Good day and welcome to the Dynex Capital Inc. Fourth Quarter Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Alison Griffin, Vice President of Investor Relations. Please go ahead.

Thank you, Andrew. Good morning everyone. This press release associated with today’s call was issued and filed with the SEC this morning, February 18, 2015. You may view the press release on the company’s website at dynexcapital.com under Investor’s center as well as on the SEC’s website at sec.gov. This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words believe, expect, forecast, anticipate, estimate, project, plans, and similar expressions identify forward-looking statements that are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. The company’s actual results and timing of certain events could differ considerably from those projected and/or contemplated by those forward-looking statements as a result of unforeseen external factors or risks. For additional information on these factors or risks please refer to the Annual Report on Form 10-K for the period ended December 31, 2013, as filed with the SEC. The document may be found under the company’s website under Investor center as well as on the SEC’s website. This call is being broadcast live over the Internet with a streaming slide presentation and can be found through a webcast link under Investor center on our website. The slide presentation may also be referenced by clicking on the Dynex Capital’s fourth quarter 2014 earnings conference call link on the presentation page of the website. With me on the call today, I have Byron Boston, CEO, President and Co-CIO, Thomas Akin, Executive Chairman, Smriti Popenoe, EVP and Co-CIO; and Steve Benedetti, EVP, CFO and COO. I’d now have the pleasure of turning the call over to Byron.

Good morning and thank you very much for joining us this morning. To our shareholders, thank you very much for investing with Dynex Capital for the past seven years. In 2008, we implemented our current strategy of building a diversified balance sheet they were performed in multiple market environments. We’re pleased with our results in 2014 because we have remained disciplined in our approach to the business. We identified the global financial and investment environment is being more complex and adjusted our strategic mindset accordingly. We have continued to favor commercial mortgage securities, but we went up in credit. We have continued to hold our selected short duration agency residential portfolio, but we allowed it to slowly rundown and as a result we increased the liquidity of our balance sheet. With a reduced balance sheet, lower leverage, lower spread risk, higher liquidity and more capital available to invest, we were able to generate a 15.3% total economic return to shareholders. There were multiple tactical decisions that were made throughout the year that are worth noting and Smriti Popenoe will discuss those later in this call. 2014 was full of surprises and we expect 2015 and 2016 to be more the same. Hence, we will continue to manage our business without taking large unnecessary risk. Commercial mortgage securities are a great anchor for our investment strategy, but we prefer the higher quality assets especially win back by multifamily properties. We love our hybrid ARM portfolio because it is truly short duration and our prepayment experience has been excellent. With that, let me turn the call over to Smriti and Steve, so they can give you more details on how we view the future.

Thanks, Byron. I’ll cover parts of Slides 5, 6 and 7 for those that might be reviewing the presentation. For the year, we generated an annual economic return of 15.3% to common shareholders, which consists of $1 in common dividends declared a $0.33 increase in book value per common share. We also earned $0.99 per share on a core net operating income basis as core earnings benefited from 9 basis points increase in adjusted net interest spread during the year, primarily from the active management of our repo book and our hedge position. Our investment portfolio was down by $514 million and shareholders equity increased by $21 million for the year, which together reduced our leverage by more than a full turn from 6.2 times to 5.1 times at the end of 2014. Turning to the fourth quarter, we reported core net operating income of $0.23 per common share, which was down slightly versus last quarter primarily from a lower earning asset base, partially offset by a higher adjusted net interest spread for the quarter. Adjusted net interest spread increased 4 basis points to a 197 basis points for the quarter as asset yields were lower by a net 9 basis points primarily from sales of non-agency CMBS in the third and fourth quarter partially offsets by slower prepayment speeds on agency ARMs and hybrids. Funding cost increased by 2 basis points primarily from maturity extensions on our repo book and hedge cost declined 15 basis points as we have managed the hedge book to stay duration neutral after the sales of the CMBS. Continuing from the third quarter, we generated gains of $11 million during the fourth quarter primarily from the continuing sale of non-agency CMBS. Overall, our portfolio CPR was 11.2% for the quarter, which was down from…

