Dynex Capital Q3 Earnings Call Highlights

Key Points

• Book value fell sharply: Dynex Capital’s book value per common share declined 15.4% to $10.91 in Q3, producing a negative 11.5% total economic return as Treasury yields rose and Agency MBS spreads widened.
• Capital and liquidity remained strong: The company raised $384 million, ended the quarter with a $3.1 billion equity base and held $1.3 billion in cash and unencumbered securities, while maintaining leverage at 9.0 times equity.
• Management sees attractive opportunities ahead: Wider mortgage spreads and reduced refinancing risk improved the outlook for Agency MBS, with estimated static returns on newly purchased, hedged assets of about 20% to 25% at roughly 10 times leverage.

Dynex Capital NYSE: DX reported a decline in third-quarter book value as higher Treasury yields and wider Agency mortgage-backed securities spreads pressured results, while management said the market repricing has created what it views as an attractive forward investment opportunity.

Book value per common share fell 15.4% during the quarter to $10.91 as of Sept. 30, from $12.90 at June 30. Including the company’s $0.51 common dividend, Chief Financial Officer Mike Sartori said total economic return was negative 11.5%. Comprehensive loss was $1.49 per common share, compared with comprehensive income of $0.80 per share in the second quarter.

Co-Chief Executive Officer and President Smriti Popenoe said the company’s liquidity, financing and hedging framework functioned as intended during a volatile period for fixed-income markets. Ten-year Treasury yields rose above 5% during the quarter, while Agency MBS spreads widened.

Market volatility weighed on book value

Chief Investment Officer T.J. Connelly said current-coupon mortgage yields rose nearly 100 basis points in the third quarter, while the 10-year Treasury yield increased by more than 80 basis points. Mortgage spreads widened by nearly 20 basis points, largely during the final two weeks of September. At quarter-end, current-coupon spreads to seven-year swaps were about 162 basis points, near the wider end of this year’s range, he said.

Connelly said spread widening accounted for more than 80% of the company’s quarterly return impact. Dynex added hedges as rates rose, which he said limited the effect of the rate move, while the company’s liquidity covered margin needs in the ordinary course of business. The company maintained its exposures and did not de-lever during the repricing.

Popenoe attributed the broader rise in yields to increased capital demand associated with artificial intelligence investment and related infrastructure, along with geopolitical uncertainty and rising government borrowing needs. She said Agency MBS were not the origin of the market stress, despite choppy and at times illiquid trading conditions.

Capital raising and financing capacity

Dynex raised $384 million of capital during the quarter, net of fees, including $268 million of common equity through its at-the-market program. It also raised $116 million of net proceeds from a Series D preferred stock offering completed in late September, its first preferred equity offering since 2020.

Sartori said the preferred issuance increased preferred equity to approximately 7% of the company’s total equity base, from roughly 3%, and diversified the capital structure. Popenoe said the company sees room for preferred equity to become a larger part of its capital mix, though future issuance would remain opportunistic and depend on factors including the cost of capital and potential uses of proceeds.

The company ended the quarter with a $3.1 billion equity capital base, up 24% year to date. It reported $1.3 billion of cash and unencumbered securities, representing more than 42% of total equity. That liquidity level was about 9% lower than the prior quarter, which Sartori said reflected its intended use as a buffer against book-value declines and to preserve capacity for future investments.

Dynex maintained more than $24 billion of repo financing across more than 25 counterparties. Sartori said funding markets remained “deep and supportive,” while Connelly said mortgage repo spreads to SOFR stayed in a 12- to 15-basis-point range and quarter-end passed without noticeable market pressure.

• Asset yields increased to 5.0% from 4.9% in the prior quarter.
• Effective financing costs rose modestly to 3.82% from 3.79%.
• Economic net interest spread remained approximately 1.18%.
• Leverage ended the quarter at 9.0 times shareholders’ equity.

Management highlights mortgage-market opportunity

Management said wider mortgage spreads, limited refinancing incentives and a more stable duration profile have improved the prospective return outlook for Agency MBS. Connelly said only about 1% of the outstanding mortgage universe has more than a 25-basis-point refinance incentive, while most Agency mortgages trade below par.

He said the reduced refinancing incentive and substantial extension that has already occurred across the mortgage universe have lowered the remaining extension risk if interest rates rise further. Dynex’s modeled impact from an instantaneous 50-basis-point increase in rates as of Sept. 30 was a roughly 0.5% reduction in common equity, compared with 3.5% at June 30, according to Connelly.

Dynex increased portfolio spread sensitivity to approximately 5.7% of common equity per 10 basis points of spread at quarter-end, from about 4.6% at June 30. Connelly said a 20-basis-point tightening in spreads, equal to roughly the quarter’s widening, would imply an approximately 11.5% gain to book value, all else equal.

The company cited demand from money managers, potential GSE buying and prospective foreign investor demand as supportive market factors. Connelly said supply dynamics at current rates mean the sector does not require substantial incremental demand to support prices. He also pointed to the growth of central clearing and sponsored repo, potential bank-capital-rule changes and Federal Reserve liquidity facilities as possible long-term supports for financing-market depth.

Return outlook and expenses

At prevailing spreads, Connelly said Dynex estimates static returns on equity for newly purchased Agency MBS hedged with interest-rate swaps at around 20% in lower coupons and roughly 25% in current coupons. Those estimates were based on approximately 10 times leverage. He said the company had net purchased assets since quarter-end.

Popenoe said Dynex’s decision not to de-lever preserved the portfolio’s earnings power despite the decline in book value. She said management remained confident in dividend coverage based on the portfolio’s existing earnings capacity, though she did not provide a new dividend outlook.

Dynex’s estimated book value, net of the accrued dividend, was $10.95 as of the Friday before the earnings call, Connelly said. Meanwhile, annualized general and administrative expense was 2% of total equity during the quarter. Sartori said G&A as a percentage of equity was about 40% lower than in the same period of 2025, reflecting operating leverage as the company has grown.

About Dynex Capital (NYSE:DX)

Dynex Capital, Inc NYSE: DX is a mortgage real estate investment trust that invests in mortgage-related assets. Its portfolio primarily consists of agency mortgage-backed securities, including securities backed by residential and commercial mortgages, as well as other mortgage assets.

The company uses financing arrangements, including repurchase agreements, to support its investment activities and seeks to generate income from the spread between the returns on its investments and its financing and operating costs.

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