Dynex Capital, Inc. · NYSE:DX
Dynex Capital — Southwest IDEAS Investor Conference 2013
38 slides from Dynex Capital's conference presentation, Nov 19, 2013
Slide 1: Southwest IDEAS Investor Conference November 20, 2013
Southwest IDEAS Investor Conference November 20, 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 9/30/13) 54,426,049 2,300,000 2,250,000 Q3 Dividends per share: $0.27 $0.53125 $0.4765625 Dividend Yield: (annualized) 12.30% 9.14% 9.12% Share Price: $8.40 $23.25 $20.90 Market Capitalization:
Slide 4: Guiding Principles
4 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
Slide 5: Third Quarter Highlights
Third Quarter Highlights 5 First quarter of results without utilizing hedge accounting GAAP net loss of $(0.13) per common share. Core net operating income (1) of $0.27 per common share, equal to the dividend declared for the quarter GAAP return on average common equity of (5.7)%. Adjusted return on
Slide 6: Core Net Operating Income
Core Net Operating Income 6 (1) Amount recorded as a portion of "interest expense" in accordance with GAAP related to the amortization of the balance remaining in accumulated other comprehensive loss as of June 30, 2013 as a result of the Company's discontinuation of hedge accounting. Core net opera
Slide 7: Book Value Change
Book Value Change 7 Decline in book value due to continued spread widening and additional hedges Book value per common share, June 30, 2013 $ 8.94 Impact of earnings per common share, excluding loss on derivative investments, net (1) 0.31 Dividends per common share (0.27 ) Changes in book value per
Slide 8: Strategy Has Not Changed
Strategy Has Not Changed • Our core investment strategy has not changed and there is a good business opportunity to generate cash flow rolling down the short-end of the yield curve • Investment portfolio is constructed to perform in a variety of market environments – Limited extension risk – Portfol
Slide 9: Economic Fundamentals are Uncertain
Economic Fundamentals are Uncertain • Sustainability and trajectory of US economic growth is uncertain • Federal reserve policy makers are projecting accelerating growth into 2014-2015, but economic growth today is only moderate • Moderate economic activity implies a 3.0%-3.25% rate on the ten- year
Slide 10: Market Technicals/Psychology are more Important
Market Technicals/Psychology are more Important 10 • Market Technicals – Technicals have been distorted by Federal Reserve participation in the capital markets • Long term interest rates and spread volatility were artificially low • Taper talk increased both spread and interest rate volatility. This
Slide 11: Government Policy is Key
Government Policy is Key 11 • Monetary Policy – Federal Reserve expected to maintain dovish policy holding short rates low for “extended period” – Steady short term interest rates should create an environment in which we can deploy capital profitably – QE3 artificially influences long rates lower –
Slide 12: Market Environment is Uncertain
Market Environment is Uncertain • The combined factors of an uncertain economic environment, distorted monetary policy and unclear fiscal and regulatory policies has and is continuing to foster a volatile market environment – On the one hand, short-rates provide opportunity to earn net interest inco
Slide 13: Portfolio Update (as of September 30, 2013)
Portfolio Update (as of September 30, 2013) 13 RMBS 22% CMBS 78% $162.4 Other 5.2% RMBS 39.2% CMBS 55.6% $281.9 $198.5 $26,4 ($ in millions) Credit Quality 25% 36% 38% 2% 0% 5% 10% 15% 20% 25% 30% 35% 40% Months to Maturity/Reset Investment Capital Allocation Net Premium by Asset Type Portfolio Expe
Slide 14: Portfolio Construction
Portfolio Construction • Our fundamental portfolio construction has not changed • Modeled Duration Gap is now at the lower end of our range of 0.5-1.5 years with duration exposure on the short-end of the curve – Hedges have been added further out on the curve • Portfolio is designed to generate cash
Slide 15: Interest Rate Exposure Reduced
Interest Rate Exposure Reduced 15 Parallel Shift in Interest Rates Percentage Change in Projected Market Value of Assets Net of Hedges (in basis points) September 30, 2013 December 31, 2012 +50 (0.27)% (0.84)% +25 (0.12)% (0.42)% – Duration risk profile reduced primarily from additional hedges – Our
Slide 16: Financing Hedges and Repurchase Agreements
Financing Hedges (Swaps and Eurodollars) as of 9/30/13 as of 6/30/13 Year effective WAVG Notional Balance WAVG Rate WAVG Notional Balance WAVG Rate 4Q2013 $1,586,444 1.55% $1,492,000 1.55% 2014 1,583,496 1.51% 1,282,671 1.67% 2015 1,686,975 1.55% 1,085,521 1.69% 2016 2,157,582 1.89% 831,877 1.62% 20
Slide 17: Outlook and Opportunities
Outlook and Opportunities • The macro environment of lower short term rates and a steeper yield curve provides an attractive carry environment • However, market volatility is generating additional costs related to increased hedging/risk management activities • Longer term, we see opportunities for c
