 4: Guiding Principles
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 wh
Slide 5: Summary of Results
Summary of Results $10.31 $10.30 $8.94 $5.00 $6.00 $7.00 $8.00 $9.00 $10.00 $11.00 Q3-2012 Q4-2012 Q1-2013 Q2-2013 $10.50 $8.94 2.00% 1.93% 1.89% 1.75% 0.00% 0.50% 1.00% 1.50% 2.00% Q3-2012 Q4-2012 Q1-2013 Q2-2013 13.5% 13.0% 13.0% 13.2% 0% 2% 4% 6% 8% 10% 12% 14% Q3-2012 Q4-2012 Q1-2013 Q2-2013 (1)
Slide 6: Diversified Business Model
Diversified Business Model Hybrid MREIT Commercial MREIT Agency MREIT Non-Agency MREIT DX Our portfolio is designed to perform in multiple market environments 6
Slide 7: Investment Thesis
Investment Thesis Short Duration High Quality Diversified Low Leverage More predictable cash flows with limited extension risk and curve roll down Highly rated assets and solid credit fundamentals RMBS/CMBS; Agency/Non- Agency; High Coupon/Low Coupon; IO’s Leverage target of ~6x, maximum 7x 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: Extension Risk
Extension Risk (as of June 28, 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 $97-21 3.00% 3.60% 15 CPR 2 CPR 5.34 years 14.30 years ~9 years FNCI 15yr $100-15 2.50% 3.025% 15
Slide 10: Investment Capital Allocation
Investment Capital Allocation (as of indicated period end) 40% 50% 56% 62% 61% 59% 60% 50% 44% 38% 39% 41% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2009 2010 2011 2012 1Q2013 2Q2013 39% 64% 68% 75% 76% 77% 61% 36% 32% 25% 24% 23% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2009 2010 2011 2012 1Q2
Slide 11: Investment Portfolio
Investment Portfolio (as of June 30, 2013) Portfolio Expected Maturity/Reset Distribution 24% 35% 39% 2% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 0-36 37-84 85-119 >120 Months to Maturity/Reset Credit Quality AAA 92% AA 1% A 6% Below A 1% *Agency MBS are considered AAA-rated. 11
Slide 12: Portfolio Performance
Portfolio Performance 23.20% 22.0% 21.5% 20.9% 21.0% 19.3% 19.0% 18.7% 18% 19% 20% 21% 22% 23% 24% Q2-2013Q1-2013Q4-2012Q3-2012 Agency Total portfolio March 31, 2013 Agency Non-Agency Portfolio Agency Non-Agency Portfolio 2.43% 5.39% 2.86% 2.60% 5.39% 3.04% (0.91%) (2.45%) (1.11%) (0.93%) (2.58%) (1
Slide 13: Q2 2013 Market Environment and Impact
Q2 2013 Market Environment and Impact • Psychological shift by fixed income investors in reaction to a perceived earlier than expected exit by the Fed from QE3 • Led to a technical sell-off globally in fixed income assets with interest rates substantially higher and spreads materially wider • Howeve
Slide 14: Impact of Environment on DX
Impact of Environment on DX • Due mainly to spread widening, book value declined by $1.56 (15% decline versus prior quarter and 13% for the year) and leverage increased by 0.5x – An estimated 68%, or $1.06, of the decline was due to wider credit spreads and 32%, or $0.50, due to higher interest rate
Slide 15: Credit Spread Changes
Credit Spread Changes (as of September 18, 2013) Assets 2Q13 Current Change 2 year vs. 10 year UST spread 218 237 19 Hybrid ARM 5/1 (2.0% coupon) spread to UST 45 40 -5 Hybrid ARM 10/1 (2.5% coupon) spread to UST 75 98 23 Agency CMBS spread to UST 92 70 -22 ‘A’-rated CMBS spread to UST 287 255 -32 C
Slide 16: DX Strategy
DX Strategy • We have taken a more defensive posture in our portfolio, but our general portfolio structure remains the same – Since June 30, we have sold $141.2 million in investments and added $1.3 billion in Eurodollar hedges on a swap equivalent basis • Our investment portfolio is constructed to
Slide 17: Opportunities
Opportunities • The macro environment of lower short term rates and a steeper yield curve provides an attractive environment for mREITS to generate income • However, market volatility is generating additional costs related to increased hedging/risk management activities • Longer-term, we see opportu
Slide 18: Managing for the Long-Term