Thanks, Steve. I will cover slides 10 to 16 for those following along in the presentation. I am going to speak briefly about 2014 and then move on to 2015. As Byron mentioned, 2014 was about understanding the macroeconomic environment and positioning for it. We took several actions last year that drove our performance. First, we maintained a long duration position as the yield curve flattened, protected our book value using forward-starting swaps and Eurodollar futures. We also actively managed our funding portfolio to fully optimize the use of our financing facilities and take advantage of attractive repo financing when it was available. As Steve mentioned, these two actions resulted in an increase in net interest spread and kept core net operating income fairly steady for the year. We methodically reduced the balance sheet and increased our capital on liquidity positions, as risk adjusted returns trended lower towards the year. We also took profits on a highly successful investment in agency credit CMBS. We reduced our exposure to the riskiest part of the credit sensitive spectrum in CMBS as risk adjusted returns were declining and monetized over $20 million in gains. In addition, we selectively added assets to the balance sheet, maintaining our risk adjusted return discipline by focusing on well structured high credit quality CMBS IOs. As such, we believe we’re entering 2015 in a very good position. Our portfolio continues to be designed to perform in a variety of market environments. We have liquidity and capital reserves that can help us withstand any temporary spike and volatility and still be positioned to add assets at attractive levels. Let’s now discuss the macroeconomic and policy factors we believe will impact Dynex, the resulting investment environment, and implications for our strategy. I’m now on Slide 11. We believe the environment…

Thanks, Smriti. I’d like to focus your attention on Slide 18 and Slide 19. At the beginning, I was really focused on Slide 4 where I gave you a seven year picture of Dynex’s performance versus the SNL U.S. Finance REIT Index. And if you look at these two slides, we’ve got a long-term picture book value and then a long-term return picture going back approximately 11 years. And I want to focus your attention on the value of a long-term strategy to generate above average dividend yields. That’s what we have done here at Dynex with a keen focus on disciplined risk management. As you can see in the chart, since 2003 when Tom Akin became Chairman of Dynex Capital, we have made many tactical and strategic decisions that have allowed our portfolio to perform in multiple market environments. Our overall philosophy has remained the same for the past 11 years. It is extremely important to note that our shareholders were protected during the large financial crisis of 2007 and 2008. Given that the current global financial economic geopolitical and regulatory environment continues to be more complex, our goal is to protect the capital of our shareholders while generating an attractive return. We will not put our shareholders equity at risk in an attempt to generate an unreasonable return for this current complex global investment environment. We are maintaining our flexibility and liquidity to give us more options as the future unfolds. I always like to end my comments reminding you of the most important fact to consider when investing in Dynex. The Board, management and employees of Dynex have material amounts of our net worth invested in Dynex Capital. Hence, we are aligned with our shareholders and we will continue to make decisions as own or operators of this company. With that operator we’ll open up the floor for – open up the call for questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Douglas Harter of Credit Suisse. Please go ahead.

Thanks. Byron, as you look out to the dividend and how are you and the board are thinking about that kind of giving your commentary around kind of maintaining a defensive positioning and sort of core earnings right now being below the dividend. I guess I just want to get your thoughts as to how you’re thinking about that?

So do you compare $0.23 and $0.25, we’re in the range of the dividend, right. So it’s not that large of a differential. Let me just say this by background. I pulled several of our long-term investors just to see how our investors felt about the overall risk environment and the strategy and the dividend. And universally everyone would say please feel free to reduce the dividend but don’t just clobber us with the 20% correction in overall book value. So by philosophy that’s the way we’ve managed our company and we will continue to do that. And if you recall going back to last fall, we pulled several quarters of earnings forward by making those sales in our CMBS securities, which gives us a cushion an ability to payout the dividends as long as we were within some decent range of overall earnings. And that’s what we stand today and that’s what we look forward to in the future, that’s what we continue to be. The backdrop we do try to paint for you though by when we talk about a more complex environment. We just trying to make sure everyone understands that it’s an environment that can change very rapidly for any investor in the marketplace. So last year we know the all investors and the currency investors all really realized that point at this point in time. So when we talk about more complex that’s what we’re acknowledging.

