Dynex Capital Reports Q3 2026 Results, Book Value Falls 15.4%

Dynex Capital Inc. reported a 15.4% decline in book value to $10.91 per share in Q3 2026, with a negative total economic return of 11.4%. The company raised $116 million through an issuance of Series D preferred stock, its first preferred equity offering in over six years, diversifying its capital structure. Dynex raised $384 million in capital during Q3, including $268 million through its ATM program.

Its economic net interest spread remained stable at approximately 1.18%. Despite market volatility, Dynex reported $1.3 billion in cash and unencumbered securities, which it said supported strategic investment opportunities. Management cited attractive mortgage spreads and improved mortgage market convexity in expressing confidence about future returns, and projected return on equity in the 20% range. Dynex Capital managed its portfolio by adding hedges as interest rates rose and kept leverage at 9.0 times shareholders' equity.

Management said significant money market balances supported robust funding markets and the company's ability to carry positions through market volatility. Operator Kaitlyn Mauritz, Head of Capital Markets and Investor Relations, opened the conference call. She thanked participants for joining Dynex Capital's third quarter 2026 earnings call and introduced Co-Chief Executive Officer and President Smriti Papineau; Chairman and Co-Chief Executive Officer Byron Boston; Chief Financial Officer Michael Sartori; and Chief Investment Officer T.J. Connelly.

Mauritz reminded participants that the discussion could include forward-looking statements based on current expectations, forecasts and assumptions. She noted that risks, uncertainties and other factors could cause actual results to differ materially. For information about these risks and factors, see our filings with the SEC, available in the Investors section of our website and on the SEC’s website. Dynex Cap undertakes no obligation to update or revise forward-looking statements.

Our earnings press release was issued and filed with the SEC earlier today and is available on our website’s Investors section at dynexcapital.com and on the SEC’s website. Our earnings presentation is also available on our Investor page. I’ll now turn the call over to Smriti for opening remarks. Smriti Papineau, Co-Chief Executive Officer and President, thanked participants for joining the call.

She described the quarter as pivotal for markets and said Dynex Cap was prepared, citing its strong liquidity position, the team’s decision to maintain its highest-conviction trade, and its capacity to invest as spreads widened. In the third quarter, book value fell 15.4% to $10.91 per share, and total economic return was negative 11.4%. Papineau said the portfolio operated as designed. The liquidity position We absorbed the decline in book value, while financing remained deep and reliable and hedging limited downside.

With 10-year Treasury yields rising above 5% during the quarter, we continued to evolve our capital structure by issuing Series D preferred stock—our first preferred equity offering in more than six years. The transaction provided an accretive source of permanent capital and further diversified our capital base. Quarterly results reflected greater volatility and higher yields across bond markets, alongside wider spreads in agency MBS markets. The company attributed these moves to fundamental shifts in the macroeconomic environment.

It said the U.S. economy is undergoing a significant positive investment cycle, driven by AI and the infrastructure needed to support it. During the third quarter, several key factors tied to AI investment underwent simultaneous, significant repricing and reassessment of risk. The company said demand for capital in the sector, its cost, the effects of that investment on commodity prices, and the subsequent impact on inflation were all higher, putting upward pressure on yields.

At the same Geopolitical uncertainty and rising government borrowing needs in the U.S. and worldwide have added to upward pressure on yields. In this environment, agency MBS have been a sideshow rather than the main event. Although trading flows have at times been choppy and illiquid, the sector has not been the source of market stress.

The fundamentals and technical backdrop for agency MBS are highly constructive. Following the significant, rapid repricing, the company sees an attractive investment opportunity. Absolute real yields are compelling at current levels, while mortgage spreads remain historically wide and offer substantial compensation as the value of borrowers’ prepayment options has declined considerably. Refinancing incentives are extremely limited, and much of the mortgage universe has already extended substantially.

