Dynex Capital, Inc. · NYSE:DX
Dynex Capital — Investor Presentation (June 2014)
38 slides from Dynex Capital's investor presentation, Jun 3, 2014
Slide 1: Investor Presentation June 2014
Investor Presentation June 2014
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: About Dynex
3 • Established in 1988, investing across commercial and residential sectors, with a long history of managing businesses across mortgage value chain • Investment philosophy based on conserving capital and managing for the long-term through market cycles • Experienced management team with 100+ years
Slide 4: About Dynex: Mission, Objectives and Core Values
4 • Mission: Manage a successful public mortgage REIT with a focus on capital preservation and providing risk-adjusted returns reflective of a diversified, leveraged fixed income portfolio. • Objectives and Core Values: Generate dividends for shareholders Manage leverage conservatively Remain owner-
Slide 5: Investment Principles
5 Investment Principles • Philosophy • Focused on capital preservation • Simple, executable strategy • Disciplined allocation of capital • Manageable risk at the enterprise level • Stable, acceptable long-term returns • Strategy • Diversified strategy with 60% of invested shareholders’ capital inves
Slide 6: Our Value Proposition - Commercial and Residential Exposure in one REIT
6 Our Value Proposition - Commercial and Residential Exposure in one REIT Of our invested capital, 60% is invested in in commercial assets and 40% is invested in single family assets 11.4% 7.1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% Residential REITs Dynex Commercial REITs Commercial Residential 0.96x
Slide 7: Market environment and investment strategy outlook
• Excess liquidity from global monetary policy is unprecedented and has led to asset value distortions. Foreign central bank action plans remain uncertain and could cause unexpected results. • The current market environment is complex. Risk premiums have declined as cash seeks to find higher returns
Slide 8: Market Snapshot
Market Snapshot (as of 5/30/2014 unless otherwise indicated) Common Stock Preferred Stock NYSE Stock Ticker: DX DXPrA DXPrB Shares Outstanding: (as of 3/31/2014) 54,697,307 2,300,000 2,250,000 1Q Dividends $0.25 $0.53125 $0.47656 Dividend Yield (annualized based on 5/30/14 share price) 11.6% 8.5% 8.
Slide 9: Appendix
APPENDIX 9
Slide 10: CMBS Investment Thesis
CMBS Investment Thesis 10 • CMBS market has rebounded since the crisis with better underwriting, more subordination, and broad investor participation • Fundamentals still positive for Commercial Real Estate, particularly multifamily, given demographic fundamentals and attitude shifts • Market techni
Slide 11: CMBS Portfolio
CMBS Portfolio (as of March 31, 2014) AAA, 73% AA, 6% A, 18% Below A, 3% Other 25% Multifamily 75% 11 Credit Quality Collateral Vintage (by year of origination) Asset Type $ in millions Agency MBS are considered AAA-rated for purposes of this chart. $0 $50 $100 $150 $200 $250 $300 $350 $400 Agency C
Slide 12: Multifamily Trends
Multifamily Trends 12 The US Fixed Income Week ly 07 February 2014 56 4Q 2013 CRE property sector review Commercial real estate fundamentals continued to improve in the fourth quarter of 2013 as effective rent levels increased and vacancy rates remained stable and even decreased across the majority
Slide 13: CMBS Trends
CMBS Trends 13 Between 2004-2008, subordination levels did not keep up with stressed LTVs. CMBS 2.0 reflects a more orderly relationship between subordination levels and stressed LTVs – providing support to our investments in senior IO tranches.
