Dynex Capital, Inc. Aktie

Hello, and welcome to the 2026 Annual Meeting of Shareholders of Dynex Capital, Inc. Please note that today's meeting is being recorded. [Operator Instructions]. It is now my pleasure to turn the meeting over to Byron Boston, Dynex's Chairman and Co-Chief Executive Officer.

Good morning, and thank you for joining us. I will now call the meeting to order. I am Byron Boston, Chairman and Co-Chief Executive Officer of Dynex Capital. I will serve as Chair of this meeting. On behalf of Board of Directors and the executive team of Dynex, I welcome you to our 2026 Annual Meeting of Shareholders. We appreciate your participation and your continued interest in the company. As in prior years, we are hosting this meeting in a virtual format, which we believe supports broad general access and participation.

I would now like to introduce the Dynex Directors attending today. In addition to me, the following members of the Board are also in attendance: Julia Coronado, our Lead Independent Director; Marie Chandoha; Alexander Crawford; Andrew Gray; Smriti Popenoe, our Co-CEO and President; and Joy Palmer. As previously disclosed, Ms. Palmer is not standing for reelection and will depart from the Board following this meeting. On behalf of the Board, I want to thank Joy for her dedicated service to Dynex and our Board of Directors. Also joining us from the management team are Michael Angelo, our Chief Legal Officer and Corporate Secretary; Mike Sartori, our Chief Financial Officer; and Kait Mauritz and Alison Griffin from our Investor Relations team.

Representing Ernst & Young, our independent auditing firm, is Andrew Harvazinski. I will now turn the meeting over to Mr. Angelo to conduct the formal business of the meeting.

Thank you, Byron. Before we begin, I would like to direct everyone's attention to the rules of conduct available on the meeting website. Although this is a virtual-only meeting, we welcome questions from shareholders and will answer questions during the Q&A portion of the meeting. I have been appointed the Inspector of Election for this meeting to certify the results of the voting and I have taken the oath of office. I have received an affidavit of mailing from Computershare, our transfer agent, certifying that the requisite notices and accompanying materials commenced mailing on April 7, 2026, to each shareholder of record as of the close of business on March 25, 2026, the record date.

As Corporate Secretary of the company, I have the list of shareholders of record of the company as of the record date, which has been available for inspection at the company's principal officers during normal business hours. As of the record date, there were 206,947,054 shares of common stock of the company issued and outstanding and entitled to notice of and to vote at this meeting of shareholders. As the Inspector of Election, I report that at least 140,653,661 shares of common stock or approximately 68% of all common shares outstanding are present or represented by proxy at this meeting. Therefore, a quorum is present and the meeting may proceed.

It is now 10:04 a.m. Eastern Time on May 21, 2026, and the polls for each matter to be voted upon at this meeting are open. As a reminder, shareholders may vote online at any time during this meeting before the polls close. If you are a shareholder entitled to vote and have not yet voted or if you would like to change your previously cast vote, please do so by clicking on the voting link on the meeting website. If you have already voted by proxy, it is not necessary to vote again. We will now review the proposals.

The first item of business is the election of directors. The 6 individuals nominated to serve until the 2027 annual meeting and until the election and qualification of their successors are: Byron Boston, Marie Chandoha, Julia Coronado, Alexander Crawford, Andrew Gray and Smriti Popenoe. There have been no other nominations received.

The second item of business is to approve on an advisory and nonbinding basis, the compensation of the company's named executive officers as disclosed in the proxy statement.

The third item of business is to ratify the selection of Ernst & Young as the company's independent auditors for the 2026 fiscal year.

The fourth item of business is to approve an amendment to the company's articles of incorporation to increase the number of authorized shares of the company's common stock from 360 million shares to 720 million shares. A copy of the amendment was included as Appendix A to the proxy statement. The matters to be voted on have now been formally presented and the polls are about to close.

Since everyone has had an opportunity to vote, the polls are now closed at 10:06 a.m. Eastern Time. All proxies and votes should now have been submitted. As the Inspector of Election, I preliminarily report that for proposal 1, a majority of the common shares entitled to vote on the proposal have been in favor of election of each director nominee.

For proposal 2, a majority of the common shares entitled to vote on the proposal have been in favor of the named executive officer's compensation as disclosed in the proxy statement.

For proposal 3, a majority of the common shares entitled to vote on the proposal have been in favor of ratification of the selection of Ernst & Young as the company's independent auditors for 2026.

For proposal 4, a majority of the common shares entitled to vote on the proposal have been in favor of the amendment to the company's articles of incorporation to increase the number of authorized shares of the company's common stock from $360 million to $720 million.

The final report of the Inspector of Election with the final vote count for the matters voted on today will be filed with the records of the company and reported on Form 8-K within 4 business days. I will now turn the meeting back over to Byron.

There is no other formal business to come before the meeting. We will now open the meeting to questions.

Seeing no questions relevant to these proceedings, the meeting is now adjourned. Thank you for joining us today and for your continued support of Dynex Capital.

This concludes the meeting. Thank you for participating. You may now disconnect.

Good day, and welcome to the Dynex Capital, Inc. First Quarter Earnings Conference Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Ms. Alison Griffin, Vice President of Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. The press release associated with today's call was issued and filed with the SEC this morning, April 20, 2026. You may view the press release on the homepage of the Dynex website at dynexcapital.com as well as on the SEC's website at sec.gov.

Before we begin, we wish to remind you that this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words believe, expect, forecast, anticipate, estimate, project, plan and similar expressions identify forward-looking statements that are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified.

The company's actual results and timing of certain events could differ considerably from those projected and/or contemplated by those forward-looking statements as a result of unforeseen external factors or risks. For additional information on these factors or risks, please refer to our disclosures filed with the SEC, which may be found on the Dynex website under Investor as well as on the SEC's website.

This conference call is being broadcast live over the Internet with a streaming slide presentation, which can be found through the webcast link on the website. The slide presentation may also be referenced on the Investors page.

Joining me on the call today are Smriti Popenoe, Co-Chief Executive Officer and President; Byron Boston, Chairman and Co-Chief Executive Officer; Mike Sartori, Chief Financial Officer; and T.J. Connolly, Chief Investment Officer.

I now have the pleasure to turn the call over to Smriti.

Thank you, Alison, and good morning, everyone. We continue to build our company at the intersection of 2 powerful demographic tailwinds, the need for income and the need for housing. Dynex continues to deliver differentiated top-tier performance. Our track record now combined with the significant growth in our capital base over the last 15 months, propels value creation by delivering scale and resilience to our shareholders.

The team is focused on methodically building durability across investments, finance, technology, risk and operations. Growing an enduring platform reinforces the value of our business meaningfully beyond the valuation of our balance sheet, further driving long-term shareholder returns.

Turning now to the global macroeconomic environment. Government policy is squarely in the driver seat, defining and driving outcomes. Scenario planning for us has evolved to mapping policy pathways. What policymakers could do next, how markets may transmit those decisions and how we position ourselves for those mods.

More than ever, mindset and preparedness are the key factors for successful decision-making because the policy pads aren't always foreseeable. Flexibility and openness in our team's mindset something we actively teach and practice are now essential parts of navigating the investment landscape.

In the first quarter, we added value by executing our plan. We managed the portfolio to a short burst of volatility, which we use to opportunistically raise and deploy capital. We grew the total capital base by 18%, deploying the funds during the quarter as MBS spreads widened. Since quarter end, MBS spreads have tightened and book value is higher.

Mike and TJ will now review the detailed quarterly results and our outlook.

Thank you, and good morning, everyone, joining us today. I'd like to begin by welcoming [ Calin More ] who joined Dynex Day to lead Capital Markets and Investor Relations. Kate brings deep industry experience across both functions, and our background will support the continued growth of our capital and investor base while deepening the engagement with our existing investors.

We are excited to add her capabilities to our strong and growing Dynex team. Turning now to our financial results for the quarter. Book value ended the quarter at $12.6 per share and economic return was negative 2.5% for the quarter, consisting of $0.51 per share of common dividends and an $0.85 per share decrease in book value. We ended the quarter with leverage at 8.6x versus total equity. The majority of the increase was attributable to the growth in our investment portfolio of $6 billion. reflecting the deployment of capital raise during the quarter of $442 million.

Our liquidity position remained very strong with $1.3 billion in cash and unencumbered securities at the end of the quarter, representing over 46% of total equity. We continue to evaluate growth through a lens of market opportunity, investment returns and long-term accretion to drive shareholder value. Net interest income for the quarter rose from $0.28 per share to $0.40 per share, primarily due to declining financing costs. which fell 33 basis points due to the impact of the Federal Reserve's rate cuts in the fourth quarter.

With respect to expenses, G&A increased quarter-over-quarter, driven primarily by onetime items. As we noted in the prior first quarter earnings, we expect overall expenses to normalize in the second quarter with full year expense ratio anticipated to be flat or modestly lower versus year-end as we grow our capital base. Importantly, we remain disciplined in managing costs in our expense structure.

With that, I'll turn it over to T.J. to provide additional detail on portfolio strategy and the outlook.

Thanks, Mike. SP999 We entered the quarter with policy attention focused squarely on housing affordability and the mortgage market. As the quarter progressed, global events, most notably the war in Iran, shifted market focus toward geopolitics and drove a sharp increase in volatility. As markets become more accustomed to that global backdrop, -- we expect both investors and policymakers to refocus on domestic priorities over the balance of the year, particularly housing and the availability of mortgage credit, a transition we believe could support tighter mortgage spreads over time.

Early in the quarter, mortgage markets benefited from a strong technical tailwind. Government policy long 1 of our most important inputs had turned supportive with policymakers emphasizing GSE mortgage buying to tighten spreads and improve affordability. As volatility rose later in the quarter, agency mortgages traded like much riskier assets, creating potential opportunities. Because we operate with strong liquidity, we navigated that volatility constructively and selectively added assets that spreads widen to more attractive levels.

Fundamentals and technicals remain highly supportive and we believe the long-term path toward tighter equilibrium spreads remains highly likely, boosted by policy, supply-demand dynamics and yield carry. Net supply is light and demand remains broad and robust across banks, REITs, money managers and foreign investors.

Last quarter, I noted that we expected net supply to be $200 billion this year. So far in 2026, it appears supply could come in even lower. Returning to the demand side, the potential bid from the Fannie Mae and Freddie Mac retained portfolios improved downside liquidity and stabilizes spreads during periods of volatility and supports broader investor participation. The GSEs have been actively buying mortgages. They are selective on valuation -- they regularly retained pools. They have previously been selling to their cash window programs.

And there was some question about potential hedging. They are mostly hedging using interest rate swaps. In parallel, proposed changes tied to the Basel III end game could lower the capital cost banks face to hold mortgages, both in loan and securitized form and to intermediate financing more efficiently.

Financing costs are declining amid the light regulatory regime. Repo markets functioned smoothly, spreads were stable and funding was readily available even during periods of heightened volatility. MBS repo spread to SOFR remained in the 13 to 17 basis point range, 3 to 5 basis points below last year's averages.

Structural improvements in the short-term funding markets alongside elevated money market balances, standing Fed backstops and more efficient balance sheet intermediation continue to support financing for high-quality mortgage assets like those Dynex ones.

We have seen Agency MBS spreads to 7-year interest rate swaps begin to trend tighter again. After moving from the high 120s to nearly 170 basis points in March, spreads were in the low $160 at quarter end and move back toward the 150 area late last week. As geopolitical events evolve and policymakers refocus on domestic issues like housing, we believe spreads can trend towards 120 again with scope for long-term equilibrium spreads closer to 100 basis points.

Static ROEs for current coupon mortgages hedged with interest rate swaps were in the mid- to high teens, and the spread outlook I just outlined provides a further tailwind to forward returns. Moreover, the opportunity to add alpha through security selection is exceptional given the environment.

Borrower prepayment behavior is increasingly heterogeneous and technology-driven, creating meaningful dispersion across pools. Over the last year, we have strategically reduced our exposure to the most callable agency MBS, those in what we call the TBA market, and we continue to do that in the first quarter. TBAs declined from over 16% of our portfolio at year-end to approximately 7% at the end of the quarter.

