Dynex Capital, Inc. Q2 2026 Earnings Call

Day, and welcome to the Dynex Capital, Inc. second quarter earnings conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Ms. Caitlin Moritz, Head of Capital Markets and Investor Relations. Please go ahead. Thank you, operator, and thank you to everyone joining us today for Dynex's second quarter 2026 earnings conference call.

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

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

Thank you, Kait, and good morning, everyone. I'm pleased to report a strong performance quarter for Dynex. Our total economic return of 6.4% was achieved alongside healthy capital issuance of nearly $400 million for the quarter. In the first six months of the year, the capital base increased to $3.1 billion from $2.4 billion at year-end, and we grew our portfolio of Agency MBS by over 40%. We are progressing well on our path, delivering consistent dividend income for our shareholders while building scale and resilience. Since 2022, we have expanded our capital base by five times and continue to see a significant opportunity to thoughtfully build the company from here. We are executing our strategy for a more durable mortgage investment platform with a valuation that is consistent with our strong track record, increasing relevance, and scale.

I want to give some context for our strategic thinking. First, why Agency MBS? Our conviction in Agency MBS as the core of our strategy is high. Agency MBS are among the most liquid and cycle-tested asset classes with a demonstrated ability to withstand periods of market stress over the past 40 years. In the last decade, our macro opinion led us to focus more on liquidity and flexibility. We've therefore allocated most of our capital to the agency sector. The compelling return, liquidity, and flexibility of this asset class are unmatched. It drove our outperformance in 2020, as well as in the Fed hiking cycle of 2022-2025. In our view, Agency MBS remains the best risk-reward across our investment universe for this macro environment. Hence, our approach is to invest in Agency MBS while building the capital base and strengthening the operating platform.

Second, what is the imperative to grow and scale? The reasons are twofold. The most straightforward, relevant reason is valuation. Larger companies, often regardless of delivered performance, typically earn a better valuation metric. This is further bolstered by the popularity of passive investing. As passive funds receive more cash, they allocate based on size to larger companies. In our view, this provides a structural tailwind for the expansion of Dynex. By delivering both performance and size, we believe we can garner higher valuations for our business and ultimately bring greater value to our shareholders. The other component driving our strategic thinking is risk management. As a macro-focused investor, we continuously evaluate global trends. We currently see increased risks related to both geopolitical conflict and technological change, reinforcing our focus on continuing to build resilience across our business and operations.

While we cannot predict the ultimate impact of AI, we are preparing by investing in people and technology and strengthening the processes that protect capital, sustain performance, and create long-term shareholder value. The goal is to drive robust, reliable, repeatable, and resilient processes that can withstand both market and operating shocks. Where we are now is that the conditions for us to execute on growing the company, building resilience and scale are very favorable, and they're creating a virtuous flywheel. By capitalizing on the investment opportunity in Agency MBS, we generate performance that attracts investors and supports valuations. This enables accretive capital raising, which in turn is invested in high-quality assets. As each turn goes through, the liquidity, visibility, and valuation has improved, a reinforcing dynamic that we believe will continue.

This is the pathway to scale, resilience, and ultimately the premium valuation deserved by our track record and durable platform. I'll now turn it over to Mike and T.J. to provide the details on the quarter and the outlook.

Thank you, Smriti. I'll now review our financial results for the second quarter ended June 30th, 2026. We reported book value per share of $12.90 at quarter end, representing a 2.4% increase from $12.60 as of March 31st. The improvement was primarily driven by tighter spreads relative to the prior quarter and accretive capital deployment Total economic return for the quarter was 6.4%, including $0.51 per share in common dividends and $0.30 per share from the increase in portfolio value during the quarter.

Net interest income increased to $0.42 per share, up from $0.40 in the prior quarter, driven primarily by lower funding costs and capital deployment into investments with attractive yield profiles and the durable earnings contribution of our existing portfolio. We ended the quarter with adjusted leverage at 8.1 versus total equity, compared to 8.6 at the end of last quarter. The decrease was primarily driven by portfolio appreciation and the retention of capital to support future investment opportunities. Consistent with our positive view on forward returns and the capital deployment opportunities that Smriti spoke to, we raised $391 million of capital in the second quarter at levels that were accretive to book value.

