Fourth Quarter 2017 Earnings Presentation February 21, 2018
Safe Harbor Statement NOTE: This presentation contains certain statements that are not historical facts and that constitute “forward -looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Statements in this presentation addressing expectations, assumptions, beliefs, projections, estimates, future plans, strategies, and events, developments that we expect or anticipate will occur in the future, and future operating results or financial condition are forward-looking statements. Forward-looking statements in this presentation may include, but are not limited to, statements regarding future interest rates, our views on expected characteristics of future investment environments, prepayment rates on our investment portfolio and risks posed by our investment portfolio, our future investment strategies, our future leverage levels and financing strategies, the use of specific financing and hedging instruments and the future impacts of these strategies, future actions by the Federal Reserve, and other central banks, and the expected performance of our investments. The words “will,” “believe,” “expect,” “forecast,” “anticipate,” “intend,” “estimate,” “assume,” “project,” “plan,” “continue,” and similar expressions also identify forward-looking statements. These forward-looking statements reflect our current beliefs, assumptions and expectations based on information currently available to us, and are applicable only as of the date of this presentation. Forward-looking statements are inherently subject to risks, uncertainties, and other factors, some of which cannot be predicted or quantified and any of which could cause the Company’s actual results and timing of certain events to differ materially from those projected in or contemplated by these forward-looking statements. Not all of these risks, uncertainties and other factors are known to us. New risks and uncertainties arise over time, and it is not possible to predict those risks or uncertainties or how they may affect us. The projections, assumptions, expectations or beliefs upon which the forward-looking statements are based can also change as a result of these risks and uncertainties or other factors. If such a risk, uncertainty, or other factor materializes in future periods, our business, financial condition, liquidity and results of operations may differ materially from those expressed or implied in our forward-looking statements. While it is not possible to identify all factors, some of the factors that may cause actual results to differ from historical results or from any results expressed or implied by our forward-looking statements, or that may cause our projections, assumptions, expectations or beliefs to change, include the risks and uncertainties referenced in our Annual Report on Form 10-K for the year ended December 31, 2016 and subsequent filings with the Securities and Exchange Commission, particularly those set forth under the caption “Risk Factors” . 2
4Q17 Highlights • Dividend of $0.18 per common share • Comprehensive income of $0.08 per common share and GAAP net income of $0.36 per common share • Core net operating income (1) of $0.20 per common share for the quarter ⦁ Includes drop income on TBA securities of $0.07 per common share • Total economic return on book value (2) of 0.8% for the quarter • Book value per common share of $7.34 at December 31, 2017 compared to $7.46 at September 30, 2017 and $7.18 at December 31, 2016 • Increased investment in 30-year fixed-rate RMBS including TBA dollar roll positions to $1.7 billion from $1.2 billion at September 30, 2017 • Leverage (3) including TBA dollar roll positions of 6.4x at December 31, 2017 versus 6.3x at September 30, 2017 (1) Reconciliations for non-GAAP measures are presented on Page 30. (2) Equals sum of dividend of $0.18 per common share less the decrease in book value of $(0.12) per common share divided by beginning book value per common share for the quarter of $7.46. (3) Equals sum of (i) total liabilities and (ii) amortized cost basis of TBA dollar roll positions (if settled) divided by total shareholders' equity 3
2017 Full Year Highlights • Dividends of $0.72 per common share • Comprehensive income of $47 million or $0.93 per common share • GAAP net income of $23 million or $0.46 per common share • Core net operating income of $37 million or $0.73 per common share • Total economic return (1) on book value of 12.3% ⦁ 10.1% from dividends declared ⦁ 2.2% from increase in book value • Reallocated capital into more liquid, higher ROE investments by transitioning from hybrid ARMs into 30-year fixed-rate Agency RMBS • Added hedges to limit impact of Fed hikes on funding costs • Leverage including TBA dollar roll positions remained relatively stable ending year at 6.4x at December 31, 2017 versus 6.3x at December 31, 2016. (1) Equals sum of dividend of $0.72 per common share plus the increase in book value of $0.16 per common share divided by beginning book value per share for the year of $7.18. 4
2017 Investment Strategy Review Strategic Focus for 2017 How We Executed Sold less liquid, lower yielding hybrid ARMs, reinvested Maintain investments in high quality, liquid assets into TBA and 30-year fixed-rate securities, improving and maintain high liquidity position. liquidity and flexibility. Operate with large liquidity and cash position. Remained active in CMBS IO and DUS markets until Maintain diversified investment strategy in returns fell below our threshold. CMBS IO continues to residential and commercial sectors. provide diversification benefits to Core EPS. Seek to capitalize on opportunities for investing As spreads on 30-year fixed-rate MBS widened last year, capital from increased market volatility and/or we took advantage and increased our allocation to this shifts in government and regulatory policy. sector. Continue to seek ways to diversify funding Managed counterparties, terms and hedging to sources as the regulatory environment becomes minimize impact of Fed hikes as well as mitigate more favorable. quarterly funding pressures. Continue commitment to disciplined risk Generated total economic return on book value of management and capital allocation decisions that 12.3% with stable leverage and higher financing costs maximize flexibility given the current while improving the overall liquidity of the portfolio. environment. 5
Investment Portfolio Changes in 2017 Shifted from ARMs to fixed-rate securities and TBAs. Increased overall liquidity of investment portfolio. Investments at December 31, 2017 Investments at December 31, 2016 Total = $4,020 million Total =$3,231 million 6
Portfolio Composition Emphasizing Higher Liquidity and Credit Quality U.S. Treasuries Fixed-rate Agency RMBS (1) Fixed-rate Agency CMBS Adjustable-rate Agency RMBS CMBS IO Other non-Agency & loans (1) Includes 30-year fixed-rate specified pools and TBAs on an if-settled basis. 7
Dynamic and Disciplined Asset Allocation Credit Diversification Sector Diversification * Includes 30-year fixed-rate specified pools and TBAs on an if-settled basis 8
Macroeconomic Themes • We believe we are in a transition to a higher return environment where we will have the ability to invest capital at long term accretive returns for Dynex shareholders. • We believe the length of transition will be uncertain, but several catalysts are already in motion – the reduction in the Fed’s balance sheet, the Fed’s apparent commitment to a rate hiking path, and fiscal policy actions which will materially increase the supply of U.S. Treasury debt. • In the near term, we expect economic data in the US and globally to be positive. Underlying fundamentals fully support this and appear to be poised to strengthen, fueled temporarily by tax cuts: ⦁ Growth was solid coming into 2018 and will be further boosted by tax cuts, consumption, government and business spending. ⦁ Employment picture continues to improve with the latest data confirming modest rise in wages as well as JOLTs “quits” data confirming more confidence and mobility among workers. ⦁ While inflation is currently low, it is difficult to see how the amount of fiscal stimulus being employed does not create some inflationary pressure in the U.S. • Global central banks are beginning to end the quantitative easing cycle led first by the U.S. The ECB is expected to make an announcement regarding the end of QE in March. While the BoJ has maintained its commitment to QE and a weaker yen, the Japanese economy has now grown for seven consecutive quarters for the first time in more than 15 years. • In the long-term, the amount of increasing global debt may prove a constraint to growth and inflation and create a more fragile global economy. • However, markets remain vulnerable to surprise events, like a geopolitical issue, or a significant global equity or rates correction that impacts aggregate demand. • Rapidly rising interest rates could also push equity markets lower or the economy into recession, causing rates to decline in a "round trip" effect similar to 1987 and 1994. 9
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