Consequently, these assets have more stable duration and expected cash flows, and the mortgage market’s convexity profile has improved dramatically. As long-term agency MBS investors, the company says it is earning a wide spread while taking on considerably less cash-flow uncertainty than it is The combination supports our confidence in strong prospective returns. Although the cost of capital has temporarily moved higher, expected returns have increased materially. This is an important period for Dynex Capital and its shareholders.

We have been building a larger, more resilient company with the liquidity and flexibility to manage market and operating shocks. As the business grows, its investment platform becomes more durable, with greater capacity to deploy capital and pursue attractive returns. I’ll hand the call to Mike and T.J. to discuss the financial results and portfolio positioning in more detail.

Michael Sartori, Chief Financial Officer, thanked Smriti and began his review of third-quarter results. Book value per common share was 10.91 at September 30, versus 12.90 at June 30. Including the 0.51 common dividend, 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.

The company raised 384 million of accretive capital during the third quarter. Net of fees, we raised $268 million in common equity through our ATM program while retaining an opportunistic approach to capital raising. In late September, we also completed our first preferred equity offering since 2020, generating $116 million in net proceeds. The offering expanded strategic flexibility in our capital structure.

Preferred equity rose from approximately 3% to 7% of our total equity base, diversifying our funding sources as the business grows. The transaction was accretive and carried an attractive cost of capital, particularly compared with the current yield on our common equity. Funding markets remain deep and supportive. We have more than $24 billion in repo financing across over 25 counterparties.

Our broad counterparty network and high-quality, liquid agency collateral provide substantial capacity to support additional investment opportunities. Asset yields increased from 4.9% to 5%, exceeding the modest rise in our effective financing cost from 3.79% to 3.82%. As a result, our economic net The interest spread was approximately 1.18%, remaining stable. Liquidity continues to be a key strength: cash and unencumbered securities totaled $1.3 billion at quarter-end, representing over 42% of total equity and down approximately 9% from the prior quarter.

As intended, these liquidity levels have helped buffer book value declines. Maintaining ample liquidity is central to the risk management framework and enables the company to pursue market opportunities as they arise. Equity capital stood at $3.1 billion at quarter-end, up 24% year to date. General and administrative expenses in the third quarter were 2% of total equity on an annualized basis, in line with the run rate discussed last quarter.

The company said it has continued to generate meaningful operating leverage as it has grown. G&A expenses have decreased as a share of equity over time and were approximately 40% lower than in the same period in 2025. The company said it continues to invest in talent, technology and infrastructure to support a larger, more scalable platform while executing its business plan. It remains committed to expense discipline and focused on further improving operating efficiency as it I’ll hand it over to T.J.

to discuss the portfolio and outlook. T.J. Connelly, Chief Investment Officer, said current-coupon mortgage yields rose nearly 100 basis points in the third quarter. The 10-year Treasury yield increased more than 80 basis points, moving above 5% for the first time since 2007.

Mortgage spreads widened nearly 20 basis points, with much of the move occurring in the last two weeks of September. At quarter-end, current-coupon spreads to 7-year swaps were around 162 basis points, near the wide end of this year’s range. The company actively managed its portfolio and added hedges as rates rose, limiting the impact of the rate move. Spread widening accounted for more than 80% of the quarter’s return, and liquidity covered margin needs in the normal course of business.

The company held its exposures and their return potential and did not delever. Connelly also announced the release of the Dynex Angle, which accompanies the earnings presentation and provides a deeper look at the company’s market and macro perspectives. It is available on the company’s website under the Dynex Realized rate volatility rose, while implied volatility in interest rate options increased even more, making mortgages cheaper. As expected, floaters with interest rate caps were particularly exposed.

Hedge funds then had to quickly exit or hedge their floater positions, selling agency MBS in the process. Rising yields and rapidly extending durations also prompted convexity selling by servicers and other mortgage hedgers. Apart from those activities, the market remained orderly. Money managers continued to buy agency MBS as spreads widened, and those purchases carried on into October.

