Good morning and welcome to the Dynex Capital Fourth Quarter and Annual Earnings Conference Call. All participants will be in listen-only mode. [Operator Instruction] 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, Investor Relations. Please go ahead.

Thank you, operator. Good morning everyone and thank you for joining us. The press release associated with today's call was issued and filed with the SEC this morning, February 17, 2016. You may view the press release on the Company's website at dynexcapital.com under Investor Center, as well as on the SEC's website at sec.gov. Before we begin, we wish to remind you that 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, plan, and similar expressions 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 our Annual Report on Form 10-K for the period ending December 31, 2014, as filed with the SEC. The document may be found on our website under Investor Center, as well as on the SEC website. This call is being broadcast live over the Internet with a streaming slide presentation which 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 2015 Earnings Conference Call link on the Presentations page of the website. With me on the call today I have Byron Boston, CEO, President and Co-CIO; Smriti Popenoe, EVP, Co-CIO; and Steve Benedetti, EVP, CFO and COO. I now have the pleasure of turning the call over to Byron.

Good morning. Thank you very much for joining us today. Our results for 2015 were mixed as we have generated a solid dividend return to our shareholders that was offset by a larger decline in our book value. Let me point out a few key things. First to better understand 2015 it is best to put our results in the context of our strategy over the past two years. In early 2014 we became concerned about the complexity and fragility of the global financial environment. As a result we sold the majority of our lower credit quality investments and reinvested our cash in AAA securities and securities backed by government agencies. By improving the credit quality and liquidity of our balance sheet we materially reduced the impact of an extremely volatile year in credit spreads. Credit spread widening, especially in the CMBS sector was the major reason for our decline in book value in 2015. We also positioned our portfolio to continue to generate solid net interest income as represented by our steady $0.24 dividend payment throughout 2015. Although we are not happy with the decline in book value, we continue to stay focused on long-term results and we do believe – which we believe will be heavily driven by generating net interest income over the long term. Second, let me say a few words about funding in the repo markets. Since the beginning of the year, we have received questions about rumored problems in the financing markets. Let me assure you that we have no problems financing our positions and the impact of being denied membership into the federal home loan bank system has been overblown. In fact the home loan bank issue does not materially impact the outlook for our business. Third, despite the periodic declines in book value we continue to remain focused on the long-term. Since 2008 we have experienced two other major bouts of book value decline due to wider spreads. In each situation, we continued to hold our positions and to invest capital at the wider spreads. As you can see in the attached charts on Slide 4 and Slide 5, we earned an above average dividend yield over time and it helped cushion the impact of volatile spreads and it was a major driver of returns over the long-term. So if you look at our slides going back to 2003 and especially if you look in 2008 you can see that we incurred a spread widening in 2013 and in 2011. We held steady to our strategy and over time as we still believe today, the strategy proves beneficial over the long-term. So with that I'm going to turn it over to Steve Benedetti and Smriti Popenoe, who will give you a lot more detail regarding our results.

Thanks Byron and good morning everybody. I'm on Slides 9 and 10 for those following the presentation. As Byron mentioned, results for the quarter and year were mixed. For the fourth quarter, we reported core net income of $0.25 per common share, while we incurred losses of $0.55 per share from the net decline in the fair value of our investments and hedges. Together this resulted in a comprehensive loss to common shareholders of $0.30 per share for the quarter. Core net operating income to common shareholders increased $0.01 per share from the prior quarter as share repurchases and favorable prepayments on our investments offset a smaller investment portfolio during the quarter. Our total economic return was a minus 2.9% for the quarter, consisting of a $0.24 dividend and a decline in book value per share of $0.48. On Slide 11, we provide a reconciliation of common shareholders equity and book value per common share for the fourth quarter. If you look at the chart on this page, the decline in book value is due to declining asset values net of hedges from a combination of higher rates reflecting our net interest rate risk position during the quarter and wider credit spreads on our securities and sympathy with the broader market rapes and sell off in risk assets. Approximately $0.26 per share of the decline was from higher interest rates and approximately $0.28 per share was from wider spreads. Offsetting these items was $0.05 in benefit primarily from the repurchase of 1.5 million common shares during the quarter at a weighted average price of $6.63. Our total economic return was minus 3.9% for the year consisting of $0.96 dividend per common share and a decline in book value per share of $1.31 on beginning book value of [$9.02]. For the…

