Executive Summary / Key Takeaways

• Strategic Growth and Accretive Deployment: Dynex Capital is executing a disciplined "raise and deploy" strategy, significantly expanding its Agency MBS portfolio to $14 billion (up 50% year-over-year) and raising $560 million in new capital year-to-date Q2 2025, often at a premium to book value, driving accretive growth and scale benefits.
• Robust Financial Performance Amidst Volatility: The company has demonstrated strong operational resilience, with net interest income trending significantly upwards (H1 2025: $40.3 million vs. H1 2024: $1.9 million) and financing costs declining, despite market turbulence and hedging losses, showcasing the effectiveness of its active management.
• Differentiated Risk Management and Technological Edge: Dynex's proactive liquidity management ($891 million in Q2 2025), dynamic hedging strategy (shift to swaps for enhanced ROE), and in-house development of a "world-class operating platform" (leveraging AI/ML) provide a competitive moat, enabling it to capitalize on market dislocations and maintain stability.
• Compelling Investment Opportunity and Dividend Strength: The Agency MBS market continues to offer attractive double-digit ROEs (mid-teens to low 20s), supporting Dynex's increased dividend (now $0.17 per share monthly) and positioning the company for sustained long-term shareholder returns.
• Navigating a Complex Competitive Environment: Dynex maintains a strong competitive standing through its specialized expertise, transparent balance sheet, and a "prepare, not predict" mindset, allowing it to outperform peers in total shareholder return despite a fragmented market and evolving regulatory landscape.

The Foundation: A Resilient Mortgage REIT in a Dynamic Market

Dynex Capital, Inc. (NYSE:DX) operates as an internally managed mortgage real estate investment trust (REIT), primarily generating income by investing on a leveraged basis in Agency mortgage-backed securities (MBS) and to-be-announced (TBA) securities. Since its inception in 1988, Dynex has focused on the intersection of capital markets and housing finance, a sector underpinned by enduring demographic trends. The company's portfolio predominantly comprises Agency residential MBS (RMBS), complemented by Agency commercial MBS (CMBS) and CMBS interest-only (IO) securities.

The current macroeconomic environment is characterized by significant volatility, influenced by evolving U.S. policies, tariff negotiations, and escalating global conflicts. Despite these headwinds, the Agency MBS market remains a compelling investment arena. Dynex's strategic positioning is designed to thrive in this complexity, emphasizing a "prepare, not predict" philosophy that prioritizes agility and resilience over market forecasts.

In the competitive landscape, Dynex distinguishes itself through its specialized expertise and disciplined risk management. While larger mortgage REITs like Annaly Capital Management (NLY) and AGNC Investment Corp. (AGNC) command greater scale, Dynex's focused approach to agency-guaranteed securities and its ability to identify relative value at the loan level provide a durable advantage. The company's transparent balance sheet, where all assets are marked to market and reflected in earnings and book value, further sets it apart from some peers who may employ less visible accounting practices. Dynex's management team, with a collective ownership of nearly 2% of the company, aligns its interests directly with shareholders, fostering a stewardship mindset that has translated into industry-leading total shareholder returns over the past one, three, and five years among agency-focused mortgage REITs.

Technological Edge and Operational Excellence

Dynex is actively building a "world-class operating platform" to enhance its operational capabilities and competitive moat. This strategic initiative involves bringing critical functions such as legal, IT operations, and accounting in-house. This move aims to achieve greater scale, cultivate and retain valuable institutional knowledge, and bolster organizational resilience.

The company is leveraging new technology tools from external partners while simultaneously developing its own internal infrastructure, applications, artificial intelligence (AI), and machine learning (ML) capabilities. While specific quantitative metrics on the direct benefits of this technology are not publicly disclosed, the strategic intent is clear: to streamline operations, improve decision-making, and prepare for a rapidly evolving financial and technological environment. This integrated approach to technology and operations is a key differentiator, allowing Dynex to manage its complex portfolio and hedging strategies with greater efficiency and precision, potentially leading to superior capital efficiency compared to competitors who may rely more heavily on fragmented external services.

Financial Performance: A Story of Strategic Execution

Dynex's recent financial performance underscores the effectiveness of its strategic approach in a challenging yet opportunistic market. For the three months ended June 30, 2025, net interest income reached $23.1 million, a notable increase from $17.1 million in the prior quarter. This upward trend is primarily attributed to the active addition of higher-yielding Agency RMBS to the portfolio and a reduction in financing costs, which declined by approximately 11 basis points quarter-over-quarter. Over the six months ended June 30, 2025, net interest income soared to $40.3 million, a substantial improvement compared to just $1.9 million in the same period of 2024, driven by purchases of higher-yielding assets and a significant 99 basis point decline in financing costs, largely due to Federal Open Market Committee (FOMC) interest rate cuts.