The GSEs also acted as expected. As noted in July, they are value-sensitive buyers, with anecdotal evidence of GSE buying in late September. Their demand when spreads were wide was enough to support a healthy mortgage market. Funding markets remained robust, and those conditions persisted into October, alongside strong demand from money market funds.

Dealer intermediation remained effective. Mortgage repo spreads to SOFR stayed near their tightest levels in several years, in a range of 12 to 15 basis points. Quarter-end passed without any noticeable pressure for the first time in many years. Looking ahead, the expansion of central clearing and sponsor repo, potential changes to bank capital requirements, and the Fed's standing liquidity facilities are expected to provide further structural support for financing and contribute to deeper, more resilient funding markets over time.

Smriti characterized the improved mortgage convexity profile as an important part of the current opportunity. To explain its significance for Dynex's portfolio, management cited the underlying figures: only about 1% of outstanding mortgages have a refinance incentive greater than 25 basis points, and the vast majority of agency mortgages trade below par. The convexity selling that contributed to the rise in yields has largely run its course, leaving very little extension even if rates rise further.

The interest rate sensitivity table at the top of page 23 of the presentation illustrates this, where the The modeled effect of rate changes on book value is now substantially smaller. As of September 30th, an instantaneous 50 basis point rate increase is estimated to reduce common equity by about 0.5%, versus 3.5% at June 30th. This means shareholders may be able to capture the attractive carry discussed earlier without depending on a particular interest-rate path. With this setup, the company intentionally increased spread exposure.

Portfolio spread sensitivity rose from about 4.6% of common equity per 10 basis points of spread at June 30 to about 5.7% at quarter end. If spreads tightened 20 basis points—roughly retracing the third-quarter widening—the model estimates book-value gains of approximately 11.5%, all else equal. Leverage finished the quarter at 9.0 times shareholders' equity. The increase largely reflected the decline in book value resulting from spread widening and convexity.

Leverage reflects the opportunity set, portfolio risk characteristics and the liquidity the company seeks to maintain. Confidence in the current positioning is based on the market backdrop, yield spread, available favorable supply and Demand technicals, the convexity profile supported by more stable mortgage duration, and favorable financing conditions are also important. Attractive modeled ROEs are not the only consideration. More stable durations and less need to rebalance hedges position the portfolio to retain more of the carry built into those returns.

We believe the compensation for the risks we are taking is sufficient, supporting our willingness to operate at the current leverage level. We maintained our positions through the repricing, preserved our financing, and deployed new capital at wider spreads. We are now earning attractive spreads on mortgages with more stable durations, while the funding market remained resilient through the volatility. We are positioned to pursue the opportunity presented by today's wider spreads.

Static ROEs on new investments hedged with interest rate swaps are around 20% for lower coupons and 25% for current coupons. As shown in the interest rate sensitivities, a 10 bp spread tightening adds almost 6% in incremental return. I'll hand the call back to Smriti for closing remarks. Smriti Papineau (Co-Chief Executive Officer and Thank you, T.J.

Market repricing is a normal occurrence, and the third-quarter mark-to-market impact is already reflected in our assets, balance sheet, book value and share price. We believe our focus—and that of investors—should now be on the portfolio’s potential to generate 20-plus percent ROEs in the future. We have strong conviction in our ability to earn those forward returns. We continue to manage Dynex Cap with a long-term shareholder perspective.

That means remaining disciplined through significant repricing, managing risk while holding positions in which we have the greatest conviction, and retaining the ability to invest as opportunities arise. Our focus goes beyond any single quarter. We are building Dynex Cap to compound value across cycles through greater scale, a flexible capital structure and the capacity to invest when shareholders are well compensated for risk. We remain invested alongside you in what we believe is a powerful long-term opportunity for shareholders.

With that, I’d like to open the call to questions. Thank you. To ask a question, please… Participants were asked to press star one on their telephone keypad to join the question queue. Those using speakerphones were asked to unmute so their signal could reach the equipment.