The first quarter reflects the strength of the Dynex model along 2 dimensions. First, disciplined risk management, supported by significant financing liquidity, strategic security selection and a focus on market structure in the context of the macro headlines allowed us to manage through elevated volatility.

Second, that same volatility created the opportunity to raise and deploy capital at more attractive valuations, which we acted on during the quarter.

Thank you, T.J. We are now combining our demonstrated ability to earn solid returns with the benefits of scale. Growing our company in this attractive investment environment is an important element of value creation. It distributes fixed costs, deepens liquidity and strengthens the company, especially in periods of volatility like we saw last quarter.

Beyond the resilience that a bigger balance sheet provides larger companies have also typically enjoyed higher, more stable valuations. We have grown rapidly to be the third largest agency focused mortgage REIT. And we believe the market has not yet fully recognized the value we are establishing through scale. As we continue to execute our plan with discipline, -- we are excited about the potential for shareholders to benefit from a more scalable platform, creating meaningful upside over the medium and long term.

As we look ahead, we remain centered on opportunistic capital growth alongside disciplined management of our existing portfolio and building operating resilience. Our management team is invested alongside shareholders our interests are aligned with yours, and we are committed to stewarding your capital with integrity, transparency and care.

I will now open the call to questions.

[Operator Instructions] We will go first to Bose George with KBW.

Can we get an update on book value quarter-to-date?

Yes. As of Friday, Friday's close, the estimated book value was $13.31 per share, net of the accrued common dividend and that's up 5.6% versus quarter end.

Perfect. Great. And then you gave your outlook for spreads potentially going back down to 120 basis points. Is that across the curve or like on a specific point on the curve.

Yes, I'm quoting those spreads, both against the 7-year swap point, which is consistent with the chart we have in our presentation there.

We'll take our next question from Trevor Cranston with Citizens JMP.

Follow up on your commentary about spreads potentially tightening to 120 or even 100 basis points as a long-term equilibrium. Can you talk about kind of your thoughts on how high you'd be willing to take leverage given that kind of outlook for tightening and how much the potential for sort of short-term bouts of volatility sort of way against that?

Right. Yes. Thank you. There are several components to thinking about our leverage. Our leverage, as Mike mentioned, did increase to 8. roughly 2/3 of the increase was actively positioning to own more mortgages given that backdrop. Mortgages really were kind of the tail of the dog for several weeks in March. -- the yield spread or mortgage basis, as we referred to, it traded with risky assets, the basis was very correlated to things like the -- so we're doing a lot of scenario analysis around that to think about just how much leverage we can comfortably manage and it was a very comfortable position for us. coming into the quarter end period.

And looking ahead, I think we're going to remain very opportunistic. We're very resolute in our view on those spreads moving from down to as much as 100 basis points. Given the GSE backdrop, we think this is -- we are on the verge of a significant regime change. So we are going to actively be opportunistic in keeping our exposures. So investors can capitalize on this opportunity.

Got it. Okay. That's helpful. And then just looking at the portfolio this quarter, it looked like the allocation to TBAs went down some. Can you talk about how you're thinking about the values of spec pools versus TBAs with incremental dollars.

Yes. The TBA market, by definition, for those who don't know, the TBA is to be announced market -- that is the cheapest to deliver segment of the mortgage market. That is to say the pools that are -- or the loans that are most callable and potentially have the most duration uncertainty typically will get delivered into a TBA transaction. And we want to avoid those. We think those get cheaper and cheaper. They have tremendous amount of uncertainty around their cash flows. They're very, very refinanceable and callable on even the slightest move in in mortgage rates. So we're trying to avoid those.

We are very strategic and have been, as I mentioned in my prepared remarks, positioning for owning significantly more pools I think we've got a long history of security selection. This is a tremendous source of alpha for us and it's unique to this model, right? It's very hard to -- for investors to go out and find mortgage pools and do the deep dive that we do, and you have to be in the institutional world. So it's a great opportunity for retail investors, for instance, to be able to access security selection like we can offer them.

We'll go next to Jason Weaver with Jones Trading.

I was wondering if you could speak to the phasing of capital deployment over the quarter and beyond.

Yes, absolutely. In terms of the capital, and I'll let Laxman to comment a little bit, but it is very opportunistic and methodical. We are thinking a lot about multiple components that go into that optimization for our shareholders. One of the things I think that the market often misses is total shareholder return is driven by the portfolio returns and the valuation.

And one thing is very clear, larger companies receive a larger valuation in this sector. And that's a very important part of our calculus as we think about phasing up the capital raising. And it was a significant quarter for us.

I'll turn it over to Smriti, who will comment a little bit more.

Jason, one of the things that we think about actively is what is the agency MBS market and what are the moves telling us about the inherent risk in that particular sector? one of the things that happened in the first quarter is that Agency MBS widened but it wasn't because there was something wrong with Agency MBS per se. It wasn't a fundamental reason. They widened because the risk assets in general were weaker.

And we view those types of opportunities to be really significant in terms of the ability to raise and deploy capital. So when we see that type of move, that's a signal to us to go put accretive capital that we're raising to work. So that's really the opportunistic nature of what we're talking about.

In general, when we see those types of opportunities, you'll see us probably raise bigger blocks of capital put those put the money to work. And then over time, I think that criterion that we've always abided by just making sure that the cost of capital is lower than the return on the capital that we're deploying, that remains sort of the gold standard in terms of our willingness to raise and deploy capital over time.

Got it. That's helpful. And just so I have this correct, obviously, forward ROE is going to be the genuine -- the biggest consideration here. But is there a downside sort of multiple on valuation that you would -- that you want to avoid or you would underwrite to price above there like on your book value multiple.

Look, we're always going to want the shares to trade at a premium to book value. I think as a business, we've now proven 2 things. One is the ability to deliver strong returns in some of the most challenging environments that the markets had in the last 10 years. So that's thing number one.

And then thing number two, I think it's this idea that as we grow, we are delivering significant benefits of scale to our shareholders. So at this point, we feel like the markets haven't necessarily taken that into account. I mean having now firmly placed ourselves as the third largest company that's doing what we're doing. I think that part is not yet fully reflected in the share price.

And for us to continue to tell that story, I think that's that's the goal here. But all else being equal, not only do we think the shares deserve to trade at book, I think we actually deserve to trade at a significant premium.

All right. Well, I appreciate that. Congrats on the quarter.

We'll go next to at Marissa Lobo with UBS.

Could you speak to swap spread dynamics over the quarter? How that impacted performance? And did you adjust the mix between treasury futures and swaps during the stress period.

The spot spreads, so the interest rate swap rate relative to treasuries is what most people are quoting there. And that does tend to correlate with risky assets, much as I mentioned, about the basis. So when stocks trade lower. For instance, the swap spread will trade more negative. And vice versa, when risky assets are doing well, the swap spread will trade less negative.

We think and we've said for several quarters now, we actually probably pushing up on 2 years now that we expect to be able to earn the additional yield spread that interest rate swap hedges offer relative to treasuries. So that is to say there is more yield spread available when hedging mortgages with interest rate swaps than there is when we hedge with treasuries.

As a result, mentioned on the last couple of calls, we expected things to be in the 60% to 80% of the portfolio hedged with interest rate swaps we were right around 70% on a DV01 basis at quarter end. And I expect that to be roughly -- that's roughly where we're comfortable in terms of the liquidity of hedges and being able to staying nimble with futures that trade practically 24/7, -- and I think there's a little bit of scope.

We could get closer if the opportunity presents itself to be closer to 80%. But again, I think that's a really compelling spread for us to continue to earn over time, and it has worked fairly well.

Appreciate that. And just moving to the GSEs, you talked about the purchase directive is resetting the spread regime tighter. How is the pace of their buying met your expectations? And did the March spread widening test that backstop thesis in a meaningful way?

Yes, it did, to some extent, test the backdrop in they have proven to be very value based. So I wouldn't say it's time-based so much. which that's really important for the understanding of the backstop, right? So at wider spreads, they will be more aggressive and all indications suggest they were more aggressive about wider spread. They are fairly methodical in terms of their pool selection.

So they are buying or retaining rather more pools than they have in the past relative to -- in the cash windows -- and I'd say overall, it is playing out roughly as we expected. There are periods of volatility. They wait, they put their hands up and say, "Okay, we'll see where value shakes out. and then they step in, much as they did when Smriti and Byron and I sat at the Freddie Mac portfolio 25 years ago. They're operating in a very similar manner at this point.

We'll take our next question from [ Mal Ross with Compass Post ].

Kind of follow-up on the previous question. but how your expectations for inflation have influenced a tenor of your interest rate swaps noting that you moved more into a 5 year? And does that reflect your expectations for a steeper to [indiscernible]?

Yes, great question. The market I'd say, in the course of the quarter, waffle lot, especially with the Warren and run the market narrates shifted very quickly at points from one focused on inflation to one focused on growth, right? And we don't know the answer. We don't predict, we prepare. So we're preparing and building this portfolio to be robust to both of those regimes potentially I think that's really important.

So you saw the swap book shorten up a little bit in that 3- to 5-year tenor. Most of that's just aging of the swap book. We're very comfortable with how this position because the view that we have here and the risk exposures that we think are the most compelling for our shareholders to earn over time is that mortgage spread relative to the interest rate curve.

So we are trying to position this to achieve the yield spread and hold our book value as steady as possible. And I think that is, given the way the portfolio is constructed currently, for this regime, it's appropriate. So I'd say, overall, our highest conviction is that mortgage yield spread is what we're here to earn, and we are hedging across the curve for that reason.

And then to follow up on the asset side, it seems like you added more in the current and lower coupons and avoided the higher coupons and assuming that it is following on with CPR expectations.

Yes. It's a great question because there were some really good opportunities in the initial days. It feels like a long time ago now. But in mid-January, after the Trump administration's announcement that the GSEs would be more active in buying certain coupons really outperform. So you'll see in our press release there that the 4% coupon is significantly lower than it was at year-end, and that was because we took advantage of that alpha, right? There was a significant outperformance in those coupons, and we moved away from those coupons as they outperformed to diversify the book up into -- we added some Fannie 2s even and then some of the higher coupons.

Again, it's all -- more and more of this market is about pool selection even than it is about coupon selection. So when you have these kind of real quick moves and things, we're watching very closely to say, "Hey, this is out of line, the Fannie Force, for instance, got significantly richer and we were able to sell into that and buy pools and other coupons that were much more compelling cash flows for us.

We'll take our next question from Eric Hagen with BTIG.

Maybe following up a little bit on this conversation around capital raising. Just looking at the timing of the capital raising, even just the broader philosophy around raising capital, I mean, is there anything fundamental that you'd identify in the current environment, which has maybe changed the level at which you're prepared to raise capital relative to where you've raised in the past. And by level, I mean, the level of your stock valuation?

Yes. I mean we disclosed already, Eric, that the bulk of the capital that was raised, was raised early in the quarter. When valuations were more supportive towards issuing capital versus investing. And then the investing environment kind of played itself out over the quarter, as everybody saw, with spreads wider as the war in Iran progressed.

So in general, I don't think the principles have changed. When it is a good idea for us to raise we raised when it's a good idea to invest -- we invest the raising and deploying don't necessarily have to be simultaneous in nature. Sometimes they are, and sometimes they're not. But the real principle, which I've said now, I think you can go back and check on earnings calls for 3-plus years, it's really this idea of -- is my cost of capital lower than the return that I can earn on that capital over time.

And I think that is what makes this investment environment so unique, a, that it's lasted as long as it has, b, that the forward returns in Agency MBS still continue to support active raising and deploying capital because over time, we believe the cost of capital is going to be lower than the return on that capital or vice versa, the return on the capital we're raising right now is actually going to be higher than the marginal cost.

So that has always been our operating principle. As we see the share price go up relative to book, we talked about price to book here, a fair amount today. I think we're more conscious about the idea of delivering total shareholder return to our shareholders.

T.J. talked about TSR being comprised of 2 things. One is the actual return on our portfolio; and secondly, the price to book. We know that those are 2 different components, and there's a trade-off between the 2, but that also is a factor in how much we raise and how much we deploy. So a lot of what we're thinking through right now is just, number one, performance is the beginning, ending and final arbiter of everything that we do. So that's always number one.