Slide 18: Managing for the Long-Term
Managing for the Long-Term (as of September 30, 2013) Historical Economic Return to Common Shareholders 18 -3.9% 20.8% 23.8% 45.9% 74.9% -10.0% 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
Slide 19: Appendix
APPENDIX 19
Slide 20: Capital Allocation (as of September 30, 2013)
Capital Allocation (as of September 30, 2013) 20 •Associated financing for investments includes repurchase agreements and securitization financing issued to third parties (which is presented on the Company's balance sheet as “non-recourse collateralized financing”). Associated financing for derivati
Slide 21: Selected Financial Highlights
21 Selected Financial Highlights (as of and for the quarter ended) 21 (1) Core net operating income to common shareholders (including on a per share basis), adjusted return on average common equity and adjusted net interest spread are non-GAAP financial measures. Reconciliations of these non-GAAP fi
Slide 22: Credit Spread Changes
Credit Spread Changes Assets September 30, 2013 June 30, 2013 Change 2 year vs. 10 year UST spread 230 218 12 Hybrid ARM 5/1 (2.0% coupon) spread to UST 40 45 -5 Hybrid ARM 10/1 (2.5% coupon) spread to UST 80 75 5 Agency CMBS spread to interest rate swaps 72 92 -20 ‘A’-rated CMBS spread to interest
Slide 23: Market Volatility
Market Volatility Source: Bloomberg 1 year/10 year Swaption Volatility January 1, 2006 – November 1, 2013 23 10-Year Treasury Note Yield January 1, 2011 – November 1, 2013
Slide 24: Hybrid ARM Credit Spreads
Hybrid ARM Credit Spreads (B as 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
Slide 25: CMBS Credit Spreads
CMBS Credit Spreads Source: Company Data 25 0 200 400 600 800 1000 1200 1400 Ba si s P o in ts CMBS Spreads vs Swaps AAA CMBS DUS Freddie Credit
Slide 26: Investment Premium Allocation
Investment Premium Allocation -$100 $0 $100 $200 $300 $400 $500 $600 $700 $800 $900 2009 2010 2011 2012 1Q2013 2Q2013 3Q2013 M il li on s Premium (Discount), net - CMBS and loans Premium, net - RMBS and loans (as of end of period) 26
Slide 27: 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 Q3 2013 Hybrid ARMs/ARMs Total Agency Total Portfolio Dynex Portfolio CPRs MBA Refinancing Index Source: Bloomberg 27
Slide 28: 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 29: CMBS v. RMBS
CMBS v. RMBS CMBS – Explicit call protection – Short duration, predictable “bond like” cash flows – Predictably rolls down the curve – Complementary cash flow profile to our RMBS investments – Opportunity for credit spread tightening RMBS – No explicit call protection – Implicit call protection thro
Slide 30: CMBS Portfolio (as of September 30, 2013)
CMBS Portfolio (as of September 30, 2013) AAA, 76% AA, 4% A, 17% Below A, 3% Other 21% Multifamily 79% $99.6 $0.0 $0.0 $400.7 prior to 2000 2000-2005 2006-2008 2009 or newer Agency CMBS, $322.2 Agency CMBS IO, $475.6 Non- Agency CMBS, $374.7 Non- Agency CMBS IO, $125.5 Credit Quality Collateral Non-
Slide 31: 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 Freddie 31 0.00% 0.20% 0.40% 0.60% 0.80%
Slide 32: 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) 32
Slide 33: 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 5 10 15 20 25 30 35 FH
Slide 34: Extension Risk
Extension Risk (as of November 1, 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 $98-0 3.00% 3.60% 15 CPR 2 CPR 5.33 years 14.22 years ~9 years FNCI 15yr $100-23 2.50% 2.97% 1
Slide 35: What is Roll-Down?
What is Roll-Down? • The Federal Reserve is in an easing mode, intent on keeping short rates low for a considerable amount of time. As a result the Treasury yield curve is exceptionally steep, meaning short-term rates are substantially lower than long-term rates. • The combination of these factors p
Slide 36: Spread Risk
Spread Risk • An asset’s “spread” is the market premium above a benchmark rate that reflects the relative riskiness of the asset versus the benchmark. • Spread risk is the uncertainty in pricing resulting from the expansion and contraction of the risk premium over the benchmark. • Spreads (and there
Slide 37: Risk Management
Risk Management •Duration target of 0.5 to 1.5 years •Derivatives to economically hedge interest rate risk •Invest in credit assets which should increase in value as rates rise •Emphasize short duration assets and more predictable cash flows Interest Rate/Extension Risk •CMBS investments with call p
Slide 38: Non-GAAP Reconciliation
Non-GAAP Reconciliation 38 DYNEX CAPITAL, INC. RECONCILIATION OF GAAP INTEREST EXPENSE TO EFFECTIVE BORROWING COSTS AND OF GAAP NET INTEREST SPREAD TO ADJUSTED NET INTEREST SPREAD (UNAUDITED) ($ in thousands) Three Months Ended September 30, 2013 June 30, 2013 September 30, 2012 Amount Yield Amount
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