Demand for our common stock and ATM issuance also reflects broadening investor interest in the Dynex story. The proceeds were deployed into Agency MBS opportunities as spreads remained supportive of risk-adjusted returns. We continue to evaluate further growth opportunities through our disciplined framework focused on market conditions, expected returns, and short and long-term accretion to shareholder value. Liquidity remains a key strength with $1.6 billion of cash in unencumbered securities at quarter end, representing over 51% of total equity, up approximately 5% from the prior quarter. Maintaining ample liquidity remains a core element of our risk management framework and provides flexibility to capitalize on market opportunities as they arise. Overall, the quarter reflected continued progress across our key financial objectives, including book value growth, disciplined capital deployment, strong liquidity and improving earnings power as we continue to execute our strategy.

With that, I'll turn it over to T.J. to discuss portfolio positioning and outlook.

Thanks, Mike. Our process worked as designed in the second quarter. We carried substantial liquidity, maintained a strong funding position, and deployed new capital into the mortgage spread widening that occurred late in the first quarter and into the second quarter. Book value appreciated as spreads tightened, reflecting the incremental portfolio growth during the quarter. These results were generated through a repeatable process built around liquidity, risk management, and disciplined capital deployment. That process is well suited for today's investment environment, where we are experiencing bouts of volatility followed by periods of calm. My initial comments today serve to tie our macroeconomic and mortgage market analysis to our portfolio construction. Our objective is to build a portfolio that can generate durable cash flows across a wide range of macroeconomic environments while preserving the flexibility to capitalize or preserve value during changing market conditions.

We observe two major trends that drive our overall risk posture. The first is the current AI investment boom, driving significant spending and changing expectations around growth, inflation, and productivity. We see this as the capital-intensive phase of a classic transformative cycle. Throughout history, these cycles have been shown to be prone to over-financing and eventual repricing, with periods of uncertainty that can create volatility. For investors like Dynex with liquidity and flexibility, these periods can create compelling opportunities. Second, policy remains an especially important driver. Federal Reserve policy, housing policy, fiscal policy, and regulatory policy all influence the supply of and demand for Agency mortgages. Under Chair Kevin, the Federal Reserve has launched a broad review of monetary policy, communications, economic data, and balance sheet strategy.

While market participants focus on the nominal size of the balance sheet in dollar terms, we think it is important for the task forces to focus on the interest rate duration of their aggregate portfolio. Any balance sheet reduction proposal should incorporate the potential impact on the duration profile of the Treasury market, marginal Treasury yields, and ultimately the cost of borrowing for the U.S. government. In our view, this puts a significant constraint on the speed and magnitude of any MBS-related actions. These factors lead us towards high-quality positions which enable flexible management of exposures. Our criteria include assets that are regularly traded and transparently priced with readily available financing or easily converted to cash. Hence our focus on the Agency MBS market hedged with interest rate swaps and futures.

This macro backdrop also reinforces why we are constructing a diversified Agency MBS portfolio designed to generate stable cash flows and durable income. In today's higher rate environment, more negatively convex mortgage assets offer meaningful current income, but they must be owned thoughtfully within a balanced portfolio that manages prepayment and extension risk. By diversifying across coupons and collateral characteristics, we can capture attractive income while maintaining the ability to preserve value and reposition capital as the macro environment evolves. Looking forward, our outlook remains constructive. As we see in the presentation, Agency MBS spreads to swaps remain in an attractive range. Mortgage rates have been remarkably stable. Refinancing activity remains muted. Our assets are generating solid cash flow and income. Technical conditions are also constructive. Demand for fixed income remains strong, as evidenced by bond fund and annuity inflows. Money managers continue to prefer Agency MBS over corporate credit.

In our view, corporate credit has minimal potential for further price appreciation, while Agency MBS offer the potential for better carry and price appreciation. Private credit investors are increasingly seeking higher quality fixed income with more transparency and liquidity. Net mortgage supply remains manageable. We have lowered our 2026 forecast for net supply to $165 billion from $200 billion. Even amid expectations for modestly higher Fed policy rates, bank demand, especially for floating rate MBS assets, has remained consistent. In addition, the GSEs have demonstrated a willingness to act as value-sensitive buyers when mortgages become particularly attractive. We remain vigilant on GSE policy changes as the midterm elections approach. Since last November, we have viewed this dynamic as a meaningful governor on mortgage spread widening and an important part of the technical landscape.