And then number two, delivering value through these other ways. But those are all factors in how we think about the pace of capital raising, deploying, et cetera.

That's really helpful. If I could sneak in 1 more here. I mean what's your perspective on the prepayment environment as community banks are given maybe more incentives to come back into the market? Do you see that driving a lot of competition among originators.

Certainly, competition drives the refinanceability right? That is a very important construct. I think more than anything, though, as we've talked about for many, many quarters now, it's all about the technology, right? That is making it easier and easier to refinance the marginal borrower. And I think that will be the dominant force over time. But to the extent you have certain incentives that you're bringing it back to something we've talked about for a long time as policy, right? So to the extent that policy shifts incentives for the players in the mortgage market. That's something we're watching very, very closely.

At this time, there are no further questions. I'd now like to turn the call back to Smriti Popenoe for any additional or closing remarks.

I thank you all for your attention, and we look forward to updating you on our quarterly results in the second quarter.

This does conclude today's conference. We thank you for your participation.

Good day, and welcome to the Dynex Capital, Inc. Fourth Quarter and Full Year 2025 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Alison Griffin, Vice President, Investor Relations. Please go ahead.

Good morning. The press release associated with today's call was issued and filed with the SEC this morning, January 26, 2026. You may view the press release on the homepage of the Dynex website at dynexcapital.com as well as on the SEC's website at sec.gov.

Before we begin, we wish to remind you that this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words believe, expect, forecast, anticipate, estimate, project, plan and similar expressions identify forward-looking statements that are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified.

The company's actual results and timing of certain events could differ considerably from those projected and/or contemplated by those forward-looking statements as a result of unforeseen external factors or risks. For additional information on these factors or risks, please refer to our disclosures filed with the SEC, which may be found on the Dynex website under Investor as well as on the SEC's website.

This conference call is being broadcast live over the Internet with a streaming slide presentation, which can be found through the webcast link on the website. The slide presentation may also be referenced under quarterly reports on the Investor Center page.

Joining me on the call today are Byron Boston, Chairman and Co-Chief Executive Officer; Smriti Popenoe, Co-Chief Executive Officer and President; Rob Colligan, Chief Financial Officer; T.J. Connelly, Chief Investment Officer; and Mike Sartori, Head of Capital Markets.

It is now my pleasure to turn the call over to Byron and Smriti.

Good morning, and thank you for joining us today. As we start 2026, let me anchor where we are in our company's evolution. Since I joined Dynex in 2008, the team and I have always operated and competed with a performance-first mentality and with the ethical stewardship of our shareholders' capital at the core of our decision-making. This focus has created a repeatable and sustainable performance edge, delivering industry-beating returns for our shareholders.

All sensibles, risk management first, treating liquidity and reputation as a strategic asset and a culture grounded in learning, kindness, trust to curiosity continue to differentiate us. What sets our approach apart is not the ability to predict every environment, but the discipline to adapt in many environments. Resilience is what ultimately enables Dynex shareholders to enjoy compounding over decades. Our framework gives us the confidence to lean into the right moments of opportunity and endure turbulence without being forced to retreat.

We can even advance during periods of dislocation, while others pull back. Over time, those small behavioral advantages have compounded into meaningful performance differences, creating the foundation to propel us to this phase of Dynex at the start of this decade.

Our strong start in 2020 gave us the springboard to create a resilient company at the intersection of capital markets and real estate finance. The decisions we made early this decade to intentionally raise capital in smaller amounts, gradually building our equity base, while generating top-tier returns set the foundation for today's sustained value-creating growth. Our momentum continues to rise as we methodically execute our strategy, and the results speak clearly.

Over this decade, through December 31, 2025, and Dynex shareholders experienced a 67% total return or nearly 9% annualized with dividends reinvested, outperforming the REM ETF by over 8,000 basis points or 700 basis points annually. 2025 was an outstanding year. Dynex shareholders earned a 29.4% total shareholder return, driven by both dividend income and significant share price performance, in a year marked by policy complexity, shifting rate expectations and geopolitical cross currents.

As of the end of last week, our total equity market capitalization, including our preferred shares, was $3 billion. In just 13 months, we have almost tripled the size of our company, creating resilience, strategic flexibility and scale for our shareholders. Delivering these results required and accelerated significant evolution across the company. We added depth and breadth across the team, building our legal team, with a new Chief Legal Officer and our investments team with 2 senior investment professionals.

We planned, commissioned and delivered 2 new offices in Richmond and New York City, and we have successfully made a transition to T.J. Connelly as our Chief Investment Officer. To reflect the needs of our growing strategically focused enterprise, we separated the roles of Chief Financial Officer and Chief Operating Officer. Rob Colligan, who held both titles will take on an expanded CFO function, including the building out of our corporate development capabilities. Today, we welcome Meakin Bennett as our new Chief Operating Officer, a seasoned operator with deep financial and operational expertise from Fannie Mae, Morgan Stanley and GE Capital and a U.S. Navy veteran Meakin brings leadership and discipline to strengthen our platform. She will lead the modernization of our operational backbone to enable scalable, efficient growth for the long term.

Looking ahead, we are operating our business in a rapidly changing global landscape. Human conflict remains the key factor, creating surprises that result in policy and market volatility. We have been prepared for the greater possibility of a wider range of outcomes and for some years now, we have called this a flat fat tail distribution. It has tilted our risk appetite towards liquidity and flexibility. Demographic trends in developed economies are reshaping growth, fiscal capacity and the cost of capital.

For years, low rates and central bank support masked the rising pressures. But in the end, fewer workers, savers and taxpayers make growth harder to generate and debt more expensive to carry. Policymakers face increasing temptation to use inflation or manage markets as a pressure release and this pattern is global. In such an environment, government policy can mean simultaneously increased risk and opportunity. This has been true for us since 2020. Our portfolio construction continues to reflect the reality of shifting policy across a variety of factors, including active government intervention in the housing market and monetary policy.

On the other hand, the global demand for income continues to rise, and that creates a powerful backdrop for our capital raising strategy. Investors across the world are searching for stable, repeatable cash flows, in an environment marked by demographic shifts, funding gaps and persistent volatility, platforms that can deliver high-quality income with stewardship, transparency, liquidity and disciplined risk management are increasingly scarce.

Dynex sits directly in that space and our ability to generate reliable dividends backed by a resilient portfolio naturally attracts capital that is seeking durable income. At the same time, the continued expansion of passive investing provides an additional structural tailwind. As passive vehicles grow, they are required to own larger positions in companies with scale and liquidity, raising capital at accretive levels, expands our equity base, improve trading liquidity and increases Dynex's relevance within these passive strategies.

The combination of rising global demand for income and the mechanical bid from passive capital strengthens our shareholder base, lowers our cost of capital and drive the long-term compounding that we aim to deliver. These factors support the building of Dynex for scale and strength growing the company in ways that embed resilience into the core of our model so we can navigate a wider set of outcomes and keep delivering long-term value.

We are evolving our business steadily, and we'll continue to fine-tune people, process, technology and structure to stay aligned with our strategy. The company is well positioned, and we are prepared for the next phase of our journey, grounded in our strategy, anchored by our core values and focused on long-term value creation.

I'll now turn it over to the team to detail more of how the strategy is being put to work and to share our results for the year. T.J.?

Thank you, Smriti. This decade, we have emphasized that government policy is one of the most powerful forces shaping asset returns, often more influential than traditional fundamentals alone. Government policy played a large role in driving returns last year and continued to do so in 2026. In a year that began with an unusual degree of macro uncertainty, our portfolio total economic return was 10.2% in the fourth quarter and 21.7% for 2025, the highest TER this decade.

We entered 2025 with mortgages at historically wide spreads to interest rate hedges and a high degree of policy uncertainty. This presented an excellent opportunity to raise and deploy capital at higher leverage and wider spreads, and the strength in our results reflects the effectiveness of this strategy. We raised capital methodically and consistently deployed it into assets at wider spreads, supporting compelling future dividends for our shareholders.

As we begin 2026, spreads have tightened further and policy direction in the MBS market has become far clearer. Recent actions and guidance now point toward a more stable and supportive framework for the mortgage market. creating a strong foundation for forward returns and greater confidence in the path ahead for MBS spreads. Our capital raising was led by Mike Sartori, our Head of Capital Markets, and he will give you more details.

Thanks, T.J. We pursue a distinctive strategic capital raising approach and partner closely with our brokerage counterparts to execute Dynex's disciplined strategy. In 2025, we executed our capital raising strategy with precision and intention. We raised capital accretively through the aftermarket program and worked hand-in-hand across the team to invest and hedge the capital on a real-time basis.

This approach allowed us to maintain tight alignment between stronger valuations on our stock and wide mortgage spreads. Over the course of the year, we raised and invested over $1 billion as our price-to-book valuation rose. As we move into 2026, we will continue to follow the same methodical disciplined playbook. We expect to issue when it is accretive, deploying the capital and investments, generating economic returns above our hurdle rate.

In the first few trading days of January, we raised nearly $350 million, and share count as of last Thursday, was 199.6 million. T.J. will further discuss the year ahead.

Thanks, Mike. While MBS spreads are tighter today than they were for much of last year, the overall return environment might be even better, driven by policy support for housing finance, higher liquidity and an environment with more opportunities to tactically create value. The Trump administration's recent announcement to increase the GSE retained portfolios by $200 billion marks a return to portfolio growth for Fannie Mae and Freddie Mac and provides a meaningful technical tailwind for spreads.

For Dynex, this is a positive. It supports valuations and it will likely reset the spread regime tighter, while limiting spread widening. The impact of the GSEs is unique. The backstop bid, especially focused on spreads allows a host of investors to reassess the amount of spread risk they are willing to take. We believe the impact will return us to a tighter range in spreads with limited spread widening, possibly like that seen before the financial crisis, as you will see on the left-hand side of the spread chart in our earnings presentation on Page 12.

We expect the return to this type of spread environment would enhance the risk return profile of the assets we own and provide attractive returns for our ongoing capital deployment. Even before the GSE buying announcement, we expected demand to overwhelm supply in 2026, led by bank demand of over $100 billion. While we expect the GSEs to be price-sensitive buyers and even for money managers to slowly reduce their MBS overweight as spreads tighten, the supply and demand balance in agency mortgages will likely lean towards higher net demand for many quarters.

As the GSE-retained portfolios grow, it is unclear how they will hedge. We are also mindful that in past periods of high portfolio growth, the GSEs had active hedging programs and swaps would be their most likely hedge if they chose to hedge duration. We also expect that GSE convexity hedging would impact technicals in the market for options. The administration appears clearly focused on reducing mortgage rates, and we remain focused on managing and mitigating convexity risk.

The fourth quarter prepayment environment reinforced one of the clearest lessons of the year. Security selection remains the most reliable and consistent source of alpha in agency MBS. In a market characterized by low, but uneven turnover and periodic spikes and refinancing, avoiding the most prepayment-sensitive collateral was essential for protecting carry and reducing reinvestment risk amid the periodic interest rate volatility. Prepayment dispersion is increasingly driven by micro level factors that reward granular pool work. Technology-enabled optimization at originators and servicers continues to make refinance and retention outreach more targeted and efficient.

The fourth quarter data reaffirms that generating alpha and Agency MBS is not simply about coupon exposure. It is about owning the right pools within those coupons. Our positioning reflects that lesson, avoiding prepayment-sensitive stories and emphasizing structurally more stable collateral. Relative value will also play a larger role in tactical asset allocation, not only within coupons, but within sectors. Of course, mortgage returns are driven not just by spread risk, but also interest rate volatility risk. Given the policy dynamics in today's markets, we expect and plan for periodic bouts of volatility.

Our yield curve exposure is more balanced as the greatest clarity on the policy front is for tighter mortgage spreads. As policy and economic data evolves, we will continually evaluate the curve exposures in our hedges. While longer maturity yields currently offer the potential for larger dispersion than shorter maturity yields, we are mindful that changes in Federal Reserve policy or personnel could shift even shorter maturity yields meaningfully. We strategically added options positions in 2025 to reduce the portfolio's exposure to rate volatility and expect that options will continue to be important in the coming quarters to manage risk.

