Dynex Capital, Inc. (NYSE:DX) Q1 2024 Earnings Call Transcript April 22, 2024
Dynex Capital, Inc. misses on earnings expectations. Reported EPS is $-0.3 EPS, expectations were $-0.09. Dynex Capital, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Thank you for standing by. My name is Jael and I will be your conference operator today. At this time, I would like to welcome everyone to the Dynex Capital, Inc. First Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the conference over to Alison Griffin, Vice President of Investor Relations. You may begin.
Alison Griffin: Good morning and thank you for joining us for Dynex Capital’s First Quarter 2024 Earnings Call. The press release associated with today’s call was issued and filed with the SEC this morning April 22nd, 2024. 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 Investors center 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 a webcast link on the homepage of our website. The slide presentation may also be referenced under quarterly reports on the investors center page. Joining me on the call is Byron Boston, Chairman and Chief Executive Officer; Smriti Popenoe, President and Chief Investment Officer; and Rob Colligan, Executive Vice President, Chief Financial Officer.
It is now my pleasure to turn the call over to Byron.
Byron Boston: Thank you, Alison. We delivered a solid 2.1% total economic return for the quarter. And as a company, we continue to execute on building our company with our long-term strategy and vision. Listed on the New York Stock Exchange in 1989, Dynex is the longest tenured mortgage REIT. I joined the company in 2008 with a goal of developing a new strategic plan of growing Dynex Capital’s balance sheet, paying a steady above average dividend, and to protect our shareholders capital over the long-term. During this period, we have guided our shareholders through multiple extraordinary market cycles. We’ve consistently made the necessary decisions to adjust our people, processes, technology and strategy to continue to perform in all future environments.
We have successfully refreshed the skill sets of our Board of Directors multiple times and focused on developing the talent of our team to reduce key person risk and to increase the probability that we continue to pay our dividend and deliver attractive returns. One of the strongest factors in our success is that we have always been guided by a core set of principles and values. Our goal is not to win at any cost, but we will do what is ethically correct to guide our shareholders through all market environments. Over the past eight years, global risks have continued to intensify and the Dynex team is ready, disciplined and well prepared. I will now turn the call over to Rob and Smriti to further elaborate on our performance for the quarter and to further explain how we are positioned to continue to perform as the future unfolds.
Robert Colligan: Thank you Byron, and good morning to everyone joining the call this morning. Dynex delivered an economic return of 2.1% for the quarter and book value ended the quarter at $13.20 per common share. The drop in the 10-year treasury that started last October began to reverse course as the expectations for federal funds rate cuts began to fade. While the 10-year treasury was up approximately 30 basis points from the end of the year, book value was essentially flat. This quarter, we raised $87 million of new capital, which was deployed in February and March when spreads were wider. The reduction of book value was about $0.07 in the quarter, related to this capital raise. We had one other item affecting earnings this quarter.
To comply with the accounting standards for share based compensation, we had an accelerated vesting condition. The impact of this acceleration compared to a standard vesting schedule reduced earnings by $0.05 and I expect this to recur annually in the first quarter of each year going forward. Beyond that, we delivered exactly what a mortgage REIT should deliver in a period that had lower volatility. We delivered a stable book value and a healthy dividend. We also announced the renewal of our stock buyback program, which allows us to buy up to $100 million of common stock and $50 million of preferred stock. Our previous program expired at the end of the quarter and we need to always have a program in place to ensure that we can support the stock price and buy shares if or when our common or preferred shares priced at an extreme discount.
In the first quarter, treasury futures remained our preferred hedging instrument. Hedge gains and losses are a component of REIT taxable income and will be part of our distribution requirement with other ordinary gains and losses. This quarter we realized the hedge loss which reduced our aggregate gains, but we still have a large cumulative benefit for the portfolio. Post quarter-end, our hedges continued to perform well as rates continue their march upwards. In an inverted yield curve environment like we have now, we expect our hedges to have a positive carry, which will support earnings. Please see page six, in the earnings release covering the hedge portfolio and page 11 in the earnings presentation for more detail on this topic. With that, I’ll now turn the call over to Smriti.