Slide 14: RMBS Investment Thesis
RMBS Investment Thesis • Hybrid ARMs diversified across product type: – Extension risk limited – Agency guarantee – Steep yield curve offers opportunity to roll down 14 • Fundamentals - Slowing trend in prepayments for premium securities - Refinancing activity slowed down as rates rose - Valuations
Slide 15: RMBS Portfolio
RMBS Portfolio (as of March 31, 2014) 15 Credit Quality Weighted Average Loan Age Asset Type Months AAA 99% Not Rated 1% Months Months to Maturity/Reset Agency RMBS 96% Agency CMO 3% Non-Agency RMBS 1% 8% 19% 48% 7% 12% 6% $0 $200 $400 $600 $800 $1,000 $1,200 $1,400 23% 9% 29% 3% 36% $- $100 $200 $3
Slide 16: Interest Rate Sensitivity
Interest Rate Sensitivity (as of March 31, 2014) 16 Parallel Change in Treasury Yields (in basis points) Percentage Change in Projected Market Value of Assets Net of Hedges +100 (1.46)% +50 (0.69)% +25 (0.33)% Curve Shift 2 year Treasury (in basis points) Curve Shift 10 year Treasury (in basis point
Slide 17: Financing Details
Financing Details (as of March 31, 2014) 17 Repurchase Agreements by Original Maturity 1.58% 1.61% 1.88% 2.47% 2.69% 2.71% $0 $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600 $1,800 $2,000 2014 2015 2016 2017 2018 2019-2024 N o tio n al in M ill io n s Remainder of Hedges Detail (by Effective Date) 1
Slide 18: Market Environment
Market Environment • Treasury yield curve has steepened dramatically over the last twelve months • 2 year rate remains anchored, reflecting Fed’s intention to keep short rates low 18 Annual Comparison Quarterly Comparison • 10 year treasury yields were under pressure at year end but have since ralli
Slide 19: Market Environment: Homeownership Rates
19 Market Environment Homeownership Rates 59.0% 60.0% 61.0% 62.0% 63.0% 64.0% 65.0% 66.0% 67.0% 68.0% 69.0% 70.0% 64.8% 69.2% Source: U.S. Census Bureau
Slide 20: Investment Environment: Mortgage Nominal Spreads to Treasuries
20 Investment Environment Mortgage Nominal Spreads to Treasuries (in basis points) 0 50 100 150 200 250 300 FNMA Current Coupon 30yr 0 50 100 150 200 250 300 350 FNMA Current Coupon 15yr Source: JP Morgan and Company data
Slide 21: Investment Environment: Non-Mortgage Spreads to Treasuries
Investment Environment Non-Mortgage Spreads to Treasuries (in basis points) 21 0 100 200 300 400 500 600 700 800 Investment Grade Composite High Yield Composite Emerging Market Composite Source: Bloomberg Composite Indexes
Slide 22: Investment Environment: CMBS Spreads
Investment Environment CMBS Spreads (in basis points) 22 Source: Company Data 0 200 400 600 800 1000 1200 1400 CMBS Spreads vs. Swaps AAA CMBS DUS Freddie Credit 90 140 190 240 290 340 390 440 490 540 Freddie Mac CMBS Ginnie Mae CMBS IO Spreads vs. Treasuries Freddie Multi- Family A rated
Slide 23: Investment Environment: Hybrid ARM Zero-Volatility Spreads
23 0 20 40 60 80 100 120 140 Oct -1 1 Ja n -1 2 A p r- 1 2 Ju l- 1 2 Oct -1 2 Ja n -1 3 A p r- 1 3 Ju l- 1 3 Oct -1 3 Ja n -1 4 '5/1 '7/1 '10/1 Investment Environment Generic Discount Hybrid ARM Zero-Volatility Spreads (in basis points) Source: Company Data
Slide 24: Investment Environment: Net RMBS Supply
24 Investment Environment Net RMBS Supply FOMC Net Purchases vs. Net Issuances Gross Issuances Source: eMBS, Federal Reserve and Goldman Sachs Fed Gross Purchases Gross Issuance Net Fed Fed Net Purchases Net Issuance
Slide 25: Investment Thesis: Capital Allocation
25 Investment Thesis Capital Allocation (as of March 31, 2014) (1)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 financ
Slide 26: Drivers of EPS: Investment Premium Allocation
Drivers of EPS Investment Premium Allocation 26 (as of end of period) -$100 $0 $100 $200 $300 $400 $500 $600 $700 $800 $900 2009 2010 2011 2012 2013 Q12014 M ill ion s Premium (Discount), net - CMBS and loans Premium, net - RMBS and loans
Slide 27: Drivers of EPS: ARM Prepayment Speeds vs MBA Refinancing Index