While policy can evolve quickly, the Agency MBS market looks likely to be supported by a strong tailwind, and the leverage returns for earnings spread income in the best segments of this market remain compelling. Our team at Dynex has a long history of extracting equity-like returns from fixed income in this kind of market regime. We rely on the principle to prepare, not predict. We operate with a flexible mindset, resisting the kind of rigid thinking that could lead us to alter portfolios at exactly the wrong moments.

Our scenario planning gives us the confidence to hold exposures through stress and to stay open to opportunities when others are constrained. That flexibility gives us tremendous optionality and helps us avoid the behavioral traps that destroy value, which is why we've been able to deliver differentiated performance across cycles.

Now I'd like to turn the call over to Rob, who will give you more details on our outstanding quarter.

Thank you, T.J. The total economic return in the fourth quarter was 10.2%, consisting of $0.51 of common dividends and a $0.78 increase in book value per share. For the year, our book value increased $0.75, and we declared $2 of dividends per common share which are paid on a monthly basis. Comprehensive income for the quarter was $190 million and was $354 million for the year. We ended the quarter with leverage of 7.3x total equity.

Our liquidity position remained very strong with $1.4 billion in cash and unencumbered securities at the end of the quarter, representing over 55% of total equity. As mentioned earlier, we've raised $1.5 billion over the last 13 months at the most accretive levels in the company's history. Beyond the resilience and stability that a larger capital base provides, we understand that a larger, more liquid company typically earns a better valuation metric. It's important to us as stewards of your capital to keep these factors in mind as we grow. The TBA and mortgage-backed securities portfolio started the year at $9.8 billion, grew to $15.8 billion at the end of September and ended the year at $19.4 billion. We continue to add to the portfolio after year-end and currently have approximately $22 billion in TBAs and mortgages.

Pools and TBAs we've held and added this year benefited from spread tightening in the second half of the year, which accelerated into year-end and continued into 2026. Our current book value, which has been in the range of $13.85 to $14.05 per share, net of the accrued dividend is up 3% to 4% from year-end. For our year-end tax disclosure, we're estimating that we earned $229 million of taxable earnings, covering all of our preferred dividend and 93% of our common dividend, which will be treated as ordinary income.

The remaining 7% is a nondividend distribution. Our dividend tax reporting will be posted to our company's website by the end of the month. Expenses for the fourth quarter were up as our accrual for performance-related compensation increased, lining up with the strong returns delivered in 2025. Our general and administrative expenses as a percentage of capital are down materially year-over-year from 2.9% of total equity at the close of last year to 2.1% at the close of 2025. We continue to make investments in people and technology to ensure Dynex is built for the future, and our expense ratio may stay at the year-end 2025 levels until additional growth is delivered and new breakpoints and levels of scale are achieved.

With that, I'll turn the call back to Smriti for her closing comments.

Thank you, Rob. As we look ahead, we remain focused on disciplined execution and delivering durable long-term value for our shareholders. We are deeply grateful for the trust you place in us. Trust is a core value at Dynex and ultimately, the product we work to deliver every day. And as a management team invested alongside shareholders, our interests are aligned with yours, and we are committed to stewarding your capital with integrity, transparency and care.

I will now open the call to questions.

[Operator Instructions]

And we'll take our first question from Doug Harter with UBS.

Hoping you could quantify where you see incremental investment returns today and how that compares to kind of year-end and 9/30, just given the spread tightening that we've seen.

Yes, absolutely. Today, we see hedged ROEs in the mid-teens with leverage around 7x and with targeted leverage in the low 8s, we see ROEs in the mid to high teens. So as we get even more clarity on the return environment with the return of these native GSE balance sheets, there's scope for modestly higher leverage, I think, in private portfolios.

And I guess just how that compares to, say, 3 months ago, just given the spread tightening, just kind of want to make sure I understand how the dynamics changed.

Yes. The dynamic is roughly it's -- depending on the coupon between 150 and 300 basis points tighter than it was, let's say, at the end of last quarter or the prior quarter, third quarter that is.

Yes. I think the biggest difference, Doug, is that before the GSE balance sheets were announced as being active participants you did have the risk of spreads widening significantly as we saw during periods of volatility in 2022, 2023, doing the tariff tantrum last year.

And what this does, it really takes a big part of that tail risk out. So yes, returns are lower, but also the ability for spreads to widen out a whole bunch because of the return on these balance sheets has also improved what I think of as the risk return profile going forward, right? The other thing that this does is once you have these native balance sheets back in business, other investors, other than ourselves, begin to reevaluate the risk reward.

And if you don't have that big downside risk from spread widening, this starts to be a really compelling space, right? These are agency guaranteed assets, you're still earning double-digit returns. So it ends up being actually a pretty good investment environment.

If I could just push back on the risk reward. I mean, I think clearly, what you had talked about in prior past couple of calls was given the wide spreads, just how attractive the risk/reward was and clearly correct given the spread tightening you've seen. So I guess just trying to square that given the amount of return that you've kind of already generated, given the spread tightening with those comments. So just want to make sure I understand that dynamic.

Yes. I mean risk rewarded by upside as well as downside right? One of the things that's been taken out of the picture here if this policy sticks and if this ends up being a situation where GSE balance sheets are here and they're here for the duration, what that does is it limits your downside risk. So the upside risk may not be as high as it was when they weren't around. But taking away downside risk is a meaningful difference in terms of your forward return profile.

So yes, the -- in 2022 to 2025, you did have an unusual situation. I mean, we call that a generational opportunity, right? So you had a generational opportunity to generate outsized returns. And with the return of these balance sheets, what happens is that your downside is much less than it was in the last 3 years. And that's when I say risk reward, it's really the risk goes down relative to the reward.

I'll just add to that, Doug. It's all about scenario planning. We are constantly planning for a range of scenarios, especially when it comes to the risk profile of the portfolio. And since the announcement that it's very clear that this administration is deeply concerned about mortgage spreads we have to talk about it as a team and say, look, the probability of going to that wide spread again is lower than it was before. And that changes the risk-reward profile that Smriti is talking about.

[Operator Instructions]

We go next to the line of Trevor Cranston with Citizens JMP.

Can you guys talk a little bit about how you're thinking about the probability of other sort of politically-motivated actions to attempt to improve housing affordability or lower mortgage rates potentially through things like lowering the g-fees that Fannie and Freddie are charging and kind of how that plays into how are you thinking about investments right now?

Trevor, so yes, I mean I think we are -- I'll just zoom back a little bit here in the '90s and the 2000s, the GSEs were very much an instrument of managing housing in the U.S., right? Like these are entities that have been around for a long time. They've been active participants in facilitating liquidity in the housing market. And they've also been directly or indirectly asked to change the way housing gets really implemented in the U.S., right?

So you can think about affordability goes back in the '90s and 2000s, those existed back then as well, right? So the history of government intervention or wanting to influence where capital actually gets put, that's not new. This has been around for some time. And these MDs have been around and they've been made to do exactly this, right? So when you have that in the back of your mind, is it possible that the government does use these entities to implement housing policy that they believe is better for Americans in terms of lowering homeownership costs and so on, absolutely, right?

So this is not new. So will they do lowering of GPs. We've heard that being talked about. We've heard about loan level pricing adjustments being taken away. All of that is very much real and possible. And I'll let T.J. talk about sort of the impact on mortgage rates and the convexity of mortgages. But we are very much anticipating and prepared for this type of intervention to happen. And what you want to do as an investor is prepare for the impacts of any and all of these potential levers that could be pulled.

So T.J. why don't you talk about just convexity impact and the mortgage rate.

Yes. And I'll just give you a quick sense of the day-to-day, Trevor. Byron and Smriti work -- and I work very closely with our partners in Washington folks at the Mortgage Bankers Association, for instance, hearing about these potential proposals that could impact the prepayment profile of the mortgages that we own and how we bid ongoing mortgages for the portfolio as we reinvest. And the day to day is that we're hearing about these things, and then we come back model them in our prepayment models, think about how the prepayment, both the turnover component and the prepayment component, refinance component that is will impact the prepays in our portfolio and what we'll do to the broader mortgage market. And we're taking that feedback, back to folks like the Mortgage Bankers Association, who are talking with the FHFA and places like that.

So it's very much a reflective relationship, and we're constantly modeling out how it might impact the mortgage market. To date, I think most of the -- it certainly impacts how we think about the most prepaid-sensitive mortgages that are out there. It continues to create more marginal demand and result in model valuing a lot of the prepayment protection that we already own, even higher than it did before.

So I would just -- as I look at the proposals, it's increasingly hard to find the kind of prepay-protected portfolio that you get with our portfolio.

Yes. I think the bottom line is there is going to be more negative convexity. And there's also the possibility that other instruments. Back in the day, we used to have prepayment-protected mortgages. Those are being talked about. We could see the ARM market come back in favor, especially in a steep deal curve environment. So we said this in the call, basically like government policy can create both risk and opportunity at the same time. And this is what we're ready to be investing in.

Yes. Okay. That's very helpful. And then can you give an update on kind of where you've deployed the capital raised in January sort of within the coupon stack and where you guys are finding the best value, post the movement that's happened since the GSE buying was announced?

We're finding that the belly of the coupon stack, primarily 5 has been the most interesting. But I will say it's been a very dynamic market, much more -- I've talked for a long time about the breadth of coupons in which we can invest. And we're finding pockets of opportunities on the specified pool side across coupon stacking and coupons that, frankly, we hadn't traded in several quarters.

So it's really across the board. If I had to point to a single coupon, I'd say it's 5.5 to some extent. But again, seeing opportunities across the stack for coupons that offer durable call protection on the specified pool side.

We go next to the line of Jason Weaver with JonesTrading.

Congrats on capping off a very solid 2025. I want to start with, effectively, you've grown the company by a huge leap, like you said in your prepared comments over the course of the last 13 months. What's your thinking today around the appropriate size of the portfolio in context with what the current opportunity set is out there.

As far as the opportunity set, I'll start there and Smriti can talk more about just the benefits of scale as a company. When I think about the opportunities that it's growing dramatically for us in terms of -- like I just said to Trevor's question, the market dynamics are such that there's more and more opportunities across the coupon stack. This team has operated -- we have a team that's actually -- many of us were actually at the agencies in the 1990s. We've operated in this environment for a long time. But it's pretty exciting, the amount of alpha that we can produce beyond just a classic spread trade, which is still compelling.

The amount of alpha that's available is significant. So when I think of this portfolio relative to the size of the market, we can be significantly bigger and still have tremendous opportunities to generate alpha. But I'll let Smriti talk to some of the benefits of the scale as well.

Yes. I mean one of the things that we've been able to do is go lean on the back of our performance track record, which came without the benefit of scale. And now investors are getting the larger equity base as something that's a real benefit coming straight down to the bottom line. I still think there's a lot of sense for the company to keep growing. In terms of resilience, in terms of being able to withstand the types of scenarios that we think are coming up in the future. It makes a lot of sense for us to keep growing.

The investment environment, again, it shifts all the time. we might be moving from what we think of as like a beta environment where it was just -- I'm not going to say easy, but you could own mortgages and spreads tighten, then you'd win. Now we're getting in an environment where, yes, you have tighter mortgage spreads. You have to be clever in your portfolio management skills to earn that return.

And having said that, look, our dividend yields are down, right? Like a year ago, you were being have to generate 17% return by the market, and we're down to close to 14%. So that also helps in this situation.

Got it. And then just one more maybe for Rob. We saw the G&A run rate bumped up in the fourth quarter. I'm assuming that has to do with incentive comp. What should we think about the forward run rate here?

Yes, good question. Thanks. You're exactly right. Good performance sometimes leads to increased incentive compensation accruals. And that's exactly what happened in the fourth quarter. As I mentioned in the prepared comments, we are building scale. So we're thinking of our expenses in the 2% of capital range for now. And obviously, as we go through the quarters, we'll give you some updates. We do plan on hiring some additional people, adding to the team and the timing of those hires could impact the run rate.

But that's what we're thinking at the current moment. And then as we grow, I do think we'll have opportunities to hit other layers or levels of scale and reduce a little bit further, but we're not thinking about that immediately in 2026.

Our next question comes from the line of Bose George with KBW.