We expect to deploy capital in Agency RMBS securities, specified pools and seasoned securities that provide stable cash flows over time. The breadth of today's mortgage market allows us to construct a portfolio that balances current income, optionality, liquidity, and long-term return potential. Our activity is opportunistic, and timing of capital deployment is an important part of our calculus. Our approach remains straightforward: maintain liquidity, preserve balance sheet flexibility, and deploy capital when market opportunities present themselves. That approach served us well during the second quarter, and we believe it positions us to continue generating durable dividend income and long-term shareholder value. I will now turn the call back over to Smriti.

Thank you, T.J. and Mike. The long-term tailwinds to our business model remain intact. The demographic need for income and housing support our company's capital and investment opportunity, where we can apply our expert ethical management of mortgage assets to generate solid returns for shareholders. The near-term conditions for our business to continue to grow, invest, and build resilience are favorable. The virtuous flywheel of performance, investor demand, valuation benefit, accretive capital raising, and opportunistic deployment is a powerful driver of shareholder value creation. To our current and prospective shareholders, I'll say this: we're delivering a double-digit dividend yield, book value with upside as MBS spreads tighten, and the potential for stronger valuation as the markets price the value of our track record and scale. For those of you who are shareholders today, thank you.

We remain invested and aligned with you and are grateful for the trust and confidence you place in us every day. To our prospective shareholders, we invite you to come and be part of the Dynex story. With that, I will turn it over to the operator for questions.

Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that is star one if you would like to ask a question. We'll now take our first question from Bose George with KBW.

Hey, everyone. Good morning. Good morning.

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

Sure, Bose. Good morning. Quarter to date through Friday, July 17th, spreads were about three basis points wider on the quarter. Book value as of Friday was approximately $12.76.

Okay, great. Thanks. Then can you just talk about your expectations for mortgage spreads, say, over the next 12 months? You kind of alluded to this, but what do you think happens with the GSE mandate to purchase MBS after they finish that $200 billion? Do you think that gets extended? Just color on that would be great. Thanks. Let me just correct it.

I misspoke there, Bose, real quickly. The book value as of Friday was $12.67. My apologies. Great. Spread outlook going forward, we think spreads with the GSE backstop, that's really important as a stabilizer for spreads.

We've seen them consistently come in when spreads widen. Over time, that insulates, I think, a lot of buyers and their willingness to hold agency mortgages. We think spreads can move into-- If you look at the spread chart we use, which is current coupon versus seven-year spreads, we can come into 100, 120 basis points. I expect that to be the equilibrium over time.

Okay, great. Thanks. We'll now take our next question from Melissa Lobo with UBS.

Good morning. Thank you. Just looking at portfolio asset growth over the quarter with the decline in leverage to 8.1. Can you talk to us about ultimately where you want leverage to run if spreads remain in the current range?

Yeah. In the current environment, Rick, good morning. I expect that leverage will be running somewhere between seven and a half and eight and a half. I think that's a very comfortable range given the technical backdrop for mortgages and the opportunity that persists and the spread outlook I just said, discussed with Bose. I think we can carry that kind of leverage or potentially even more leaning into any bouts of liquidity. As I mentioned, we carry tremendous liquidity for exactly those sorts of situations like we saw in the second quarter. I think this recent activity is indicative of what we may see going forward.

Okay, thank you. We're reading articles about AI-driven refinancing risk potentially increasing negative convexity in the market. How are you beginning to incorporate that in your security selection and your hedge construction?

Yeah, this is a critical concept we've talked a lot about over time. There's no doubt it is going to make it easier for originators to refinance borrowers very quickly. The algorithms are going to move more quickly. I often like to say it's come down to as quickly as the borrower is willing to answer the text message or phone call, whatever means they have. That makes security selection absolutely paramount. The easiest to refinance will be very quick. Whereas those who are more insulated and have lower loan balances, for instance, other characteristics that offer protection to prepayments will be increasingly valued in the marketplace. I think that's a construct that just hasn't been fully priced into our markets at this point.

Got it. Thank you. Thanks for taking my questions.

Our next question will come from Doug Harter with BTIG.