The operator then opened the first question to Doug Harter of U.S. Bancorp. Doug Harter asked about the company’s risk positioning and its comfort with allowing leverage to increase if markets remained weak and spreads widened in the near term, following earlier remarks about near-term market risk compared with the longer-term outlook. Chief Investment Officer T.J.

Connelly said a favorable financing environment was a key market factor and that he wanted to emphasize it further. He said money market balances had grown by about 60% over the prior two to three years, with $8 trillion held in money market funds. In his view, those balances supported the ability to carry positions through market volatility. He began to note that realized volatility had been notable, but the supplied section ends before he completes the point.

The sharp move in the third quarter was in implied volatility. Significant macroeconomic risk is priced into these mortgages, but we have been able to maintain financing through volatile periods. Financing markets have remained extremely healthy, giving us confidence in the leverage we are carrying. Doug Harter, an analyst at U.S.

Bancorp, asked how the company arrived at its estimate of 20 to 20-plus percent returns. Chief Investment Officer T.J. Connelly said the figure represented levered ROE, based on the company’s models and its view of spreads at the end of the third quarter. The model indicated about 20% static ROE on five-through-six coupons, while some higher coupons, including six and a half, were around 25% ROE.

Leverage in that static ROE model worked out to around 10. Bose George of KBW asked for an update on quarter-to-date book value. CFO Michael Sartori said estimated book value, net of the accrued dividend, was $10.95 as of Friday. George asked whether anything unusual or seasonal explained expenses appearing closer to one and a half than the 2% figure, and whether 2% was the appropriate figure to use going forward.

Sartori said general and administrative expenses were down about 40% from the same time last year. The company remains focused on the 2% ratio and expects operating leverage benefits as it continues to grow. Sartori added that performance and returns are what matter. A company representative said compensation expense drives the decrease and is aligned with company performance and shareholder value.

Analyst Bose George of KBW thanked the executives. CFO Michael Sartori said he may have briefly cut out and restated the book value as $10.95. George clarified, “95 cents,” and thanked him. Operator then introduced UBS analyst Marissa Lobo.

She asked about demand, including bank demand, GSE purchases and foreign demand, and who might be the marginal buyer of agency MBS at the current spread levels. Chief Investment Officer T.J. Connelly said GSEs were very likely in the market in September and had provided a backstop bid for mortgages. He said the company had discussed this for several quarters, following the January tweet and the GSEs’ active purchases in the first quarter.

Connelly said that remained an important backdrop, then began to describe what was notable. At current rate levels and given the supply dynamics, only a modest amount of additional demand is needed. Foreign buyers have been active. In Europe, for example, there was news that Norges Bank might sell global sovereign bonds to purchase agency mortgages, specifically U.S.

agency mortgages. That is notable. I believe this could provide a long-term flow of support and demonstrates the quality of these assets. At these real-yield levels, the yield is compelling to global investors, so I expect foreign investors to contribute to demand.

The mortgage REIT community is also becoming increasingly important. Smriti Papineau, Co-Chief Executive Officer and President, said forward returns look solid in the low to mid 20s. She said the company has preserved its earnings power despite the decline in book value. One key decision during the quarter was not to deleverage; she said that approach retained its earnings power, in fact all The company said the issuance was highly accretive to common shareholders and that it was pleased with the deal’s timing and market reception.

It described its capital structure as flexible, noting that preferred stock accounts for about 7% of the total capital structure, with room for that share to increase. The company said decisions on capital structure and fundraising are opportunistic, taking into account shareholder accretion and where capital can be deployed relative to its cost. It said it was pleased to have reentered the market and may continue to use this as a source of capital in the future. Operator: We’ll go next to Meryl Ross with Compass Point.

Please go ahead. Meryl Ross, analyst at Compass Point: Thank you. Looking at slide 24 and the changes to your hedge positions, it An analyst asked when Dynex changed its positioning, what informed the decisions and whether management was satisfied with its position at quarter-end. Chief Investment Officer T.J.