Just going back to the earlier discussion with Doug on returns. In terms of returns going forward, do you see room for more upside from spread tightening? Or is it really more of a stable dividend, just given the volatility is -- should be more muted going forward?

Yes. I think that when we talk about the spread regime, I'd point you to Page 12, Bose. I think there's a really good case to be made that you can return to a tighter spread regime, much more like we saw throughout the late '90s and into the early 2000s. And it's not just because of the GSEs. It's really -- or they're buying that is, it's really about the backstop and the support from the government that you're potentially getting allows all investors to take more risk. So yes, I think there's -- on a stand-alone basis, the ROEs are compelling. The yield profile that we can garner from this portfolio remains compelling, and there's the potential for significant spread tightening back to that kind of regime.

And then just a follow-up on the GSEs. What do you think happens once the GSEs get closer to that $200 billion cap, do you think it gets extended? Or how do you see their longer-term role in the market?

It certainly seems to be -- I've never seen before tweets from someone like -- or a report from someone like the FHFA or anything like that in history that focused on mortgage spreads, not just mortgage rates but on mortgage spreads. That is a very different thing. And to me, indicates that we are in a unique environment. So to your question, it's hard for me to see how $200 billion is necessarily the cap. I think it could be significantly more. And we know that it can be changed quite easily by the FHFA and/or treasury pretty quickly.

We'll move next to Jason Stewart with Compass Point.

One more follow-up on levered returns. T.J., just so I'm clear, the mid-teens and high teens at 7 and 8x. That's a carry return. It doesn't incorporate this new spread regime moving tighter, correct? And then just a follow-up on that, if you could address when you're thinking about that context of ROEs, how are you thinking about hedging that book?

Great. Yes. To answer your question, yes, that is a carry ROE. It assumes no additional spread tightening. That's absolutely correct. Those numbers that I quoted. And then the second part of your question was thinking about the hedge book. 2 things. One, on the composition of the hedge book, swaps offer a significant amount of carry relative to treasuries by hedging and swaps that is, relative to treasuries.

So 2/3, 1/3 has been our mix roughly for quite some time. I expect. That will be the case to maybe be slightly biased more towards swaps at points, potentially in the 60% to 80% of range as a percent of our total hedge book on the interest rate swap side of things. Interest rate swaps do tend to be a very natural hedge for the portfolio. And when the environment we've talked in the past about the macro factors that impact swaps relative to treasuries. And I think those factors remain supportive of us hedging with interest rate swaps.

In terms of curve positioning, I'll note that our curve position is you'll see it in our scenario analysis, the risk profile slides that are in the deck much closer to home in terms of a little bit less of a steepening bias, Longer term, I do expect we will have a steepening bias in the portfolio. But as the yield curve has kind of found a new equilibrium around these levels, we've found it prudent to allow the portfolio to be more balanced.

Jason, can I just add something just because it seems like there's just a shock value component of this in terms of how much spreads have tightened in the last year, or over the last 2 or 3 years. One of the things I just want to remind everyone is that the environment that we just are coming from that we've just come from is the unusual environment. To see agency MBS spreads at those levels, 150, 160, 180 over treasuries. I mean those are unusual environments. And we have gone out and raise capital and put capital to work. And as I said, we call this a generational opportunity, right?

What we're coming back to is really how things have been for most of the time in the housing finance system. What we're coming back to is a more normal "normal world" where you have some type of native balance sheet that's owning these mortgage assets, acting as a buffer, right? Spreads are now in a much more "normalized" range. And you have the opportunity to earn returns not just from owning MBS versus a hedge, but you have opportunities from relative value.

You can do curve positioning and this idea -- so this is more normal, and we're coming from an unusual environment, okay? So that's a perspective, I think it's -- the unusual environment is "over". But we are just coming back to what we see as a very normalized environment. For the GSEs, a lot of people on this team were there when they were public. We understand and know this structure. To your question about what happens when the $200 million runs out, they can issue debt. They can do lots of things to grow the size of their balance sheet. We know very well how that process works. So for us to be -- to make money in that environment is actually -- there are opportunities for us to do that. So that's something I don't want people to miss out on is that we're just coming back from an unusual period to what is a more normal period.

Good color. I just had one other question. You mentioned corporate development capabilities in your prepared remarks. And I was just wondering if you could elaborate on that and whether that had anything to do with potential policy changes? Or maybe you could just take one more step on that comment.

Absolutely. Yes. Look, I think a big part of delivering scale to shareholders and strategic flexibility to shareholders, we have to have the capability to evaluate all types of opportunities. Dynex has been a company that, over time, we've delivered to shareholders a lot of different clever diversified strategies through the history of the company. And our job is to always have the ability to evaluate those options so that if such options exist and they should be exercised, we're ready to do that, right?

So that is -- that's a big part of thinking more strategically about the balance sheet, about the investment opportunities that we have versus others that come up. All of that is in the spirit of creating options for our shareholders, which I believe is one of the jobs that I have.

[Operator Instructions]

We turn to Eric Hagen with BTIG.

So this emphasis on lower interest rates and lower mortgage rates is very real. I mean do you think this pressure on the Fed to cut rates is good and supportive of the market right now? Do you think it will be effective? And do you think it eventually just creates maybe a situation where there's just more interest rate volatility and the volatility is more one directional anyway?

Sure, Eric. So one of the things we've been ready for, for some time is this idea that there's more and more government intervention in the market, right? And in my prepared remarks, I talked about when you have fewer savers, fewer taxpayers, it's harder to carry the amount of debt that we have in the U.S. and other places in the world. Debt to GDP, et cetera, et cetera.

So it's much -- it's not unusual in these types of situations for their IIb explicit efforts to influence monetary policy and other policy, including what mortgage rates are going to be. So that's not unusual for us. And that's what we've been expecting and that's what we planned for, right? Now how it actually comes to pass in terms of whether it's through personnel changes or whatever else that the actual rate gets pegged or lowered or whatever that is, I don't know.

I mean we can't predict that. But we are prepared for this idea that front-end rates could be influenced by something other than just fundamentals, right? And you guys have heard us talk about this, this idea of fundamentals, technicals, psychology. And now we talk about fundamentals, technicals, psychology and policy. And a lot of times, fundamentals and policy could be divergent. And when you're sitting in that environment, you have to really be ready for a lot of different things.

So just from the perspective of can it happen, we believe there's a high probability of that happening, and we are preparing for that. Will it happen? How it happens? Very hard to tell. And there are benefits, obviously, to the Agency MBS market to the extent that front-end rates are lower, I mean, that makes them more attractive to hold. But that's really not -- we're not counting on that happening for any of our strategies to work out.

I'll let T.J. talk about the mortgage piece because these guys have been really focused on how just having the mortgage rate move independently of other rates, that really creates an interesting dynamic in the portfolio, and these guys have been working on mitigating that risk for some time now.

Sure. Absolutely. Yes. As Smriti mentioned, we have 4 arrows in our analytics quiver: Policy; fundamentals; technicals and psychology. Those are the 4 lenses through which we look at the market. And as we look at each component of the yield curve, we're thinking a lot about, okay, the mortgage rate in isolation, the Fed funds policy rate, SOFR rates in isolation, those sorts of things. So as we isolate those and think about the volatility profile for each component of the yield curve as well as every coupon of the mortgage coupon stack, policy could impact any one of those components. So it's something we spend a lot of time thinking about in terms of our hedge book and the volatility profile of the portfolio.

One of the other pieces here, Eric, is that we've been in an environment where the market sometimes don't know how to price a lot of this uncertainty. And so it's a very -- it ends up looking calm, right? And then when there is some kind of announcement, you have about a volatility right? So it's a very different type of strategy. During the moments of calm, you're able to earn the OAS. You're able to earn sort of like the carry from shorting options. During the moments of volatility, you'd better have enough liquidity, right, to be able to manage yourself through that scenario. So that is another way to think about it.

Sorry, I was going to ask one more just really quickly here. I mean the move for your book value up 4% since year-end, I mean that's a good move, but maybe we expected it to be up a little bit more. I mean has your leverage been stable? And maybe just like the immediate reaction on the back of that 20 or 30 basis points of spread tightening on the back of the announcement. Like how was that -- how did that unfold for you guys?

Yes. Obviously, on an immediate reaction, when book value increases, leverage goes down mathematically, and I mentioned the 7% to 8% kind of range when I discuss the ROEs, and that's generally where we expect this portfolio will land for the better part of the next several quarters as the opportunities arise, we take it up and down from there. So our -- we feel very comfortable that we can earn the kind of spreads that we are seeking to earn and that our shareholders are expecting to support the dividend with these ROEs that leverage between 7% and 8%.

At this time, we have no further signals. I'd like to turn the floor back to our speakers for any additional or closing remarks.

Thank you. Thanks, everyone, for joining us today, and we look forward to updating you on our First Quarter Results in April.

This concludes today's conference. We thank you for your participation. You may disconnect at this time.

Hello, and thank you for standing by. My name is Lacey, and I will be your conference operator today. At this time, I would like to welcome everyone to the Dynex Capital Inc. Third Quarter Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to Alison Griffin, VP of Investor Relations. You may begin.

Thank you, and good morning. The press release associated with today's call was issued and filed with the SEC this morning, October 20, 2025. You may view the press release on the website, dynexcapital.com, as well as on the SEC's website at sec.gov.

Before we begin, we wish to remind you that this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words believe, expect, forecast, anticipate, estimate, project, plan and similar expressions identify forward-looking statements that are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. The company's actual results and timing of certain events could differ considerably from those projected and/or contemplated by those forward-looking statements as a result of unforeseen external factors or risks.

For additional information on these factors or risks, please refer to our disclosures filed with the SEC, which may be found on the Dynex website under Investor as well as on the SEC's website. This conference call is being broadcast live over the Internet with a streaming slide presentation, which can be found through the webcast link on the website. The slide presentation may also be referenced under quarterly reports on the Investor Center page.

Joining me on the call today are Byron Boston, Chairman and Co-Chief Executive Officer; Smriti Popenoe, Co-Chief Executive Officer and President; Rob Colligan, Chief Financial Officer and Chief Operating Officer; and T.J. Connelly, Chief Investment Officer.

I now have the pleasure of turning the call over to Smriti.

Thank you, Alison. Good morning, everyone, and thank you for joining us today. We continue to execute our strategy to build a resilient company at the intersection of capital markets and housing finance. We believe in the long-term shareholder value creation potential of our differentiated platform, investing in residential and commercial mortgage-backed securities managed with Dynex's through-the-cycle mindset, risk discipline, liquidity and capital management expertise. Our offering is unique, and our strategy continues to generate strong returns.

Year-to-date shareholder returns were 20% as of last Friday's close, 23% over the last year. In the last 3 years, our shareholders have seen returns of nearly 72% with dividends reinvested in Dynex. Our total economic return of 10.3% for the quarter and 11.5% year-to-date reflect the disciplined management of the generational opportunity in Agency RMBS we have been talking about since 2022. Keeping book value stable, we have paid out a substantial dividend.

Agency RMBS spreads continue to offer returns to support our growth and investment strategy. The strong investment environment fueled capital raising, and we crossed another milestone, our common equity market cap is now above $1.8 billion as we continue to broaden the scope of individuals who trust us with their savings and institutions who trust us with their capital.

The operating environment remains highly complex. The global economy is vulnerable to persistent inflation as geopolitics shape investment at the national level. In the U.S., we are still parsing through tariff-related price shocks, a labor market slowdown and a government shutdown. Risk assets, especially equities, have shrugged off most of these concerns. We are watching for quick shifts in market sentiment as trends in the fundamental economy become more clear. The Federal Reserve appears committed to bringing rates down to more neutral levels and even so the uncertainty in the rate path is significant. T.J. will go into more detail during his comments.

Our principles of holding liquidity and investing in liquid assets are highly appropriate for this environment. I'll say a word about private credit markets. At Dynex, we have always taken the view that total system risk is like a balloon. You squeeze it on one end, and it shows up somewhere else. The private credit market is a reflection of this. The U.S. economy is highly financialized and operates on a great deal of leverage being available. In the private credit sector, much of that leverage is hidden in funds that do not mark to market like Dynex. Sometimes it's not even possible to get a mark or sell those assets. Even as cracks in this market develops, we are prepared for surprises that could prove much more persistent than they have at similar points in other cycles in history.

