Dynex Capital, Inc. · NYSE:DX
Dynex Capital — Q1 2020 Earnings Presentation
35 slides from Dynex Capital's earnings presentation, May 6, 2020
Slide 1: First Quarter 2020 Earnings Presentation
First Quarter 2020 Earnings Presentation May 6, 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 Guiding Principles 5 Performance 6 Macroeconomic Thesis 7 Current Environment 8 Investment Strategy 9 Return Environment 11 Key Takeaways 12 Positive Industry Trends 13 Summary 14 Appendix 15 - Macroeconomic Environment 17 - Market Info 20 - Risk Position, Portfolio and Fi
Slide 4: Market Snapshot
Market Snapshot May 5, 2020 Common Preferred Stocks NYSE Ticker Stock DX DXPrB DXPrC Shares Outstanding (in millions) 23.0 2.8 4.5 1Q20 Dividends Declared $0.45 $0.4765625 $0.259 Annualized Dividend Yield 13.20% 8.19% 7.81% Book Value per share (as of 3/31/20) $16.07 — — Share Price $13.64 $23.27 $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 loss of ($1.45) per common share and GAAP net loss of ($4.63) per common share • Core net operating income(1) of $0.51 per common share • Book value per common share of $16.07 at March 31, 2020 compared to $18.01 at December 31, 2019, reflecting spread widening
Slide 7: 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 8: Current Environment - Short to Medium Term
Current Environment - Short to Medium Term • An already fragile global economy is absorbing the impact of twin exogenous shocks - the COVID-19 pandemic and the collapse in oil prices – of enormous magnitude with far reaching repercussions that will be felt well into the future. • The world faces unp
Slide 9: Investment Portfolio (as of dates indicated)
Investment Portfolio (as of dates indicated) • 93% of Agency guaranteed assets as of April 30, 2020 • $312mm of cash and unencumbered assets, of which $190mm is cash April 30, 2020 (1) March 31, 2020 December 31, 2019 Non-Agency Non-Agency CMBS IO: 7% CMBS IO: 5% Agency CMBS IO: 8% Non-Agency CMBS A
Slide 10: Portfolio Characteristics (as of March 31, 2020)
Portfolio Characteristics (as of March 31, 2020) Par Value WAVG Unamortized 3-month Total Par Estimated % of Coupon Amortized Premium 3-month WAVG ($ in millions) Pools TBA (5) Value Fair Value Portfolio (1) cost (%) (2) Balance (2) CPR (2) yield (2) Agency RMBS 2.5% coupon $ 109,577 $ — $ 109,577 $
Slide 11: Return Environment (as of April 30, 2020)
Return Environment (as of April 30, 2020) Agency MBS Higher 15yr and 30yr RMBS (1,2) Agency RMBS offer attractive returns Return Range 8-15% 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, th
Slide 12: Key Takeaways
Key Takeaways • Our disciplined approach served us well through the market disruption in March. The challenge now will be to navigate the short, medium and long-term impacts of the exogenous shocks. • We see current opportunities to earn net interest income in sectors where government policy has bee
Slide 13: 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 14: Focused on the Long-Term
Focused on the Long-Term Total Return (%) January 1, 2008 - March 31, 2020 Source: SNL 14
Slide 15: Supplemental Information
Supplemental Information
Slide 16: Global Risk Landscape World Economic Forum Global Risk Report 2020
Global Risk Landscape World Economic Forum Global Risk Report 2020 16
Slide 17: 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. 17
Slide 18: 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 19: 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 20 years Source: Bloomberg 19
Slide 20: Fixed Income Market Update
