How Dynex Capital is sizing up investment amid GSE reform

Dynex Capital, a mortgage real-estate investment trust run by executives with expertise running pre-conservatorship government-sponsored enterprise portfolios, demonstrated its ability to handle election volatility in the fourth quarter in a manner that improved some of its metrics.

Net income was around 60 cents per common share or $51 million, improving on a S&P Capital IQ consensus mean estimate closer to 20 cents. It also reported 10 cents in earnings per share with adjustments for one-time items, beating a 4 cent estimate.

Comprehensive income was nearly $12.6 million, down from higher levels in comparable periods. Earnings available for distribution were positive for the first time since early 2023, topping $8.1 million, according to Keefe, Bruyette & Woods.

(REITs employ a structure in which they must distribute at least 90% of their income to investors, who typically analyze them based on their comprehensive income and EAD in addition to net income.)

The market is watching to see how REITs and other investors look at the mortgage-backed securities markets as current elected leaders look to resume moving the enterprises out of government conservatorship. Dynex has a cautiously optimistic view.

"We are focused on delivering value at the intersection of capital markets and housing finance, where we believe there will be sustained opportunity," said Byron Boston, co-CEO and chairman of the board at Dynex Capital, said in an earnings call on Monday.

The REIT is entering the year with a constructive view of a GSE exit's implications, according to T.J.Connelly, the company's newly promoted co-chief investment officer. Connelly was previously senior vice president of strategy and research.

"Our base case for the coming year is the talk of reform could create volatility in spreads, likely offering an opportunity for us to deploy capital accretively, much like we did last year around the election," he said in an earnings call.

The company was able to raise capital and invest it into securities sold at attractive prices at the time, Connelly said.

There are broad ramifications of GSE reform beyond potentially attractive pricing that Dynex and the market will be watching closely and weighing, he said.

"GSE privatization could have significant implications for housing finance, especially as stretched affordability and inflation continue to weigh on households," said Connelly.

Two key components to keeping the agency MBS market stable and liquid amid a conservatorship exit are how the enterprises' guarantee and the sufficiency of their regulatory capital levels are handled, Connelly said.

"The team at Dynex monitors these developments closely, and is actively engaged with Washington to remain at the forefront of policy changes," he added.

Connelly, Boston and Smirti Laxman Popenoe — who shares the CEO and CIO titles in addition to the position of president — are among those at Dynex who previously were involved in managing mortgage-related bonds at Freddie Mac before the Great Financial Crisis.

It's experience that's become more timely with the current leadership in Washington returning to a focus on moving the GSEs back to a model more closely aligned to that used in the past, when the enterprises had an implicit government guarantee rather than an explicit one.

Popenoe said that experience shows such a model is possible to achieve, but also something that is easier said than done given the large MBS market they currently support.

"Could we get there? Yes, but the hurdle to get there is actually quite substantial," she said.

When asked how the line between the private and GSE markets might shift due to such a change, Popenoe said she foresees Fannie Mae and Freddie Mac's footprint shrinking, but it's too early to really say how.

"We're waiting to see what the actual actions are," she said.