As I've emphasized, our growth is deliberate, it's anchored and strategy, opportunistic investing and focused value creation. The team is operating with preparedness, discipline and tactical agility, our results are a direct outcome of that approach. I remain focused on strengthening our market position and expanding our ability to capture future opportunities.

Rob and T.J. will now give you further details on the quarter and the outlook. I'll turn it over to Rob.

Thank you, Smriti. Good morning, and welcome to everyone joining us today. To start, our net interest income continues to trend upward as we add new investments with attractive yields to our portfolio and in the current market, swaps add to the carry value of our investments.

It's important to note that this quarter's net interest income does not include the impact of the FOMC rate cut in September, and we expect the rate cut will add a tailwind to net interest margin in the fourth quarter.

Second, we have been discussing a raise-and-deploy strategy all year. Pools and TBAs we've held and added this year have greatly benefited from the spread tightening experienced in the third quarter. We had over $130 million of gains on our portfolio in the third quarter alone. T.J. will go into more detail on our portfolio during his comments.

Third, this year, we've raised new capital, $254 million in the quarter and $776 million year-to-date. Our stock has performed well, allowing us to continue to raise capital at a premium to book value, which is accretive to our shareholders.

Growing our capital base is an important part of our long-term strategy to build a strong and resilient company, structured to deliver compelling returns for shareholders over all economic cycles. Our portfolio is larger, 10% larger since the end of the second quarter, and has grown over 50% larger since the beginning of the year. While our portfolio has grown, we continue to focus on disciplined risk management and liquidity to weather future volatility. Our liquidity at quarter end was over $1 billion and was over 50% of total equity.

Lastly, we are opening up an office in New York City. This new location will allow us to attract important talent in trading and portfolio management positions as well as being physically closer to many of our business partners for an important part of our current and future success. We look forward to being in New York while maintaining Glen Allen, Virginia as the company's headquarters. Both locations will be strategically important to us as we build a solid foundation for the future of Dynex Capital.

With that, I'll turn the call over to T.J. for his comments.

Thank you, Rob. Entering the quarter, Agency mortgages offered wide spreads to treasuries and interest rate swaps. We maintained one of our highest exposure levels in recent years to capitalize on these high-quality yields. Implied volatility started to decline early in the quarter as markets got more comfortable with the policy outlook. Nominal spreads remain wide though, and we continue to raise and deploy more capital.

As Rob noted, we raised $254 million in new common equity capital in the third quarter, bringing the year-to-date new capital growth to $776 million. We've raised and deployed capital at levels well above the average share price and price-to-book ratios during the quarter.

As I noted last quarter, we carried a deliberate bias towards lower coupons, which we believe are poised to outperform, especially when mortgage rates declined even just modestly. By mid-September, mortgage rates hit the lowest levels of the last year. The Agency current coupon yield declined from nearly 5.75% to nearly 5%. That was enough to generate a sharp increase in the refinance index as many high-quality borrowers briefly saw 6.25% or lower [ note ] point 30-year fixed rate mortgages, and mortgage bankers started to issue adjustable rate mortgages with even lower note rates.

We've discussed in previous calls that prepayment speeds could be very responsive given the technological investments many mortgage bankers had made. And indeed, the latest report may only mark the beginning of this trend. Security selection in the specified pool market remains a source of potential alpha and the dislocations created by this latest prepay wave are proving to offer opportunities for us. September's prepayment report, released just over a week ago, showed fast prepayments for higher-coupon mortgages. And we expect that most of the increase in speeds won't be seen until the October report due in early November.

Of course, with faster prepayments comes an acceleration in gross supply as borrowers take out new lower-loan-rate mortgages. Markets ultimately clear based on net supply of new mortgage production, which we expect to remain muted with the housing market flow for at least the next few quarters. But gross supply matters in the short term, as investors react differently with respect to the timing of prepayments. Moreover, prepayments shift the composition of the market across coupons.

Late in the quarter, as refis increased, we saw more supply in coupons like 4.5% and 5%. And with many segments of 5.5% and even 6% pools notably cheaper, we had a slight bias to move back up in coupon to take advantage of the dislocation.

Longer term, we expect there will be growing opportunities across the mortgage market as the policy environment evolves. While specific policies are likely still to be developed, the regulatory tone from Washington is towards policy that supports housing and a liquid market for mortgages, both residential and commercial.

Longer term, the supply outlook for Agency RMBS could evolve more favorably. The volume of loans that are guaranteed by Fannie Mae or Freddie Mac has fallen slightly in 2025. Production of Ginnie Mae and non-QM MBS backed by loans ineligible for Agency MBS securitization have grown relative to that of Fannie and Freddie. And while policy directives from the Federal Housing Finance Agency have been fluid, the initial policy shifts under the current administration tilted towards reducing the GSE footprint with actions like the elimination of special credit programs.

Overall, the longer-term outlook favors tighter agency mortgage spreads, and the potential for developing opportunities outside of Agency RMBS looks increasingly interesting. For now, credit spreads remain tight, while Agency spreads remain notably wide relative to their own history and most credit products. We are watching for more potential cracks in consumer credit. Auto loan delinquencies, for instance, are starting to creep higher. And with labor markets showing hints of weakness, we are watching the consumer closely.

We observed that most private and public credit markets offer very little, if any, margin of safety for weaker credit performance. That makes Agency paper look very attractive for many traditional fixed income investors and new investors that may realize the value in liquid assets after carrying too much exposure to private credit. Agency securities continue to offer strong risk-adjusted returns. As investors realize the potential returns in Agency RMBS, we expect that spreads will compress.

We also increased our exposure to Agency CMBS, modestly in the last quarter as that sector lagged the performance of RMBS. Over time, we expect to increase our exposure to Agency CMBS relative to RMBS as RMBS spreads tighten.

Today's portfolio remains extremely attractive. Our shareholders gain exposure to a cheap asset class and a unique platform in which to leverage these assets.

Thank you for your focus on our work. I will now turn the call over to Byron Boston.

Thank you, T.J., and good morning to all. I want to make just one very important point. As significant shareholders, the executive team stays focused on durable shareholder-first decisions. Dependable yield is front and center, and Dynex's disciplined approach supports a competitive dividend.

And on that note, I'm going to turn it back over to Smriti for final comments.

Thanks, Byron. As the quarter came to a close, Rob and I increased our personal investments in the company, strengthening our alignment with shareholders through the purchase of additional shares. I'm genuinely excited about what the future holds for Dynex and look forward to updating you all again on our progress in January.

That ends our prepared remarks, and I'll turn it over to the operator to build the Q&A pipeline.

[Operator Instructions] Your first question comes from the line of Bose George.

Actually, first question, I just wanted to ask about where you see incremental spreads and current ROEs? And how that compares to the ROE that's implied in your current dividend?

Bose, it's T.J. The ROEs in Agency RMBS remain in the high teens, net of hedging costs. And really, you can get to growth in the mid-20s on a large percentage of the coupon stack.

And that -- in terms of leverage, does that kind of imply your current leverage? Or yes, is that kind of the implied leverage in that number?

Yes. At the current levels, it would be right around the mid-teens -- mid- to high-teens numbers.

Okay. Great. And then can we get an update on book value quarter-to-date?

Yes. Estimated $12.71, net of the dividend accrual as of Friday's close.

Your next question comes from the line of Doug Harter with UBS.

T.J., in your prepared remarks, you talked about still seeing mortgage spreads as wide relative to their history. I guess when we look at it, spreads are kind of closer to or slightly tighter than their long-run average. So just hoping you could kind of flesh out that comment and kind of what measure you're looking at to come to that conclusion?

Yes. The spread -- if you look at them just versus certain components of the treasury curve, I could certainly see what you're talking about there, Bose. However -- sorry, Doug. I'd say, versus interest rate swaps, though, if you look at them versus interest rate swaps, mortgage spreads are still in that top quartile of the widest levels we've seen over the long term.

Got it. And then I guess just on that, how are you thinking about swap spreads here? What could be any catalyst to get them to change and risk of kind of moving against you?

Yes. We continue to see the federal deficit as a major factor. We've talked a lot about that in the past. Certainly, as treasury supply increases relative to expectations, and that's an important construct that we think about it relative to expectations, which are obviously very high for treasury supply at this point. To the extent that you were to outperform those expectations, you were to see treasury supply come in more than expected, then spreads could certainly go more negative.

It's important to note, though, that at today's spread levels, you have a nice buffer there, right? So we can withstand some more negative swap spreads and still earn that carry over time. And that's really the beauty of this model with permanent capital and holding the kind of liquidity that we do that we're able to hold on to these positions and ultimately capture that spread is -- I think it's really the best vehicle in which to do that.

Your next question comes from the line of Trevor Cranston with JMP Securities.

You guys talked a little bit about the supply side of the equation for Agencies over the next year or so. Can you talk a little bit about what you're seeing on the demand side of things? And in particular, I'm curious, it looks like the GSEs grew their balance sheets or retained portfolios a bit in the third quarter. I'm curious what you think about the potential for the GSEs as a player on the demand side of things going forward?

Yes. Absolutely, that is a source of potential marginal demand that we have not seen in a long time. Their monthly reports show that things have been kind of status quo for the last, let's say, well, several years.

I think GSE holdings of Agency MBS could certainly increase. So far, their activity looks much like it has for the last several years, but they have the capacity to add as much as $450 billion under the current stock purchase agreements with treasury, and they only hold about $194 billion. So it's a massive amount of potential. I see it as -- I don't think it's a very high probability, we see them use all of that capacity, but it's certainly one of the levers that this administration can pull to impact housing markets.

Got it. Okay. And then on the...

Your other point -- I'm sorry, I didn't get to all of your -- I just focused on the GSEs there. I'll just touch on the supply-and-demand outlook broadly, on the demand side, in particular, from the other major institutions. Bank deposit growth should continue to support demand. We're continuing to see solid deposit growth. The banks have been relatively quiet since the first quarter. I suspect that they'll be back in a reasonably big way, especially in the first quarter of 2026. Institutional investors, foreign governments, I continue to see them as net sellers of a small amount of mortgages.

And then domestic bond funds and annuities have continued to see very strong performance. Last week, it was actually one of the strongest weeks of inflows that we've seen in domestic bond funds in some time. So those are solid marginal source of demand.

And lastly, the mortgage REIT community. We continue to be a preferred method at least of some of the top mortgage REITs out there. I think we are the preferred manager of mortgages on a levered basis in the marketplace, and we are a marginal source of demand, too.

So overall, I think there's plenty of moving parts. It's created some nice opportunities for us on the demand front as the sort different sources of demand just kind of ebb and flow and create a little bit more volatility in spreads.

Yes. Okay. That's helpful. And on the hedging side of things, with the implied volatility coming down, it looks like your option position increased a little bit this quarter. But is there any real sort of impact on how you guys are thinking about the hedging strategy overall with the lower volatility priced in right now?

Yes. When vol is lower, that is what we spend a lot of time thinking about where should we look to repurchase some of the options that were inherently short in a levered mortgage position. And there are pockets of cheap volatility, we continue to look at those, and you can see the positions that we've added modestly in the third quarter. So I think it's -- that remains a deep and liquid market. It's a great way for us to continue to stabilize the duration of our portfolio.

I think also I'd add there, Trevor, just the macro thought process, looking at what the distribution of outcomes could be and the market seems to be cutting some tails out of the process. And when that type of opportunity exists, we really think long and hard about protecting our shareholders in these outsized tail events. And when that protection looks cheap, we tend to jump in and make those types of decisions.

Your next question comes from the line of Eric Hagen with BTIG.

Just following up on this volatility market kind of theme. I mean, why do you think the market has shrugged off all these themes, which would maybe ordinarily kind of drive more volatility, especially over these last few weeks? I mean, does that change the way that you think about the range for MBS spreads more holistically right now?

So at a big picture, I think there have been events that have narrowed sort of the market's opinion of what the outcomes could be, right? So there's more certainty, and even the passage of time gives us more certainty. So policy-wise, we're sitting here with the Fed looking like they're firmly committed to some level of eases over the next two to three meetings. You've also seen a lot of policy outcomes from the administration, becoming more clear, right? So I think the market has reacted to that.