Fixed Income Market Update Change Security 3/31/20 1/31/20 12/31/19 9/30/19 6/30/19 3/31/19 12/31/18 during 2019 Treasury (2) IOER rate 0.10% 1.60% 1.55% 1.80% 2.35% 2.40% 2.40% (0.85)% 1m repo (1) 0.35% 1.75% 2.06% 2.43% 2.63% 2.70% 2.49% (0.43)% 3m T-bill 0.09% 1.54% 1.54% 1.81% 2.09% 2.38% 2.36%
Slide 21: Specified Pool Pricing Matrix - Specified Pools vs. TBAs
Specified Pool Pricing Matrix - Specified Pools vs. TBAs Change during 30 Year MBS 3/31/20 1/31/20 12/31/19 9/30/19 6/30/19 3/31/19 12/31/18 2019 TBA Price 104.81 102.27 101.44 101.98 100.85 99.54 97.79 3.65 85K Max 1.25 2.38 1.88 1.59 1.03 0.28 0.28 1.60 150K Max 0.93 1.69 1.38 1.09 0.72 0.16 0.16
Slide 22: 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 23: 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 March 31, 2020 As of De
Slide 24: 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 25: Prepayment Protection on Unamortized Premium
Prepayment Protection on Unamortized Premium Investment Premium by Asset Type (as of March 31, 2020) ($ in millions) CMBS IO: $462.7 100% of investment premium exposure in CMBS has structural prepayment protection Agency CMBS: $16.9 Agency RMBS: $19.2 Unamortized Premium (as of 3/31/20) $ in Million
Slide 26: Hedge Position (as of March 31, 2020)
Hedge Position (as of March 31, 2020) Interest Rate Swaps Futures and Options Notional WAVG WAVG Life Notional Years to Maturity- Amount (in Pay-Fixed Remaining ($ in millions) Amount Fair Value Swaps millions) Rate (in years) Options on U.S. Treasury futures $1,700 $ 3,031 < 3 years $ 150 1.61% 0.3
Slide 27: Funding Strategy (as of March 31, 2020)
Funding Strategy (as of March 31, 2020) ($s in thousands) Weighted Average Fair Value of • Weighted average repo rate as of Collateral Type Balance Rate Collateral March 31, 2020 declined 30 basis Agency RMBS $2,180,966 1.69 % $2,259,403 points to 1.71% compared to 2.01% Agency CMBS 1,823,951 1.66 %
Slide 28: Performance Statistics Overview
Performance Statistics Overview (1) Net Interest Spread Adjusted Net Interest Spread 1.54% 1.52% 1.51% 1.53% 1.47% 1.44% 1.41% 1.34% 1.32% 1.24% 1.19% 1.07% 1.08% 1.10% 1.14% 1.03% 0.93% 0.84% 0.76% 0.82% Q4- Q1- Q2- Q3- Q4- Q1- Q2- Q3- Q4- Q1- Q4- Q1- Q2- Q3- Q4- Q1- Q2- Q3- Q4- Q1- 17 18 18 18 18
Slide 29: Financial Performance - Comparative Quarters
Financial Performance - Comparative Quarters 1Q20 4Q19 Income Per Common Income Per Common ($ in thousands, except per share amounts) (Expense) Share (Expense) Share Interest income $39,822 $1.73 $41,961 $1.83 Interest expense 22,101 0.96 25,766 1.12 GAAP net interest income 17,721 0.77 16,195 0.71
Slide 30: Book Value Rollforward
Book Value Rollforward Per Common ($ in thousands, except per share amounts) Share Common shareholders' equity, December 31, 2019 (1) $414,739 $18.01 GAAP net income to common shareholders: Core net operating income to common (2) 11,639 Realized gain on sale of MBS, net 84,783 Change in fair value o
Slide 31: Reconciliation of GAAP Measures to Non-GAAP Measures
Reconciliation of GAAP Measures to Non-GAAP Measures Quarter Ended ($ in thousands except per share data) 3/31/2020 12/31/2019 09/30/2019 06/30/2019 3/31/2019 GAAP net income (loss) to common shareholders ($106,234) $51,774 ($39,945) ($122,191) ($55,273) Adjustments: Change in fair value of derivati
Slide 32: 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 33: 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 34: 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 35: Dynex Capital Inc.
X DYNEX CAPITAL INC.