Second Quarter 2018 Earnings Presentation August 2, 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 and expected economic trends, 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, 2017 and subsequent filings with the Securities and Exchange Commission, particularly those set forth under the caption “Risk Factors”. 2
Second Quarter 2018 Highlights • Earned comprehensive income of $0.05 per common share and net income of $0.23 per common share • Earned Core net operating income (1) of $0.18 per common share for the quarter, unchanged from the first quarter of 2018 ◦ Adjusted net interest income improved $0.6 million as net effective yield on assets improved 4 bps and interest rate swaps had a net receive rate of 34 bps versus a net pay rate of 3 bps in the first quarter • Generated economic return on book value (2) per common share of $0.04 per share, or 0.6 % for the quarter ◦ Declared a dividend of $0.18 per common share for the sixth quarter in a row ◦ Book value per common share declined $0.14 per share, or 2.0% to $6 .93 at June 30, 2018 compared to $7.07 at March 31, 2018 • Leverage (3) including TBA dollar roll positions of 6 .1x shareholders’ equity at June 30, 2018 compared to 6 .5x at March 31, 2018 ◦ Leverage was lower due to asset sales late in the second quarter. The capital has subsequently been redeployed primarily into fixed-rate Agency RMBS (1) Reconciliations for non-GAAP measures are presented on slide 20. (2) Equals sum of dividend of $0.18 per common share less the decrease in book value of $(0.14) per common share divided by beginning book value per common share for the quarter of $7.07. 3 (3) Equals sum of (i) total liabilities and (ii) amortized cost basis of TBA dollar roll positions (if settled) divided by total shareholders' equity.
Key Macro Themes • We believe the ability for interest rates to rise rapidly and remain elevated over the long term is limited. ◦ The foundations of the global economy are built on extraordinary growth in central bank balance sheets and global debt making global growth fragile and vulnerable to rapid adjustments. ◦ Global debt is a significant headwind against growth, higher rates and inflation. ◦ Markets remain vulnerable to surprise events, as demonstrated in May this year with the political issue in Italy. Interest rates dropped 32 bps over a short period. • The current structure of relative investment returns overwhelmingly favors high credit quality, liquid investments. ◦ The global market environment has shifted as the Federal Reserve bank is reducing its balance sheet and tightening monetary policy, necessitating a shift in focus to liquidity. • There are long-term favorable trends that should support our business model 4
Portfolio Evolution Emphasizing Higher Liquidity, Credit Quality and Flexibility $3,296 $3,621 $4,022 $3,932 $3,616 $4,000 $147 $205 U.S. Treasuries $58 $415 $1,223 $1,730 $3,000 $1,790 Fixed-rate Agency $739 RMBS (1) $1,919 ($ in millions) $304 $2,000 $28 6 Adjustable-rate Agency $273 RMBS $40 $1,320 $1,307 $1,124 Fixed-rate Agency $98 4 $96 6 $1,000 CMBS $76 4 $730 CMBS IO $6 93 $6 58 $6 13 Other non-Agency & loans $0 $58 $57 $42 $22 $20 2Q17 3Q17 4Q17 1Q18 2Q18 Reduced ARM portfolio and increased 30-yr fixed rate portfolio (1) Includes 30-year fixed-rate specified pools and TBAs on an if-settled basis. 5
Portfolio Composition (as of June 30, 2018) Agency Residential & We remain heavily invested in Agency Residential Commercial MBS: 90% and Commercial MBS • Our portfolio allocation reflects our expectations regarding the U.S. and global economies, interest rates and credit spreads Treasuries: 2% Non-Agency • We have a diversified portfolio across residential Other and Non-Agency AAA: and commercial agency securities Loans: 2% 6 % • We have benefited from this diversification for Multi Family Commercial: multiple years 38 % Other Single Family Commercial: 6 % Residential- ARMs: 2% Single Family - Residential Fixed: 54% 6
Benefits of Diversification Rising Interest Rate Environment Falling Interest Rate Environment • We expect that the DX Portfolio will exhibit less "duration drift" in both the up and down interest rate environment and therefore less price volatility than a portfolio of entirely residential investments • Diversification is a CORE PRINCIPLE for DX • A diversified portfolio of residential and commercial assets should have a more stable return profile over time ◦ Commercial assets have positive convexity versus residential assets due to their call protection and more predictable cash flows ◦ This also means lower hedge costs versus residential assets 7
Return Environment (as of June 30, 2018) Assets & Available Returns (1) Agency MBS offers attractive returns Higher Agency MBS • We believe the most compelling levered RMBS (2) , CMBS, CMBS-IO Government Range 9-13% Issued AAA risk-adjusted returns today are offered by Rated the highest credit quality and the most liquid assets Non-Agency MBS AAA CMBS-IO, RMBS, RMBS-IO, • Agency MBS offer more attractive returns as Rated CMBS the the Federal Reserve reduces its Range 3-9% investment in this sector Non-Agency MBS AA – BBB Rated Range 3-7% • The current structure of global asset prices and returns are being driven by central Non-Agency MBS Below banks and the extraordinary growth in Range 7-11% Investment global debt Grade/ Loans/MSRs Non-Rated Range 5-11% Lower (1) Range of levered returns based on Company calculations 8 (2) Includes specified pool and TBA
Favorable Long-Term Investment Trends • Substantial global demand for cash yield should support demand for mortgage REIT stocks: ◦ Aging global population ◦ Negative to low yields globally • Expanding investment opportunities from growing RMBS/CMBS supply: ◦ Need for private capital to replace government balance sheets ◦ Favorable U.S. demographic trends driving household formation/housing demand • Potential greater returns on investments in the future: ◦ Better risk premiums as Federal Reserve reduces its footprint ◦ Less competition from GSEs for assets as they are reformed ◦ Lower regulatory costs over the long-term 9
Attractive Returns over the Long-Term Total Return (%) January 1, 2008 - June 30, 2018 10 Source: SNL Financial (assumes dividends reinvested)
Attractive Returns from the U.S. Housing Finance System Total Return (%) January 1, 2003 - June 30, 2018 11 Source: SNL Financial (assumes dividends reinvested)
Recommend
More recommend