Smriti Popenoe: Thank you Rob, and good morning, everyone. As global economy continues to transition to the post pandemic new normal, we have been planning for an evolving environment, bouts of volatility and periods of comp. In the near-term, our risk management framework includes tail risks for modestly higher policy rates and much lower rates overall as well. We remain highly cognizant of geopolitical risks, especially elections here in the United States. We expressed our view last quarter about the unsustainable US fiscal trajectory. This remains a factor in our rates positioning. Therefore, our investment in capital management strategy continues to be designed for a bumpy ride. We remain focused on high quality liquid agency RMBS, which offer compelling long-term risk adjusted returns.
Our portfolio is positioned to meet our long-term target returns at today’s spread levels. We see bouts of volatility as opportunities to add assets. Spread tightening and eventual fed eases are tailwinds and upside, but they are not necessary for us to generate returns. Agency MBS returns are attractive and accretive today versus our cost of capital. We expected volatility in economic data to be a major factor driving MBS spreads. So far this quarter, we have seen higher volatility versus last quarter, and as a result, our models have option adjusted spreads approximately 15 basis points wider across our portfolio. We remain well off the wides of Agency MBS seen in November 2023 and October 2022. We feel the range of MBS spreads will be narrower going forward as sponsorship for the sector has improved substantially since the fourth quarter 2023 with the return of banks.
In addition, it is expected that the Fed will soon be announcing a reduction in the pace of its quantitative tightening campaigns. And while this reduction may not impact MBS directly, any change which adds reserves to the banking system is yet another positive for the sector. We expect that short-term technicals of higher supply will push spreads wider, all else being equal, and this might be exacerbated by market volatility. Over the medium and long-term however, we continue to expect tighter equilibrium spreads for Agency MBS. In the absence of severe disruptions, we would regard any short-term widening as a dip buying opportunity. I’d like to cover our thoughts around capital raising in this environment. All our capital decision making is driven by the same top down macroeconomics based thinking that drives our investment process.
Our primary criterion when raising capital is whether we expect to earn a long-term investment return that meets or exceeds the long-term level of the dividend. In today’s investment environment, we believe there’s a compelling opportunity to earn this type of return in Agency MBS. This is driven by the transition from the risk being housed on public balance sheets like the Fed to private capital like Dynex. In other words, we believe the total economic return from growing and scaling the business in a healthy investment environment exceeds the cost of capital is accretive to shareholders and lays the foundation for the market to put a higher valuation on our unique platform. As always, we stand ready to buy back the stock in extreme disruptions.
And here again, we evaluate the marginal return on buybacks versus investments. Every decision has a long-term lens on it. Finally, we believe there are significant strategic benefits to growing the company. Building resilience and scale is an important strategic goal to ensure the longevity of our company. Moreover, factors such as index inclusion can drive additional shareholder return and liquidity in the stock. Our view remains that today’s spreads offer compelling returns, enhanced by tighter long-term equilibrium mortgage spreads. We remain focused on delivering long-term total economic return to our shareholders. I’ll now turn it over to Byron.
Byron Boston: Thank you, Smriti. Our company is uniquely positioned for this environment. Today we are generating income from a government guaranteed asset class with flexibility and expertise to pivot across the credit spectrum. We have an experienced team, with a stewardship mindset, a disciplined process and a track record of excellence. Our actions are guided by a long-term strategic process that we believe will continue to drive shareholder value well into the future. We’re growing our income generating company as the demographic need for stable income is increasing due to the aging of global populations. In US, the need for income is expected to rise as the baby-boom generation moves through retirement. I just returned from an educational trip to China, Hong Kong and South Korea and observed similar trends in those countries.
These demographics support the long-term value of the Dynex platform, providing further upside to shareholders. I will be sharing more on this in a thought piece later this week. We thank you for your interest in Dynex and look forward to speaking with you again next quarter. I will now open it up for questions.
Operator: Thank you. The floor is now open for questions. [Operator Instructions]. Your first question comes from the line of George Bose of KBW. Your line is open.
Bose George: Hey guys, this is Bose, good morning. For the first question, thanks for the update on spreads quarter-to-date. Could we also get an estimate of where your book value is?
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