The company's investment portfolio, including TBAs, expanded by approximately 44% from year-end 2024 to June 30, 2025, reaching $14 billion. This growth reflects the deployment of approximately $2.8 billion in Agency RMBS and $418 million in Agency CMBS during the first half of 2025. While the company reported net losses on derivative instruments of $58.1 million in Q2 2025 and $176.2 million in H1 2025, these were largely a function of declining SOFR-based swap and U.S. Treasury rates. Management views these as part of a balanced hedging strategy, noting that interest rate swaps contribute positively to economic net interest income and enhance portfolio ROE by 200 to 300 basis points.

Dynex has significantly strengthened its capital base, raising $560 million in new capital year-to-date through Q2 2025, much of it at a premium to book value. This accretive capital raising has supported portfolio growth and enhanced liquidity. As of June 30, 2025, liquidity stood at a robust $891 million, representing 55% of total equity, comprising $388 million in unrestricted cash and $499 million in unencumbered Agency MBS. Repurchase agreement borrowings increased to $9 billion, financing the expanded portfolio, yet the company has experienced no difficulty securing financing, with stable repo rates (15-20 basis points over SOFR) and consistent haircuts. Leverage increased from 7.4 times in Q1 2025 to 8.3 times in Q2 2025, reflecting management's confidence in the improving risk environment. Despite an increase in operating expenses for the six months ended June 30, 2025, primarily due to higher compensation, the company achieved a 70 basis point reduction in its expense ratio for the full year 2024, demonstrating the benefits of scale from its capital growth.

Strategic Outlook and Dividend Strength

Dynex's outlook remains highly positive, anchored by the compelling returns available in the Agency MBS market. Management anticipates continued opportunities to deploy capital into these liquid assets, which are currently offering attractive ROEs ranging from the mid-teens to the low 20s when fully hedged. This positive carry environment is expected to support the company's dividend without requiring further significant market movements or Federal Reserve action. The company has already increased its monthly common stock dividend to $0.17 per share for July and August 2025, surpassing pre-COVID levels, a testament to its confidence in sustainable returns.

The company's strategic vision is informed by an expectation of approximately 50 basis points of Fed rate cuts in 2025, potentially leading to a terminal Fed Funds rate between 3% and 4%, and mortgage rates settling between 5% and 7%. This environment is conducive to earning carry and managing prepayment risk through careful security selection, including a deliberate bias towards lower coupons and specified pools with strong prepayment protection. Dynex also sees "tremendous upside earnings power" from potentially increasing its total leverage by 1 to 2 times from current levels, which it plans to do opportunistically. This increased leverage, combined with favorable drop income from TBA dollar roll positions, is expected to further enhance economic returns. The company holds substantial deferred tax hedge gains totaling $719 million, with over $100 million projected for recognition annually through fiscal year 2027, alongside $529 million in capital loss carryforwards, which provide a significant long-term tax benefit.

Risk Management: Preparing, Not Predicting

While the outlook is strong, Dynex operates with a deep respect for market risks, adhering to its "prepare, not predict" philosophy. Key risks include interest rate risk, spread risk, and prepayment risk, which has intensified with recent industry consolidation like Rocket Mortgage's acquisition of Mr. Cooper. Dynex mitigates these by actively managing its hedge portfolio, focusing on specified pools, and maintaining robust liquidity.

The company also closely monitors the uncertain future of Government-Sponsored Entities (GSEs) like Fannie Mae and Freddie Mac. While the U.S. housing finance system is deeply entrenched, any policy changes, even if well-intentioned, could be "misunderstood by the market," leading to temporary spread volatility. Similarly, broader regulatory changes, particularly those affecting bank capital requirements, could influence market dynamics. Dynex's strategy of maintaining ample liquidity and a flexible balance sheet, coupled with its engagement with policymakers, positions it to absorb potential shocks and capitalize on dislocations. The company has demonstrated its ability to navigate periods of "unpredictable price action and dislocation," such as the April 2025 tariff announcement, without being forced to crystallize losses.

Conclusion

Dynex Capital, Inc. stands as a compelling investment in the mortgage REIT sector, distinguished by its disciplined strategy, robust financial performance, and proactive risk management. The company's ability to consistently generate strong net interest income and accretive portfolio growth, even amidst significant market volatility, underscores the effectiveness of its "raise and deploy" model. Its strategic investments in Agency MBS, coupled with a dynamic hedging approach that leverages interest rate swaps for enhanced ROE, position it to capitalize on the current environment of wide spreads and a steepening yield curve.

The ongoing development of its in-house operating platform, integrating advanced technology, further strengthens Dynex's competitive advantages, fostering operational efficiency and resilience. This technological differentiation, combined with a transparent balance sheet and a management team deeply aligned with shareholder interests, provides a solid foundation for long-term value creation. As the company continues to grow its capital base and opportunistically increase leverage, its commitment to delivering attractive, sustainable dividends remains central to its investment thesis, making Dynex Capital a resilient and rewarding proposition for discerning investors.