Connelly said the company increased hedges progressively as rates rose, largely in lockstep with the move. Dynex entered the quarter intending to keep adding hedges as rates moved higher. After rates passed 5%, the company recognized the mortgage convexity profile it had discussed and followed a defined plan to add hedges. Connelly said the book had a modest increase in some longer-dated hedges, including swap hedges shown on page 24 and Treasury futures hedges.

Analyst Meryl Ross then cited Freddie Mac’s view that mortgage rates would be 7.5% through 2027 and asked where the company saw better value in that market, saying it did not appear to be in TBAs. T.J. Connelly, Chief Investment Officer, said the company does not focus on a static mortgage rate over time. Instead, it considers a range of scenarios and prepares for outcomes both above and below the seven and a half mortgage rate mentioned.

He said the portfolio is designed to generate solid cash flows across different environments. Connelly said the convexity profile and stable duration profile discussed are most compelling in coupons of five and a half and lower, and are important to earning these ROEs. Meryl Ross, an analyst at Compass Point, thanked him. The operator then introduced Trevor Cranston of Citizens JMP.

Cranston said the company’s overall rate exposure appeared to have declined during the quarter and asked for its macro views, including how it assesses the risk of rates moving significantly. Higher or lower than current levels? And how do you think mortgage-backed securities would perform if rates moved significantly in either direction from here? Thanks.

T.J. Connelly, Chief Investment Officer, said the key consideration is what is priced into swaption and interest-rate options markets. Implied volatility is elevated and notably above realized volatility, he said, making it an important factor in the company’s ability to earn these ROEs and achieve available returns. Connelly said the overall mortgage market’s convexity profile is very stable in a higher-rate environment, with durations extending only modestly.

From a broad macro perspective, housing turnover is around 4.5% per year, he said. Existing home sales are very depressed and may have been forming a bottom over the past several years. At the turnover rates implied by mortgages, turnover is very low in the The mortgage structure supports very stable cash flows, while unusually high implied volatility has widened spreads. In the current macro environment, that spread makes the targeted returns compelling.

Taking significant macro exposure is not attractive; the focus is deliberately on earning returns from the spread, largely regardless of the direction of interest rates. Chief Financial Officer Michael Sartori said that, at current mortgage-market pricing, incremental extension over the next 25, 50 or 100 basis points is very limited because 90% of the extension has already occurred. He said this limits further extension if rates rise. For investors concerned about higher-rate scenarios, the key consideration is the price of options in implied-volatility markets.

The mortgage market is already pricing in a significant risk premium for implied volatility, and the company believes it is being compensated for the additional risk. Trevor Cranston, an analyst at Citizens JMP, asked whether the existing portfolio provides sufficient dividend coverage. He also sought clarification on the incremental ROEs discussed as being in the 20-plus percent range, which he understood were calculated using 10 times leverage, above the company’s current level. Cranston asked how the third-quarter changes affected the company’s dividend policy.

Chief Financial Officer Michael Sartori said the portfolio’s earnings power remains intact. Because the company did not deleverage during the quarter, the impact was reflected in book value, he said, while the portfolio’s earnings power was preserved. Sartori added that the company had been confident in its ability to cover the dividend over the past several quarters, even before the latest developments. Sartori said that view had not changed substantially because the company did not significantly adjust the portfolio, particularly on the asset side.

He described that part of the portfolio as relatively well preserved. T.J. Connelly, Chief Investment Officer, said the figures he cited assumed leverage of 10 times. He noted that leverage stood at 9 at quarter-end and that the company had also made net asset purchases since quarter-end.

After the analyst thanked him, the operator said there were no further questions and invited Smriti Papineau to make closing remarks. Papineau, Co-Chief Executive Officer and President, thanked participants and said the company looked forward to updating them on its performance in January. The operator then ended the conference. The transcript is provided for informational purposes, and the provider cautioned that the automated transcription may contain errors or omissions.

It directed readers to the company’s SEC filings for official statements and financial information. Statements made by company representatives and analysts reflect their views on the date of this call and may change without notice.