Managing for the Long-Term (as of June 30, 2013) 4.6% 17.0% 25.3% 54.6% 71.4% 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 Historical Economic Return to Common Shareholders 18
Slide 19: Appendix
APPENDIX 19
Slide 20: Non-GAAP Financial Measures
Non-GAAP Financial Measures This presentation includes certain financial measures – adjusted diluted earnings per common share and adjusted annualized return on average common equity – that are not presented in accordance with generally accepted accounting principles, or GAAP. These non-GAAP financi
Slide 21: Capital Allocation
Capital Allocation (as of June 30, 2013) 21
Slide 22: Selected Financial Highlights
22 Selected Financial Highlights (as of and for the quarter ended) 22
Slide 23: Dynex vs. Other Yield Vehicles
Dynex vs. Other Yield Vehicles Dividend Yield Source: SNL, market data as of 7/30/13. Note: Agency MREITs include NLY, AGNC, HTS, CYS, CMO, ANH, ARR and WMC. Hybrid MREITs include CIM, MFA, TWO, IVR, MTGE, DX, AMTG, EFC, MITT and NYMT. Non-Agency MREITs include RWT and PMT. Comm MREITs include NCT,
Slide 24: Investment Premium Allocation
Investment Premium Allocation -$100 $0 $100 $200 $300 $400 $500 $600 $700 $800 $900 2009 2010 2011 2012 1Q2013 2Q2013 M il li on s Premium (Discount), net - CMBS and loans Premium, net - RMBS and loans (as of end of period) 24
Slide 25: Prepayment Speeds versus Refinancing Index
Prepayment Speeds versus 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 Hybrid ARMs/ARMs Total Agency Total Portfolio Dynex Portfolio CPRs MBA Refinancing Index Source: Bloomberg 25
Slide 26: 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 27: CMBS v. RMBS
CMBS v. RMBS CMBS – Explicit call protection – Short duration, predictable “bond like” cash flows – Predictability rolls down the curve – Complimentary cash flow profile to our RMBS investments – Opportunity for credit spread tightening RMBS – No explicit call protection – Implicit call protection t
Slide 28: CMBS Portfolio
CMBS Portfolio (as of June 30, 2013) AAA, 75% AA, 3% A, 18% Below A, 4% Other 21% Multifamily 79% $109.6 $0.0 $0.0 $460.8 prior to 2000 2000-2005 2006-2008 2009 or newer Agency CMBS, $342.3 Agency CMBS IO, $550.2 Non- Agency CMBS, $439.8 Non- Agency CMBS IO, $130.6 Credit Quality Collateral Non-Agen
Slide 29: 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 0.00% 0.05% 0.10% 0.15% 0.20% 0.25% 0.30
Slide 30: CMBS Spreads
CMBS Spreads Source: Company Data 30
Slide 31: Hybrid ARM Spreads
Hybrid ARM Spreads (b a s 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 l- 1
Slide 32: Volatility has increased
Volatility has increased Source: Bloomberg 1 year/10 year Swaption Volatility January 2006 – September 27, 2013 32
Slide 33: Rates have moved to a higher range
Rates have moved to a higher range Source: Bloomberg 10-Year Treasury Note Yield January 1, 2011 – September 27, 2013 33
Slide 34: 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) 34
Slide 35: 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 % % 0.0 5.0 10.0 15.0 20.0 2
Slide 36: Financing
Financing (as of June 30, 2013) Repurchase Agreements Financing Balance (1) WAVG Rate By collateral pledged: Agency $3,569,482 0.49% Non-Agency 479,344 1.34% Other 23,017 1.61% Total $4,071,843 0.60% By original maturity: (days) 0-30 $1,677,943 0.64% 31-60 1,121,607 0.69% 61-90 353,523 0.40% >90 918
Slide 37: Hedge Accounting
Hedge Accounting • Hedge accounting under GAAP restricts flexibility in managing repo and poses operational issues • We dropped hedge accounting effective at the end of the second quarter • Beginning in the 3rd quarter, changes in fair value of hedging instruments will be reported through Income ver
Slide 38: 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 39: 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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