Thank you Steve. For the call today I will begin by focusing on our performance for last year and last quarter and then turn to our current positioning and outlook. In the first quarter of last year, you heard us describe the investment environment as complex. In fact if you look at the charts on page 15 in our deck, in the four quarters of 2015 we actually had a mini bear market, a mini bull market in the same year with curve twists of all types, a bull flat during the first quarter, bear steepener in the second, bull steepener in the third and we ended the year with bear flattener. If you are not familiar with these terms, we have included a definition on page 41. We saw interest rate at times buffeted by domestic factors and at times driven entirely by non-US closing factors. In the second half of the year, rate movements were accompanied by a broad-based repricing of risk premiums, spreads widened across the board with risky assets taking the biggest hit. The list of exogenous events in 2015 is long but the critical one was the dramatic fall in oil prices. As Byron mentioned, we did assess this environment as complex, but one in which we had the opportunity to earn net interest income in high quality assets, specifically those that would suffer less in a spread repricing. We approached this year with an up in credit, up in liquidity strategy, allocated capital selectively to assets and aggressively to share repurchases when the opportunity presented itself and we decided to maintain our swap hedge positions for 2016 and beyond. With this strategy and economic backdrop, as Steve mentioned, for the full year, we generated a total economic return of minus 3.9%. Our book value…

Thank you Smriti. As you can see we want to give you a lot of details we can understand, like exactly how we’re approaching the market today. And with our last, sounding too repetitive I want to repeat the fact about complex and fair to global markets. Now, in the last we look to the future with great anticipation. One of the largest challenges will be impacted regulation. However, due to regulations will have both the positive and a negative impact. Most importantly, we believe market returns will adjust to the new regulatory environment, we continue believe in the long term opportunities that are developing in a variety of securitized product sectors, especially in CMBS, I think it’s a great long term core product for our portfolio. As prices adjust book value may fluctuate, but opportunities will be created. Please look at slide 25, just a comparable total return across multiple asset classes, as you can see 2015 was not a great year for returns across the global landscape. Nonetheless, as we continue to stay focused on disciplined risk management we believe the future dividend payments will help cushion short term fluctuations in book value and as you can see on the reiterate I’ll show you chart again on slide 26 and slide 27, long term chart in on constantly looking at reminding myself to stay focused on long term returns. And you can see that from either 2003 to 2008 these returns are driven heavily by above average dividend yields and as such we look towards the future with great anticipation. With that we’ll open floor, we’ll open the call up to questions.

Thank you. [Operator Instructions] And our first question will come from Eric Hagen from KBW. Please go ahead.

Thanks, good morning guys. Can you describe some of the hedges you have in place protect from spread wide, credit spread widening as opposed to just pure interest duration? I appreciate the book value roll forward which is genesis of the question. Thanks.

In this type of business model, your best way, you’re really de-risking method for credit spread would be to reduce your balance sheet. And we’ve done it in the past, its best if you look back at the 2008 time period. So, we take spread risk in this business model, we’re not hedging our spread risk, we do carry a long duration position to help offset the impact of wider spreads, historical correlation which shows the spread widening in down rate environment and potentially we’ve tied in enough great environment. just be more specific as we look out into the future, 2016 and 2017 will be very interesting years for CMBS. More at the top of the capital sack with agency backed product and AAA product, we affirm and believe this is money good over the long term as these spreads continue to wide, it creates great return opportunities and as we look through 2016 we have the new regulations coming on board where you may see some prices readjust. But, as long as continue to invest at the wider spreads remain in the business we have shown in the past that throughout the time that this business model would turn out to be a extremely profitable overtime. So we don't hedge spread risk, spread risk is the risk that we take, our biggest concern would be that if we had product that really was not money good, but the CMBS product today especially with some of the positive and the negative the regulations one of the positives of the regulatory environment is that goes to try to reduce the potential for having an out of control credit environment. So, we still believe in the CMBS sector spread may fluctuate we want to take advantage of wider spreads.