But one of the things that does happen is there's a short-term focus for the markets. And in our long-term way of thinking and just recognizing everything that we talk about in the global environment, demographics, migration, geopolitics, all of that, that doesn't take away the probability for tail events, right? There's also like massive amounts of liquidity still available in the markets that are driving asset flows that are affecting options prices, right?

So as we look at the fundamentals, the technicals, the psychology, we're evaluating the whole picture, we like the idea of buying out-of-the-money protection here because there's some -- the environment isn't as calm as it looks. That's kind of our opinion. So that's the thought process.

I mean, the market has shrugged off a lot. I think there's one particular sector in the market that's driving a lot of the thought process, and that's the advent of AI. But the rest of the economy still exists. They're still vulnerable to shocks. And that part -- that is really what we -- how we think about.

And as you know, the big money in this sector gets lost or made during periods of extreme volatility, and so we have to think about those scenarios. And even if they're a low probability, we have to be ready. And we think about when protection is cheap, we're doing that thought process.

T.J., did you have anything else to add on that?

No, I think that's -- the critical part there is that you're constantly preparing for the unexpected when you run this kind of portfolio. That is what we do. In some ways, I don't know the answer to your question, why has the market shrugged things off. We're preparing for the day when the markets start to react in a big way.

And you're seeing some little things that are pointing in that direction, right? Like you're seeing a few things that aren't going potentially as well. So these are just indicators of the vulnerability. Yes.

Totally. Always appreciate your thoughtful responses. You guys noted the expectation for faster speeds. And so as you guys do reinvest that, do you feel like there's opportunities to pick up alpha like within the coupon stack? Or are you pretty much driven into the current coupon in order to support your return on capital? Or is there really like more flexibility to pick spots?

Great question. I think, that has been something we've identified as a potential source of alpha for several quarters now, not just taking what the current coupon gives you, not acting like the largest index kind of player. And we had that deliberate lower coupon bias, and that was very, very strategic and intentional for the last several quarters. I think it's really starting to pay off.

So yes, you're right. As we reinvest some of the paydowns on the book, the opportunities across the capital -- across the coupon stack are tremendous. And that's the great part about our size. We are at a great scale and can continue to grow while not being so large that we can't move outside the current coupon and remain very nimble.

[Operator Instructions] At this time, there are no further questions. I would like to turn the call over to Smriti Popenoe, Co-CEO and President, for closing remarks.

Thank you, operator, and thank you, everyone, for your time and attention. I look forward to updating you all again in January. We'll now close the call.

This concludes today's call. You may disconnect.

Thank you for standing by. My name is Carla, and I will be your conference operator today. At this time, I would like to welcome everyone to the Dynex Capital, Inc. Second Quarter Earnings Conference Call. [Operator Instructions]

I would now like to turn the call over to Alison Griffin, Vice President, Investor Relations. You may begin.

Good morning. The press release associated with today's call was issued and filed with the SEC this morning, July 21, 2025. You may view the press release on the homepage of the Dynex website at dynexcapital.com as well as on the SEC's website at sec.gov.

Before we begin, we wish to remind you that this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words believe, expect, forecast, anticipate, estimate, project, plan and similar expressions identify forward-looking statements that are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. The company's actual results and timing of certain events could differ considerably from those projected and/or contemplated by those forward-looking statements as a result of unforeseen external factors or risks.

For additional information on these factors or risks, please refer to our disclosures filed with the SEC, which may be found on the Dynex website under Investor as well as on the SEC's website. This conference call is being broadcast live over the Internet with a streaming slide presentation, which can be found through the webcast link on the website. The slide presentation may also be referenced under quarterly reports on the Investor center page.

Joining me on the call today are Byron Boston, Chairman and Co-Chief Executive Officer; Smriti Popenoe, Co-Chief Executive Officer and President; Rob Colligan, Chief Financial Officer and Chief Operating Officer; and T.J. Connelly, Chief Investment Officer.

I will now turn the call over to Smriti.

Thank you Alison, and good morning, everyone. I'd like to recognize and congratulate my colleagues, Bob Nelson, Chief Risk Officer of Dynex; Wayne Brockwell, our Senior Vice President of Asset Liability Management and Richmond Office Executive; Alison Griffin, our Head of Investor Relations; Mark Werner, our Head of Financing; and Jeff Childress, our Chief Accounting Officer, for each completing over 20 years of service at Dynex. Their careers have evolved with the company and their contributions continue to be a significant factor in our success. I'm also pleased to announce the appointment of Michael Angelo as our Chief Legal Officer and Corporate Secretary. Michael brings a great attitude, outstanding credentials and highly relevant experience from a variety of financial institutions, and I look forward to working with him closely in his new role.

Last quarter saw tremendous market volatility and yet our investment opportunity set for solid long-term total return generation remains largely intact. We are growing our company in a highly dynamic macroeconomic and business environment. The breadth and scale of change domestically and globally across a comprehensive set of factors is enormous. Demographics are evolving to play a major role in politics and policy. Human conflict is escalating and rapidly reshaping the world over the last 50 years. The government policies we have relied on as a backdrop to decision-making are facing fundamental and foundational shift. Technology is now poised to be a major factor in the transformation of daily life, impacting economies and societies at a global scale. As we navigate this as long-term investors, the most important aspect of our process is our mindset, our approach to the environment. We are focused on keeping that clear, protecting shareholder value and taking advantage of what opportunities present themselves. We continue to execute our strategy of raising capital, deploying it into a historically cheap and liquid investment opportunity and managing our portfolio carefully through any volatile period. I'm excited about the accelerating growth of the company and are delivering a meaningful operating leverage.

This quarter, Dynex crossed another milestone. Our market capitalization as of June 30 is over $1.5 billion, representing nearly 50% growth since June 2024. The discipline, experience and expertise of the team was on full display in April and will continue to be a differentiator for Dynex in the future.

Rob and T.J. will now give you further details on the quarter and the outlook. I'll turn it over to Rob.

Thank you, Smriti. We have several highlights to share for the quarter. First, our net interest income continues to trend upwards as we add new investments with attractive yields to our portfolio and swaps continue to contribute to our economic net interest income. .

With the steepening of the yield curve, the Agency RMBS market is currently offering positive carry, which doesn't require any action from the Fed or other market moves to deliver the levered yield to support our dividend. Mortgage spreads remain wide and negative swap spreads adds to the long-term returns of the portfolio. And the reduction in financing costs later this year or in 2026 would be an additional boost to an already strong return. Second, this year, we've raised $560 million of new capital. Our stock has performed well, allowing us to continue raising capital at a premium to book value which is accretive to shareholders. We raised capital above book, positioning us to grow and deploy capital into an attractive market. T.J. will cover the fundamentals and technicals of the portfolio in his comments.

Third, our portfolio is 25% larger since the end of the first quarter and stands at $14 billion compared to $11 billion at the end of the first quarter and is over 50% larger than this time last year. While our portfolio has grown, we continue to focus on disciplined risk management and maintaining ample levels of liquidity to weather future volatility. Our liquidity at quarter end was $891 million or 55% of total equity. Finally, in keeping with our long-term strategy to build a world-class operating platform, we have brought several functions in-house to help us achieve scale build and retain valuable institutional knowledge and strengthen our organizational resilience. In the last year, we added key human capital to our legal IT operations and accounting teams. These human assets are positioned to help us better manage our existing business partnerships while leveraging new technology tools from our partners as well as our own internal developments in infrastructure, applications artificial intelligence and machine learning. The changes we are making in people and technology will keep us ahead of the curve and prepare us for a fast-changing financial and technological environment.

I'll now turn it over to T.J.

Thank you, Rob. This was an important quarter for demonstrating the strength of our strategy and the structural advantages of our platform and one in which our team executed with discipline clarity and conviction. The second quarter began with unusual volatility, especially in April across mortgages, treasuries and the swap market. The market struggled with liquidity. We saw unpredictable price action and dislocation not seen since early 2020. While the broader market contended with volatility and uncertainty, we remain focused and fully engaged. In many respects, this quarter validated the value of our proactive positioning, liquidity discipline and long-term orientation. We took advantage of the significant value created by widespread and market uncertainty, we executed on our strategic plan.

We grew the investment portfolio by over $3 billion in the quarter. As Rob mentioned, we raised capital methodically above book value, we deployed that capital in Agency MBS in a measured and strategic way. Moreover, as the policy environment became more supportive, we strategically increased our leverage from 7.4x last quarter to 8.3x in the second quarter. Our ability to be proactive with portfolio growth and leverage was directly supported by our strong cash liquidity and the continued health of the mortgage repo market. When volatility spikes, we benefit from a steady stream of insights from our trusted financing partners. That helps us stay agile and well informed. Throughout the second quarter, mortgage repo markets remain stable in both pricing and availability. Spreads do over consistently held in the 15 to 20 basis point range, similar to what we saw in the first quarter with ample capacity across term structures out to 3 and 6 months. That constructive funding environment gives us the confidence to lean in, knowing we had the liquidity and balance sheet flexibility to take advantage of compelling opportunities as they emerge.

Agency mortgage-backed securities continue to offer what we view as the best combination of liquidity, credit quality and return potential in fixed income today. ROEs on newly acquired positions when fully hedged with interest rate swaps are currently ranging from the mid-teens to the low 20% range. That's attractive by any standard, and these are transparent, high-quality money good assets. While many other assets from corporate bonds to equities retraces completely or even eclipse level seen before the April tariff announcement, mortgages remain not far off the cheapest levels of April. Mortgages are extremely cheap relative to corporate bonds. That is primarily due to a mixed technical picture in the medium term.

Net supply of Agency RMBS remain low by historical standards and demand has yet to fully materialize, creating a medium-term headwind for spread tightening. Many money managers remain overweight the sector. And although banks did reenter the market earlier in the year, further participation may be delayed until there is greater clarity around the Fed's rate cutting path. Until then, technicals are supportive of spreads remaining historically wide, allowing us to execute on our raise-and-deploy strategy. For investors like us with stable capital and long investment horizon, we can continue to harvest the historic yield spread for our shareholders. Security selection continues to be a key source of value for us. With over 10 active coupons in the market, we identified attractive opportunities across a wide range of Agency RMBS and even in the Agency CMBS market. While we expect exposure to Agency CMBS to remain modest as a share of the total portfolio, we added selectively in the quarter where the risk-adjusted return profile aligned with our broader strategy.

In addition to offering compelling relative value, Agency CMBS helped diversify and stabilize the portfolio's cash flow and total return profile, given their unique prepayment characteristics and underlying asset base. Our team brings deep expertise in analyzing and underwriting agency guaranteed securities at the loan level, which gives us a durable advantage in identifying relative value others may miss. That same strength I mentioned in terms of liquidity, risk posture and funding also enhances our ability to take advantage of opportunities within the coupon stack and across specified pools. At present, we are carrying a deliberate bias toward lower coupons, which we believe are poised to outperform, especially when mortgage rates decline, even just modestly.

The second quarter was exactly [indiscernible] a period in which our strategy shines. We stayed disciplined stuck to our playbook and took advantage of a window in the market to lock in assets we believe will perform across a wide range of macro outcomes. This remains an exceptional environment for long-term capital deployment in our space, and I couldn't be more confident in our positioning as we look ahead. The current environment remains highly favorable with wide Agency MBS spreads supported by a technical backdrop where many traditional buyers have yet to return, allowing private capital like Dynex to extract historic return from mortgage yields relative to hedges. While policy fundamentals and technicals may remain volatile and event risk elevated, we are well prepared and well positioned to capitalize on these dynamics and generate strong risk-adjusted returns.

I will turn it over to Byron.

Thank you, T.J. We are executing our strategic vision that incorporates culture and core values as well as a keen focus on macroeconomic factors. Future-oriented strategic thinking is at the core of how we operate the company. Our disciplined thought process permeates from the board on down and influences all of our decisions. We believe this stewardship mindset to be the foundation of our ongoing differentiated performance. Smriti and I are leading the company to earn investors' trust to be their choice of Ethical asset manager focused on performance and long-term stewardship of their capital.