Thanks. Can you guys talk about how you're thinking about investing in a market that's kind of very headline-driven at the moment, and how that kind of bouts of volatility play into how you think about that leverage range you just talked about, TJ?

Yeah. Hi, Doug. I'll just give you the big picture, and TJ can drive the rest of it. It has been interesting for some time now, we've been talking about this idea that surprises are highly probable. The surprises just come from a lot of different places. In that situation, just from the top down, that's one of the reasons we have the Agency MBS book that we have. We carry the levels of liquidity that we do. It allows us to really get into these moments where there's capital raising that's happening at accretive levels, and we can choose to deploy that capital when the bouts of volatility actually hit. In those moments, obviously we always have the choice of taking up risk or taking down risk. We're being very thoughtful about that as we see these opportunities show up.

In general, it just allows us to have more flexibility and add assets at wider levels of spread. That's been sort of the tactical way in which we've been managing this past few months, or maybe even just since the tariff tantrum of 2025. More tactically, I think TJ can talk about how we're doing it in conjunction with the capital raising.

Yeah. Obviously, we start with a very top-down approach, Doug. One of the observations I make about overall macro markets is, and we can go all the way back to the Ukraine war, is how quickly commodity markets are able to rebalance. That has been quite striking. You can go back to the agricultural markets in 2022, and then right on through to crude oil markets in the last really four months or so. As we look at that, one of the important parts of the calculus that we're thinking a lot about are all the scenarios that are possible, what the surprises could do, gap risk, for instance, in rates, things of that nature.

That's why we carry the liquidity and tactically leaves us in a position of strength to be able to lean into things when it's pretty remarkable how realized volatility has come down over the course of really the second quarter, even given the headlines. You hear the headlines from Friday night until Sunday evening, and then you look at the actual price action, it's been fairly modest. Markets are resilient, and I think it's really important to realize that the supply and demand profile for real assets in the global economy rebalances remarkably quickly. That is definitely a part of the calculus when we're looking at tactical opportunities as spreads widen.

Great. Appreciate it. Then just one more on the operating expenses. Can you just talk about your outlook for the level there? It's been bouncing around a little bit the past couple of quarters as you kind of build out, but came down this quarter. Just how should we think about what is the kind of the right level going forward?

Yeah, Doug. I'll take that. As we mentioned last quarter, we continue to track our expense ratio at 2% of total equity this year. That's how you would think about it.

2% for the full year.

Yeah. Okay. I appreciate that.

Thank you very much. No problem, Doug.

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

Hey, thanks. Good morning. Good morning.

Looking at the chart of rate volatility, it's kind of moved down to the low end of where it's been over the last five years, which is obviously supportive of MBS spreads. Curious how you guys think about that going forward, if you think it's possible that volatility continues to move into a lower range or do you think it'll remain kind of somewhat elevated by the geopolitical and headline risk? Thanks. Yeah, I assume you're looking at something like the MOVE Index, for instance there, Trevor.

It has come down significantly this year. We have had these bouncing spikes. Most importantly, we're constantly preparing the portfolio for spikes in volatility and being able to be in a position of strength when we get those. Overall, though, if you overlay that, I will say you could move out the vol surface, say look at one-year expirations on 10-year swap rates, for instance. Realized volatility on that point of the yield curve has been remarkably lower than implied volatilities. There is still scope for implied volatilities to move down significantly, and that has a very clear line to mortgage performance over time. As implied volatility comes down, mortgages tend to perform better.

Got it. Okay, that makes sense. Then sort of a general question on how you guys are thinking about leverage. You noted the positive technicals in the MBS market as well as the funding markets. I'm curious if the kind of broad backdrop of positive trends on both those sides has changed how you guys think about your target range for leverage for the portfolio at all? Thanks. Hi, Trevor. I think in general, the big picture answer to that is our overall opinion hasn't changed, and it's really driven by the macro environment.

When TJ talked about it in his comments, the policy framework that's going on, developments in technology, geopolitics, the overall level of macro risk, it sort of really drives where that leverage is conceptually. The secondary factor is where mortgage spreads are relative to interest rate swaps. In this kind of environment, yes, mortgages remain attractive. Yes, we feel like we can earn a really good rate of return, but high levels of leverage are sort of out of the picture, out of the scope, simply because of our deep respect for the macro environment.