Drivers of EPS ARM Prepayment Speeds vs MBA Refinancing Index 27 Source : MBA REFI Index (Bloomberg) M B A R ef i I n d ex V al u e 0 1000 2000 3000 4000 5000 6000 7000 0 5 10 15 20 25 30 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 DX Hybrid ARMs/ARMs DX T
Slide 28: Drivers of Book Value: Spread Risk
Drivers of Book Value 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
Slide 29: Drivers of Book Value: Spread Changes
Drivers of Book Value Spread Changes 29 Assets March 31, 2014 December 31, 2013 Change 2 year vs. 10 year UST spread 230 265 -35 Hybrid ARM 5/1 spread to UST 21 30 -9 Hybrid ARM 10/1 spread to UST 57 76 -19 Agency CMBS spread to interest rate swaps 50 58 -8 ‘A’-rated CMBS spread to interest rate swa
Slide 30: Drivers of Book Value and EPS: Risk Management
Drivers of Book Value and EPS Risk Management 30 Key Risk Mitigating Strategy Interest Rate/Extension Risk Duration target of 0.5 to 1.5 years Derivatives to economically hedge interest rate risk Invest in credit assets that should increase in value as rates rise Short duration assets and more predi
Slide 31: Drivers of Book Value: Extension Risk
Drivers of Book Value Extension Risk (as of April 30, 2014) 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 Price Coupon WAC Speed Average Life Average Life Extension FN 30yr $101-13 3.50% 4.01% 15 CPR 2 CPR 5.36 years 14.31 years ~9 years FNCI 15yr $103-5 3.0% 3.48% 15
Slide 32: First Quarter 2014 Highlights
• GAAP net loss of $0.06 per common share and a return on common equity of (2.5)%, reflecting change in fair value of derivatives over the quarter • Core net operating income(1) of $0.25 and an adjusted return on common equity(1) of 11.3% • Common dividend declared of $0.25 per share, for an annuali
Slide 33: Portfolio Update
Portfolio Update (as of March 31, 2014) AAA 90% AA 2% A 6% Below A 2% 33 Commercial Securities with IO 47.2% Residential Securities 32.1% Legacy Investments 4.1% Other assets, net 6.4% Cash 10.2% $192.2 $282.7 $38.2 $61.2 $24.7 Residential 17% Commercial 83% $140.2 ($ in millions) MBS Credit Quality
Slide 34: Key Financial Metrics
Key Financial Metrics 34 • Core net operating income per share for the first quarter was $0.25 equal to the dividend of $0.25 per share • Investment portfolio purchases and repositioning on both investments and funding/hedging contributed to wider net interest spread in the quarter Core Net Operatin
Slide 35: Accounting Disclosure: Selected Financial Highlights
35 Accounting Disclosure Selected Financial Highlights (as of and for the quarter ended) (1) Core net operating income to common shareholders (including on a per share basis), adjusted return on average common equity and adjusted net interest spread are non-GAAP financial measures. Reconciliations o
Slide 36: Accounting Disclosure: Book Value Reconciliation
Accounting Disclosure Book Value Reconciliation 36 Book Value ($ in thousands) Book Value Per Common Share Shareholders' equity, December 31, 2013 $ 585,876 $ 8.69 GAAP net loss to common shareholders: Core net operating income 13,746 0.25 Amortization of de-designated cash flow hedges (2,288 ) (0.0
Slide 37: Core Net Operating Income Reconciliation
37 ($ in thousands except per share data) Quarter Ended 3/31/2014 12/31/2013 9/30/2013 6/30/2013 3/31/2013 Net (loss) income to common shareholders $ (3,028) $ 19,266 $ (6,921) $ 29,442 $ 18,381 Adjustments: Amortization of de-designated cash flow hedges (1) 2,288 2,609 2,583 — — Change in fair valu
Slide 38: Reconciliation of GAAP Measures to Non-GAAP Measures
Accounting Disclosure Reconciliation of GAAP Measures to Non-GAAP Measures 38 (1) Rates shown are based on annualized interest expense amounts divided by average interest bearing liabilities. Recalculation of annualized cost of funds using total interest expense shown in the table may not be possibl