I will now turn it back over to Smriti for closing comments.

Thanks, Byron. As you've heard from my colleagues, we are laser-focused on generating long-term returns and dividends are a big piece of how we create value for shareholders. We've now increased our dividend above pre-COVID levels. Looking ahead, we see meaningful value to unlock through future growth. stronger stock liquidity and the growing appeal of our high-quality, ethically managed and highly liquid investment platform.

Operator, we will now open the call to questions.

[Operator Instructions] Your first question comes from Bose George with KBW.

First, just wanted to ask about leverage. Can you just talk about the range you're targeting? Is this kind of the higher end of the range you're at? And also just related in terms of the mix of capital. Preferred now has become a pretty small piece just as the common equity has grown. Could we see that being bigger?

Thanks for the question. I'll let T.J. answer the more detailed question on leverage. But in general, we have flexed the leverage down when we believe the risk environment doesn't warrant sort of that incremental risk. And one of the big shifts over the last quarter was really the removal of some tail risk events. We had May 27, the tweet about the GSE guarantees, the one big beautiful Bill Act getting passed. And so in general, I think our leverage today just reflects more of a return to normal. And at this point, you're seeing the high teens, mid-20s ROEs, and -- and we feel like that is really a great place for us to be an investor. In general, you will see us flex the leverage higher when we believe that the risk environment warrants it. So at this point, I feel like we're just getting back to where we feel like we can generate that solid total return over time. T.J., I don't know if you have anything to add on that?

Sure. Yes. As the quarter progressed, the risk environment did improve. Over the course of the quarter, we increased leverage very methodically as policy uncertainty lifted. Initially, we focused on mortgages with a little bit more duration certainty to them, such as Agency CMBS. And then over the course of the quarter, we started adding more 30-year mortgages. So it was definitely an evolution over the course of the quarter as that policy environment adjusted.

And then to your second question on the capital structure, Look, I think the most accretive thing for our shareholders to do right now is to raise capital above book and deploy that capital. The preferred markets have generally been very spotty and perhaps not even open at this point. We're always ready to think through when and how that structure becomes accretive. But for now, the focus is on the common.

Okay. Great. And then could I just get an update on book value quarter-to-date?

Sure. Yes. As of Friday, book value was nearly unchanged from quarter end after taking out the accrued dividend to date.

Your next question comes from Doug Harter with UBS.

Great. In your prepared remarks, you were talking about kind of some of the other investors in the mortgage-backed space. Can you just give us your updated thoughts around kind of if when or what conditions might require them to kind of be more active or vice versa, if they went the other way and what potential catalyst do you see for changes in spreads?

Sure. The banks are the big player that could potentially return. They were active in the first 2 months of the year, especially in agency CMOs, for instance, off of a 30-year collateral. I think for a lot of those banks, they will return when they actually see more Fed rate cuts. So to some extent, you need to see the actual rate cut happen before they'll be active. Certainly, there are some large players that are highly sophisticated and can act before that or hedging with interest rate swaps, things of that nature. But for the bank community broadly I think you need to see those funding rates come down on the front end of the yield curve. So that's one of the major players.

The other money managers have been very active there mortgages are extremely cheap relative to corporates. These are historic cheaps versus corporate bonds. So money managers have broadly been on that and overweight mortgages relative to corporate, and the story over the course of the quarter was simply one where money managers had outflows early in the quarter, mostly actually to buy stocks, which was a very interesting fund flow. So the money management community just had to sell mortgages as they got outflows from their bond funds. Those fund flows returned later in the quarter, and they were back finding mortgages again. But broadly speaking, those players are overweight mortgages. So those are the 2 big players increasingly. There's a need for more private capital in the agency mortgage market. And we are it. The mortgage REIT community is a huge marginal player. So outside of those 2 big ones, we're next in many days during the quarter, mortgage REITs were the marginal buyer, and we are continuing to raise capital to deploy it. We are the -- in my mind, we're the manager of choice for the agency mortgage market, we, the mortgage REIT community. So that's a big one.

Overseas would be another. Japan remains a significant holder. They were actually a buyer. We have data through May -- they were actually a buyer in May, which I thought was very interesting in my calculus for supply and demand, I've assumed almost nothing on net from overseas demand. But on net, that's been a surprise to the upside. So those are the major players. I'd emphasize, again, the mortgage REITs are continuing to grow as a marginal source of demand for the agency mortgage market as the market starts to realize that we're a fantastic vehicle from which to do this trade.

Great. And kind of also, can you give us your updated thoughts on swap spreads and kind of how you see those playing out over the coming months?

Yes. swap spreads, I'll use the 7-year point as an example, down to 47 basis points below this morning, anyway below where treasuries were trading that is incremental return that we can extract. So the kinds of ROEs that we're going to produce in those, as I mentioned in my prepared remarks, in the high teens and even low 20s, reflect that. So minus 47. I think it's quite attractive, has a large margin of safety. So we can take an even larger widening. So a move to, let's say, minus 50, even minus 55 on a mark-to-market basis is fine given the carry that you're enjoying over the course of the year relative to treasuries.

And I would just add to that, Doug, in the medium to long term, we feel like this is an instrument that really incrementally benefits our shareholders from a return on equity perspective, capital adjusted and everything else. So our willingness to take that short-term spread fluctuation relative to where we ultimately believe these spreads will end up. I think we feel that is still a very good long-term risk return trade-off.

Your next question comes from Eric Hagen with BTIG.

Looks like there's currently 50 basis points of rate cuts priced into the forward curve that's through year-end. If the Fed doesn't cut rates or it cuts fewer than the 2 cuts that are currently embedded in there. What do you think the response is for both rates and MBS spreads? How much risk do you think is like embedded in that scenario where they cut fewer than 2x?

Right. The way I approach that question is really through the supply and demand lens supply will remain very low if we -- which it's continued to be. So if we don't have rate cuts, the supply picture remains very muted. On the demand front, banks -- we're sitting at these spreads basically without a bank bid for the better part of the last several months. So I think there's very little impact on spreads. Certainly, just allows for investors like us to earn more spread over time. It's a significant yield spread that we're earning today. Sure, spread tightening would be great. book value would go up. We don't need that in order to make the kinds of returns our investors are expecting. The spreads at today's level are compelling in and of themselves. So certainly, I think there's a chance that we don't get any rate cuts. The data is very volatile. At the margin, my personal view, the team's view here at Dynex is that we will probably get 50 basis points of rate cuts this year. And the risk to that view are actually probably towards more cuts late in the year as we see the consumer potentially start to slow.

That's good color. I appreciate that. What's the current thinking behind the coupon allocation between pools versus TBAs, like if your allocation to TBAs was lower, would that presumably maybe drag down the yield on the portfolio a little bit? Or how should we think about the flexibility in adjusting the TBA position and still running above like 8x leverage?

Yes. Certainly, the TBA position certainly impacts the accounting flows and how that flows through, and I'll let Rob comment on that. But specifically for the economic returns, the TBA rules have been trading SOFR plus 15 to 25 late in various monthly cycles. They've been going out roles for the current coupon have been going out a bit above actually the implied -- I should say the implied financing on the TBAs has been going out a bit above where we can repo mortgages. So I really like -- so that in and of itself favors owning some pools and the pools pricing is very fair relative to current expectations for prepayment. We don't think in terms of today's prepayments. We need to think much more dynamically as mortgage investors and so in a rally, some of these scenarios where we could have very fast prepayments on certain segments of the market, to me, it really favors a larger pool position. So we have been working to a larger pool position in expect to continue to do so.

Your next question comes from Trevor Cranston with JMP Securities.

You guys mentioned opportunistically adding some Agency CMBS to the portfolio this quarter. Can you just kind of give us an overview of where you're seeing returns on Agency CMBS right now relative to RMBS? And kind of how, in general, you think about those fitting into the portfolio and how big relative to the RMBS position they could get over time?

Great. Thanks, Trevor. I'll just give you sort of the big picture thought process behind it, Agency CMBS, obviously, these are instruments guaranteed by Freddie Mac and Fannie Mae. They have a very different risk profile in that these instruments, they're locked out from prepayments depending on the structure, you have 10-year instruments that are locked out from prepayments for 9.5 years or 7-year instruments locked up for 6.5 years or 5-year instruments locked up for 4.5 years. So they have a very stable economic return profile. And at this point, we're thinking through is where this return profile is coming from where on the yield curve, it makes sense for us to deploy some capital. And really one of the main reasons for us driving into this space is our ability to hedge these and lock up that return with interest rate swaps, which currently have negative spreads to treasury. So the overall return profile really, really looks good and solid in terms of our long-term total return thinking. So call-protected assets, agency-guaranteed more stable cash flows. They've always been a part of Dynex's portfolio in Dynex's thinking and returns at this point are really starting to be where, as we think about where long-term total returns will eventually end up. They're starting to be complaining. I'll let T.J. give you the thought process between sort of RMBS versus CMBS returns, but that's the philosophy behind it.

Yes. The -- and the positions, Trevor, that we've been purchasing are focused on the 5-year part of the agency CMBS market. As Smriti mentioned, it's a very stable economic return profile. These bonds are trading around swaps plus 90 basis points. I think what's probably the most compelling about the space is really the technical picture. When you think about those players, I mentioned in terms of the supply and demand picture, this is a mature market now that is finally getting large enough to attract some of those large players. So it's trading remarkably well, banks as well as insurance companies, you look at annuity fund flows have been huge over the last several years, and those players are starting to look more and more at this market. So I think there is a scenario where the total economic return profile of these bonds ends up every bit is attractive or every bit as compelling as you see on, say, 30-year RMBS. So you can add these to the portfolio and get a little bit more certainty in terms of the cash flows. And I think ultimately, the total return profile is every bit as good as those ROEs I mentioned on 30 years.

I think one other piece in here is thinking about curve positioning. This is a great way for us to add durable yields in the front end of the yield curve to the extent that that's the place where there's either Fed activity or less volatility. So it's a nice stabilizer for the book.

[Operator Instructions] Your next question comes from Jason Stewart with JonesTrading.

Okay. It's Jason with Janey. One follow-up on the hedge questioning. T.J., in terms of duration, any thoughts on adding longer duration as you go down a coupon on the hedge side. And if you do go longer duration treasuries versus swaps, I mean, how are you thinking about that at the longer end of the curve?

Sure. Yes. Our hedges have remained focused on the longer part of the curve, 7 and 20 are a big part of where our hedges are focused. We are targeting a duration that is generally flat in terms of the overall duration profile of the portfolio with that yield curve steepening bias, as Smriti mentioned, looking for those kinds of assets that are in the front end of the yield curve and hedging with some longer maturities, especially as we own some of the lower coupon 30 years makes -- makes sense.

In terms of treasury versus swaps, to your question there, the book has been roughly 2/3 interest rate swap certainly we have room to strategically increase or decrease that at any given time. But I generally expect this to be kind of the way things looked at the end of the second quarter to be broadly a baseline for how we're thinking about the mix.

Okay. So on the longer side, the 30-year and kind of your future treasury futures to stick with that strategy, you're not going to go too much further than 10 to 15-year swaps. Is that what I'm hearing?

Yes. The book in the -- at the end of the quarter looked broadly how I would expect things to look going forward. Obviously, yield curve positioning is a very dynamic market. So let me be clear on that. So we could certainly adjust our curve position if and when our views changed. But I think the end of the quarter was a good baseline.

Fair enough. And then, Rob, on the G&A expense line item, anything onetime in nature there? How should we think about that line item as you bring these functions that you discussed in-house?

Sure. Thanks for the question. The first half of the year, we tend to be a little bit higher with annual meetings and a couple of Qs, we did have some compensation increases probably in the range of $3 million or $4 million in the first half. And for us, it's interesting. We're one of the first companies in our sector to report, which is good, but also some of our compensation is on a relative basis. So we'll see how that adjusts out throughout the rest of the year. But yes, we do tend to trend down Q3 and 4. I'd expect that to continue.

There are no further questions at this time. I will now turn the conference back over to Smriti Popenoe for closing remarks.

Great. Thank you, everyone, for your time this morning, and I look forward to updating you all on our progress next quarter. Have a great day.

This concludes today's conference call. You may now disconnect.