Got it. And I guess what are you looking for as kind of the flashpoints to possibly cause the investment environment to be more attractive for you to put some of that capital to work?

So let me just tie this together with your other question. So we hit a point where we said and Smriti mentioned is that okay, we hit our balance sheet at this level, we’d like to keep it at this level or grow it from this point. And so that a lot of what has happened – core earnings are a reflection of just the overall balance sheet side. So as you think about the future and you think about how close we are in terms of dividend, it will give you some idea. So are you saying what indication, what flashpoints will make us change our opinion or think differently about the environment or see as the environment evolves? It really as we always talk about is a point of clarity and clarity means we’re at a point where asset valuations could adjust. Asset valuations adjust; we’re in position to put more capital to work. The only way that you manage through a period of asset value adjustment is you have a lower balance sheet. So we want to put more capital to work when its spreads are wider and we want to put less capital to work when spreads are tighter. At the end of day that’s what we’ve been doing at Dynex Capital. So we see asset valuations adjust, we will be investing our capital. At this point though I think it is important to emphasize that one big decision that we did look at the balance sheet and say let’s take a pause in terms of allowing the balance sheet to rundown before the balance sheet look for other diversifying opportunities to potentially put capital to work.

Great, thank you for that Byron.

The next question comes from David Walrod of Ladenburg. Please go ahead.

Hi, good morning everyone.

Hi, David.

Hi, David.

Hi, quick question, you have a new line item in the balance sheet investment in limited partnership. Can you give us a little color on that?

That’s a small investment that we’ve done before where we – there is a group that we feel very, very comfortable with. As Smriti mentioned earlier that we have made investments in the NPL/RPL scratch and dent type loan space, they have all been generally small investments, but very attractive returns over time. We’ve invested both in securities, which are shorter duration instruments, we’ve also invested through this process of directly in a fund that provides exactly the same type of short-term return profile that have been relatively attractive.

Okay, great. And then the other question I had was the share buyback you announced, can you talk a little bit about where you are out there?

Hi, Dave, it is Steve. I think we’re sort of similar in the same spot that we were in – when we talked about this last quarter. It’s one of the options for the use of our capital. Obviously, the stock today is trading at a discount to book value and so on – it’s on the margin analysis versus other opportunities to put our capital to work. We obviously didn’t buy anything back this quarter, the fourth quarter, but that remains an option going forward for us.

Okay, thanks a lot.

[Operator Instruction] The next question comes from Mike Widner from KBW. Please go ahead.

Hi, good morning guys.

Good morning, Mike.

So just listening to the tone of sort of how you talk about the investment environment and there was number of assets you talked about where I think you’re positive and you like the RPL/NPL and single-family rental, CMBS, et cetera. So a lot of things you seem to like today I guess what just strikes me just slightly less cautious, more optimistic if you will tone. You talked about growing the portfolio. So I guess volatility in the bond market has obviously picked up, but you guys seem I guess on the margin more optimistic or at least more comfortable with the investment environment today and then pick a time period a year ago, three quarters ago. So I mean is that right or am I just sort of imaging the tone difference there?

Mike, let me just say this. I can get kind of wired up and sound like a country preacher time when we start talking about global risk. So I purposely – yes, I purposely try to stay remain calm and sit in my seat and relax. Here is something that’s different than a year ago. Our balance sheet is down. We’re down from our peak balance sheet, we maybe $1 billion down in assets. So if you look back to seven years, we don’t want to use long-term charges, we put a lot of capital to work when spreads are really, really wide. So in 2011, when spreads were really, really wide, we back to [indiscernible] and put a ton of capital to work. Now the spreads are really, really tight and returns are lower, we’ll reduce that amount, but our balance sheet has come down and so we’re at a point of saying okay and we debate this internally, okay what’s the right size of the balance sheet. As of right now, we’re saying let’s hold it here and look to put money to work. One of our key parts of that happens to be diversity. Let’s have multiple different diversified bucket of assets, so we don’t expo - overly expose ourselves to anyone sector in this what we considered to be high global risk environment. I think we’re very vulnerable to surprise us Mike and we continue to feel that way, but we truly have reduced our risk profile at this point. And so, we just asked ourselves should we drive our balance sheet down to $2 billion and that’s not the right answer right now. As we stand right now, we just say look here is our balance sheet where it is, let’s look for these various different opportunities, as Smriti went through a nice little list, but behind that philosophy is diversifying because the risk environment is far more complex than let’s say five years ago. In my opinion 2008 was easy versus 2015.