Okay that's helpful. I always appreciate your macro commentary, so I guess going back to the idea of negative interest rates. How do you think the stock and I guess equally important that the mortgage REIT sector, how do you think that survives or just copes with a negative interest rate environment I don't think it's unreasonable to think that U.S. rates can chase European and Japanese yields pretty far down the curve? Thanks Byron.

Here what's changed if you look back over, you’ve to look since 2008 that's where we have been building in the current portfolio. There is a couple of real psychological shifts that in my opinion has happened at the Federal Reserve. First one was when they really shifted from the lower; really had a desire for raised rates so I would say right now the Federal Reserve Bank, the government of Federal Reserve would like to raise interest rates if they could. But, they may not be able to and the thought process would be the zero lower bound as if once they got to rate at zero they couldn't go lower but as we see now over the last couple of years first Europe did this and now Japan has done this. Let me just say that in the U.S. we took some more drastic steps to help in this process. The issue with negative rates in my opinion was that fiscal policy can truly make a difference so the question comes how can we get to fiscal policy changes that will elevate the need for negative interest rates. And fiscal policy in the U.S. can truly make a global difference well if you look at the current election you would say – and its years away. But, if you think about scenario where in fact U.S. would have to go to global rates it probably in a situation where all kind of drastic measures will suddenly appear and be willing to be considered. So, I continue to believe that if you have a negative rate environment, our financing cost will not go negative, our financing cost will decline and now absolutely potentially be a positive one of the biggest concern would be prepayment risks and that's why we stick with the CMBS sector. We have had an opinion with some concern about the global environments for really some type actually fiscal 2008, we never really changed that opinion. I always say that structure global finance doesn't really make sense, it's unsustainable it has to change there has to be corrections and we have had one in 2008 here in the U.S., we had another trying to deal with U.S., the European debt crisis and now we are right in the middle of the European, I mean of a emerging market adjustment what will be the ultimate impact of those there is still a question mark around that. I do believe before we get to negative interest rates in the U.S. would be a drastic step I think other steps maybe taken in Washington that may elevate Federal role. And I would also think that when you really look at the current level of employment and how close we are to having a decent level of economic activity again I still believe those will provide some cushions to ultimately getting to a negative interest rate environment.

And I think also from a positioning perspective Eric, it's also a very compelling reason to maintain a long duration position.

And then, let me emphasize again CMBS, I don’t think I completed that part. The CMBS product is prepayment protected. So, one of the key benefits in 2015 was we really had a positive prepayment experience, our CMBS position offsets any negative in our ARM and hybrid ARM portfolio and we had a positive experience in two ways. One, when our CMBS product repays we are compensated. The second reason is that in our ARM portfolio we selected specified tools and its portfolio and it’s outperformed, we can compare our average prepayments to be in our ARM portfolio versus others in the industry. So again, lower rates one of the largest risk is prepayment risk and it can perform really significant if you were to say take the tenure down 50 basis points, we will be in good shape with the amount of capital that we have allocated to the CMBS sector.

That’s really helpful as always guys, thanks for the commentary.

Thanks Eric.

[Operator Instructions] Our next question will come from Douglas Harter of Credit Suisse. Please go ahead.

Thanks. As you guys mentioned you could still see some volatility in spreads in this environment and how you look to balance book value volatility versus kind of generating net interest income?