We're able to adjust the leverage more tactically within a narrower range, I think you'll see us do that's what this last quarter's activity reflects. The ability to take that up or down within plus or minus one times, to be able to adjust to conditions in the mortgage market. Overall, really respecting the fact that there is this very different level of global macro risk that's out there, we're at war, those things really define sort of the bigger picture risk appetite.

Yeah. Okay. That's helpful. Thank you.

We'll now take our next question from Jason Weaver with JonesTrading.

Hi, guys. Good morning, and thanks for taking the question. I'm just looking at slide 26 in the deck, and it looks like you've lengthened the book by adding more long end exposure there. Is that an inherent curve view embedded in there, or how should I think about that?

On page 26, you see some more- You added some 7, 10-year and some 15, 20-year as well.

15, 20-years, yeah, interest rate swaps. Those are paying positions. Those are pay fixed positions. We are paying fixed rate farther out the curve. It is slightly more of a steepening bias relative to the previous quarter. You also at the same time- Sorry, it's just consistent with the adding the specified pools, which tend to have longer durations.

Exactly, yeah. in that part of the curve.

Yeah, that's fair, would seem to match some of the 5.0 and 5.5. I get that. Then. Yeah, I'd also, just one clarification there.

I'd also note that you see the futures position, the 30-year U.S. futures position is slightly smaller short than it was. Effectively, there was some movement between those two positions.

Right. Okay. I see it. Fair enough. Okay, the follow-up. On the book value increase, can you ballpark on how much of that was due to issuance above book versus tightening on the portfolio that was in place?

Yeah. Trevor, we typically don't break that out. We typically don't break that out.

That's fair. All right. Well, thank you for the questions.

You bet. We'll take our next question from Jason Stewart with Compass Point.

Hi, thanks. Good morning. Hi, Jason.

Thinking about the shape of the yield curve and forwards, how are you thinking about positioning the portfolio in a potentially flatter environment, and do you disagree in terms of the path of where forwards are in terms of short rates?

Yeah. Good morning, Jason. The portfolio entered the quarter with probably less of a curve bias than at any time in the last six to eight quarters. That's left us in a position of strength to potentially lean into some of this flattening that we've seen, to your point. We're fairly well hedged across the curve. At this point, are looking for opportunities to potentially put on a slightly more of a steepening bias. At this point, we think that the portfolio is very well hedged across the curve.

Okay. Just thinking about spec pools and framing that risk, including spec pool payups and how you hedge that. I understand the conceptual desire to have more cash flow certainty. If we are in a directionally higher rate environment in terms of long rates, how do you think about how much premium at risk you're willing to accept and how should we think about that number relative to the hedge book?

Yeah. That's an interesting comment. Sorry. I think you're talking about. The payups over TBAs for pools have been held up remarkably robustly. That market is becoming more and more liquid. We've been doing this since Byron and Smriti and I were at Freddie Mac over 25 years ago, where they effectively invented the spec pool market. That market has become deeper and more liquid, more transparently priced than at any point in our careers. I'm not sure the calculus is quite as simple as thinking about, oh, where will this payup be relative to TBA? It's a very deep market. Security selection is becoming so paramount that every mortgage investor is looking at the individual characteristics of each pool, much like you do in other segments of the bond market.

We do think about those things, especially in terms of being prepared for all scenarios that are out there. I think it's really important to note that specified pool market is becoming more and more liquid, and more transparently priced. These pools that we're buying will perform well in higher rates, especially as housing turnover evolves with I think there's a case to be made that housing turnover is at very low levels for clear reasons we all know. The demographics, though, support it starting to increase at some point. I think these pools that we're buying will provide those durable cash flows that I spoke to.

Okay. Fair enough on that. One follow-up on Jason's question. I know we won't get the number, but in terms of 3Q book value quarter to date, was there any impact on book from share issuance?

There was no real impact to the share on that, so it's very minimal, if anything.

Okay. Thank you much. That does conclude our question and answer session for today.

I'd like to turn the conference back over to Smriti for any additional or closing comments.

We thank everyone for your attention this morning, and we look forward to updating you again for our third quarter results. Thank you very much. Operator.

Thank you. Once again, that does conclude today's conference. We thank you all for your participation.