Dynex Capital, Inc. 2026 Q3 Earnings Call

Please go ahead. Thank you, operator, and thank you to everyone joining us today for Dynex's third quarter 2026 earnings conference call.

Joining me on today's conference call are Smriti L. Popenoe, Co-Chief Executive Officer and President, Byron L. Boston, Chairman and Co-Chief Executive Officer, Mike Sartori, Chief Financial Officer, and T.J. Connelly, Chief Investment Officer. Before we begin, I'd like to remind you that today's discussion may include forward-looking statements. These statements are based on current expectations, forecasts, and assumptions and are subject to risks, uncertainties, and other factors that could cause actual results to differ materially. For additional information regarding these risks and factors, please refer to our filings with the SEC, available in the Investor section of our website, as well as on the SEC's website. Dynex undertakes no obligation to update or revise any forward-looking statements.

Our earnings press release was issued and filed with the SEC earlier today and is available on the Investor section of our website at dynexcapital.com, as well as on the SEC's website. We may also reference our earnings presentation today, which is also available on our Investor page. With that, I'll turn the call over to Smriti for opening remarks.

Thank you, Kate. Good morning, everyone, and thank you for joining us today. This was a pivotal quarter in the markets, and Dynex was prepared for this moment. We had a strong liquidity position. Our experienced team maintained our position in our highest conviction trade, and we have retained the capacity to invest as spreads have moved wider. In the third quarter, book value declined 15.4% to $10.91 per share for a total economic return of negative 11.4%. Our portfolio operated as designed. The liquidity position absorbed the book value movement, our financing remained deep and reliable, and our hedging limited our downside as ten-year Treasury yields rose above 5%. During the quarter, we took another step in the evolution of our capital structure with the issuance of our Series D preferred stock, our first preferred equity offering in more than six years.

The transaction added an accretive source of permanent capital and further diversified our capital base. The quarter's results reflect higher volatility and higher yields in the overall bond markets and wider spreads in the Agency MBS markets. These moves were driven by fundamental shifts in the macroeconomic system. The U.S. economy is in the midst of a significant positive investment cycle driven by AI and the infrastructure required to support it. During the third quarter, we experienced a simultaneous and significant risk and price re-rating of several crucial factors related to AI investment. The significant demand for capital in this sector, the price of that capital, the impact of that capital investment on the price of commodities, and the follow-on impacts of all of this on inflation are all higher, pushing yields up.

At the same time, geopolitical uncertainty and rising government borrowing needs, both in the U.S. and globally, have reinforced upward pressure on yields. Against this backdrop, Agency MBS have actually been a sideshow, not the main act, and while flows were choppy and illiquid at times, the sector has not been the origin of market stress. In fact, the fundamentals and technicals behind Agency MBS are highly constructive. After the significant and rapid repricing, we find ourselves once again facing a highly attractive investment opportunity. Absolute real yields are compelling. At current levels, mortgage spreads are still historically wide and provide significant compensation at a time when the value of the borrower's prepayment option is substantially lower. Refinancing incentive is extremely limited and much of the mortgage universe has already extended substantially.

As a result, the duration and expected cash flows of these assets are more stable, and most importantly, the convexity profile of the mortgage market has improved dramatically. As a result, and as long-term investors in Agency MBS, we are being paid a wide spread while assuming considerably less cash flow uncertainty than is typically associated with mortgages. This combination underpins our confidence around strong forward returns. Yes, the cost of capital has temporarily adjusted higher, but prospective returns have adjusted materially higher. This is an important moment for Dynex and our shareholders. We've been building a more scaled and resilient Dynex with the liquidity and flexibility to navigate market and operating shocks. As we grow, our investment platform becomes increasingly durable with greater capacity to deploy capital and opportunistically capture attractive returns.

I'd now like to turn the call over to Mike and T.J. to discuss our financial results and portfolio positioning in greater detail.

Thank you, Smriti. I'll now review our financial results for the third quarter. We reported book value per common share of $10.91 at September 30, compared with $12.90 at June 30. Including the $0.51 common dividend, total economic return was negative 11.5%. Comprehensive loss was $1.49 per common share compared with comprehensive income of $0.80 per share in the second quarter. We raised $384 million of accretive capital during the third quarter, net of fees, including $268 million of common equity through our ATM program while maintaining an opportunistic approach to capital raising. We also completed our first preferred equity offering since 2020, raising $116 million of net proceeds in late September. The transaction was an important step in creating strategic flexibility in our capital structure.

The offering increased preferred equity as a percentage of our capital stack from approximately 3% to 7% of our total equity base, diversifying our sources of capital as we continue to grow the business. The transaction was accretive and priced at an attractive cost of capital, particularly relative to the current yield on our common equity. Importantly, funding markets remain deep and supportive. We maintain more than $24 billion of repo financing across over 25 counterparties. The breadth of our counterparty relationships, combined with the high quality and liquidity of our Agency collateral, provide substantial capacity to support additional investment opportunities. Asset yields increased from 4.9% to 5%, outpacing the modest increase in our effective financing cost from 3.79% to 3.82%. As a result, our economic net interest spread remained stable at approximately 1.18%.

Liquidity remains a key strength, with $1.3 billion of cash and unencumbered securities at quarter end, representing over 42% of total equity, down approximately 9% from the prior quarter. As designed, liquidity levels have buffered the book value declines. Maintaining ample liquidity remains a core element of our risk management framework and allows us to capitalize on market opportunities as they arise. We ended the quarter with a $3.1 billion equity capital base, an increase of 24% year-to-date. Turning to operating expenses, G&A for the third quarter was 2% of total equity on an annualized basis, consistent with the run rate we discussed last quarter. As we have grown, we have continued to generate meaningful operating leverage across the platform. G&A expenses have declined as a percentage of equity over time and was approximately 40% lower than the same period in 2025.

As we execute on our business plan, we have continued to invest in talent, technology, and infrastructure to support a larger, more scalable platform. We remain committed to expense discipline and focused on further enhancing operating efficiency as we scale. With that, I'll turn it over to T.J. to discuss our portfolio and outlook in greater detail.

Thanks, Mike. Current coupon mortgage yields moved nearly 100 basis points higher in the third quarter. The 10-year Treasury rose over 80 basis points, eclipsing 5% for the first time since 2007, and mortgage spreads widened nearly 20 basis points, much of it in the last two weeks of September. At quarter end, current coupon spreads to seven-year swaps were around 162 basis points, near the wide end of this year's range. We managed our portfolio actively and with discipline. As rates rose, we added to our hedges in lockstep. As a result, we limited the impact of the rate move. Spread widening drove over 80% of the return in the quarter, and our liquidity continued to do its job. This covered margin in the normal course of business. We held our exposures and their return potential. We did not de-lever. As I turn to market dynamics, this quarter, I am excited to announce the release of the Dynex Angle to accompany our earnings presentation.