Yes, I mean that – well, I don’t know, I guess that depends on what you’re in, but yes for you…

Yes, it depends on what seat you are sitting in right 2008.

So I guess maybe another way to – or another lens to sort of view that through visioning, you finished in terms of leverage and these are just off the top of my head and these might be a little off, but it leverage around 5.6 times today. You sort of – I got the impression, you know, you’re thinking about growing that, if I look back to where you sort of peaked, I mean, it was beginning of 2013, you were at six times and not a huge change and then you were kind of 6.8, 6.5 times kind of mid-year 2013, but I think that was more – the book value coming down and the asset is going up. I guess how do I think about your opportunism? And again you talked about growing the portfolio from here. So I mean relative to sort of 5.6 to 6 times leverage, I mean how do we think about where you’re heading?

Yes, I think the bigger decision for us is more putting a floor on the balance sheet. We’ve operated in or around 6x plus or minus something that’s always been our philosophy. The number that you have mentioned in terms of the peak, we probably on our own drove our balance sheet up to probably 6.4, 6.5, and so we’ve always looked at 6x has been kind of the center point of which we’re operating around, but we’re not running out right now to just say, hey, let’s lever backup to 6x.

And by the way Mike, we’re at 5.1, you said 5.6, so it’s – I mean, we’re a full turn down from where we were last year.

Oh, yes, I was looking at the different number there, but yes, that’s – okay, so plenty of room I guess is the bottom line for increasing it, but you’re also doing it cautiously and…

I like flexibility with options.

I like that too.

And we’re also – if I use military readiness, the language, we’re in DEFCON 4 man. We’re prepared. We’re prepared given the global environment. We’re in DEFCON 4. And so there is two parts of this. Everyone wants better returns; the only way to get better returns is that asset valuations have to adjust. It’s more painful when asset valuations address the more assets that you have. So again I’m going to go back to the simple concept when that spreads are really, really wide like in 2011 and 2012, we pushed the balance sheet as hard as we could up. And as spreads have come in and returns have decreased, we have reduced the balance sheet and we’re prepared to try to take advantage of a better investing environment and whether through surprises, which I think is the bright word to utilize here. And in the meantime, what we’re basically saying is you can generate a decent return.

Well, I appreciate the comments as always. And I guess just to come back to the starting point to that question. You described yourself as sort of feeling like you’re a DEFCON 4 now. Is that – where we have five at some point last year or you think we’re…

No, no, we were never at five.

Okay.

Okay. Five is September 2008, that in 2000, in fact I would say that entire period of March – I would say from August of 2007 all the way through September 2008 ratably and that’s five.

Yes.

You’re right in the middle, but you know what’s happening, you know for fact what’s going on and that’s why I say 2008 is easier. You knew exactly what was taking place. But at this point, there’re multiple places globally where any of us investing money can be surprised.

Yes, well, I appreciate it as always. Thank you, guys.

Thanks Mike.

Thanks Mike.

[Operator Instruction] The next question comes from Steve Delaney from JMP Securities. Please go ahead.

Thanks. Good morning everyone and thanks for taking the question. Byron, I want to apologize if this has been covered because I was jumping between calls. But I had the opportunity to read your comment letter regarding the FHFAs proposal with respect to captive insurance memberships in the Federal Home Loan Bank system. I know you’re tracking that closely. I was curious if you would be willing to sort of share your thoughts on, so what the timing and what the possible outcome might be and then specifically with respect to Dynex, if you could gain membership to the home loan bank system where with respect to which asset classes that you have? Where would you see such advanced funding being the most beneficial to Dynex? Thank you.

I appreciate the – first I appreciate your listening to our calls, Steve. You’ve just highlighted the fact that you have other things to do and so I appreciate you being here.

Sure.

My understanding on the FHFA front, there is a raging debate inside of the FHFA about how to resolve this issue. I’m sure that the people in the FHFA did not write this rule to anticipating 1,300 letters coming back with 99% of those letters - 99.8% being to the negative.

Right.

So from my understanding is that it kind of stretches this entire process out a bit, which is what happens as we wait. And that’s out there, I don’t have any answer for that. I’m not sure what that that will look like. A lot of discussions are being had, some people are saying, hey, maybe they will start, accepting applications, rumors are someone maybe making an application, well those all things that I’ve just heard in the market, the rumors.

Right.

I can’t substantiate any part of that. I will say and remind us all that we’re dealing with Washington D.C. and there is no reason for me to - all believe that I can predict what can happen given the politics of the situation. Mel Watt did was in front of Congress recently, my understanding is that he could be in front of Congress again at some point where he will be questioned about this issue. I have been encouraged by the amount of whether it’s a house members or Senate members that are aware of this situation and/or pre-disposed to - oppose the mindset that fit within FHFA. Now let’s discuss - so obviously we would like them to allow REITs, such as Dynex Capital to be a counterparty and a borrower from the Federal Home Loan Bank system. So what would we do, how would we benefit? First and foremost, it diversifies the liability side of our balance sheet. So now, I’d moved away from having my entire balance sheet exposed to let’s call large U.S. banks and some foreign banks.

Right.

That diversified into what I considered to be one of the more stable sources of financing that allows us, that will gives us more opportunity to continue to operate within the housing finance system. So that’s diversity. The second part of that happens to be the more financing options, which means that I may have more asset choices. So as you see, we don’t have a ton of long duration assets in our portfolio and the main reason is the function of financing, just think about it, right. You have $1 billion of 30 years on securities, finance with 30 day repo. I like the idea of having hybrid ARMs finance with 30 day repo, but I do 30 of fixed rate securities. But once you get into - the home loan bank can offer you five-year financing, seven-year, ten-year financing, a variety of different options. The other place where they can offer you potentially better financing is around home loan or some other type of asset class such that which will allow us to broaden.

Right.

So I will remind you the history of Dynex. Over 30 years of being in operation, we have had almost every business model under our roof. We were direct lenders back in the 1990s to both the residential sector and the commercial sector with a heavy emphasis of multi-family. Today, we have all securities. So you have to ask the question, Byron, why today you only have securities? Because they are more liquid. We’re more liquid in a more complex global environment. You give me the financing options of a home loan banking system. You give me more options to invest in the housing finance system. I’ll also emphasize that in the 1990s, Dynex is a large low income tax housing credit lender. So you also give us an opportunity to think in terms - a broader in terms of the types of borrowers that we’d not be willing to participate with, giving more financing options. So our entire existence really has been in the housing finance system and that’s the point that where we made to the - to the FHFA a regulators is that this is our existence. Of more so, we’re probably more focusing on housing finance to many other financial institutions including banks, commercial banks, community banks and others. And the immediate impact what’s on balance sheet right now that we could immediately finance, our multi-family securities will go great as an asset that is financed through the Home Loan Bank System.

Great, Byron, I really appreciate you, sharing your thoughts about it. I think it would be a great opportunity. And if it happens, we’ll be looking forward to seeing how Dynex takes advantage of the opportunity. So thank you for your comments.

This concludes our question-and-answer session. I would like to turn the conference back over to Byron Boston, CEO and Co-CIO, for any closing remarks.

Thank you very much. And we appreciate you all join us for our year-end and our fourth quarter conference call. We look forward to having you join us again for our first quarter results. Thank you.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.