Here is what we have done in the past, so I want to use 2011 as an example because in that year if you look at our quarter-to-quarter you will see some declines in book values. As spread continue to widen out we continue to invest money, we stock with the sector and overtime it prove to be a very, very, very valuable investment. Likewise, I have a lot of comfort in the CMBS product especially at the top of the capital spec, especially this agency, this agency CMBS product. We lean on CMBS but let’s say another opportunity evolve hybrid ARM security we are probably going to be slower in terms of trying to reallocate the lower credit product until we get more comfortable with that adjustment process that kind of ripple through high yield wide now as investment grade credit wide now then you saw the CMBS lower credit product wide now and if there is any issues with financing that will probably be in the lower credit products as opposed to the higher credit product. So we are going to lean and say that the higher in that the capital spec if you take agency CMBS out in widen it in steps with non-agency CMBS I think it's a great investment especially if the 30 or 50 year fixed product remain within a tight band of credit spread. So that's why I look at the future with great anticipation because there is a ton of scenario it may evolve here but I am absolutely believer in this business model generating the above average dividend yield. And what do I mean by above average dividend yield that means GE [indiscernible] dividend or increasing dividend over time that’s not realistic for this business model for anyone in this industry. The business, the dividend levels should fluctuate but when I say above average dividend yield, I am comparing it to the average on the S&P or the average on the Russell 2000 and our business model is made to generate that hyper cat flow to our shareholders. So yes, CMBS spreads may fluctuate I think there is some debate as to exactly how this will happen, I think 2016 and 2017 will be the most interesting year than you have this huge drop off in 2018 in the amount of loans that are coming up through refinancing. So I think, it may be a great opportunity to accumulate a solid balance sheet or a really attractive assets with good credit quality and good prepayment protection over the next year or two.

I guess along those lines Byron, if we were to go through a period unlike 2011 where spreads don't snap back where they continue to widen for an extended period of time before the ultimate quality, the assets gets reflected I guess what is the risk that you kind of get stopped out in some of those positions given that you’re a levered invest –

IP agency product that's exactly why we sold that product at the end of 2014, but if you recall we had a large position in BBB and single A rated CMBS product. We sold the entire position because we said spreads were too tight, the global financial environment is too complex and therefore it's too risky to have those assets on short term financing, it's better –

The one other thing on that goes out is that you are right that that spreads could widen, but you don't ever want to get stopped out of these positions because you are managing your liquidity and your capital for those contingency. So, as you are adding a riskier assets onto your balance sheet your liquidity and contingency planning has to incorporate a scenario that those spreads could go wider right. One of the things that why we have been able to do what we have been able to do, maintain leverage at our current level have the asset position is that liquidity and capital management one thing we have always said is hey, spreads widening is actually a good thing for us. It's not great for current position but it's great for marginal investments right. So you want to be able to manage the liquidity in capital position to have the liquidity and capital available to invest when that happens and to be able to manage that cycle appropriately and what timing is everything in this business so you don't want to be too early to the game, you don't want to be too late to the game and obviously how we assess the environment is going to be a big factor and when we invest.

And if you look back over time Dough you will see that – to the 98 crisis or the 94 crisis or early 1990s when you did have a real estate collapse, the agency product can truly perform differently than the non-agency products especially in terms of financing being available for those products versus other product sectors. So, I don't disagree with you that's what we that's what our risk management we talk about this risk management and our best example of that would be the move that we made to get to sell all of our single A rated and BBB rated product and move up to more toward agency based portfolio.

Great, thank you.

Our next question will come from David Walrod of Ladenburg. Please go ahead.

Good morning everyone.

Hi David

I just wanted to talk about the share buyback a little bit, you said you’ve $9 million remaining on the current authorization.

That's right

We do.

Talk a lot about your investment opportunities that are available now can you I guess kind of way out how you think about putting money to work to those opportunities versus buyback of stock at these levels?

Let me just say David we bought back a fair amount of shares last year at a time when spreads were much tighter on a relative basis to our stock. At this point there has been a major adjustment in credit spreads. And so, returns are more attractive and when I think about the long term opportunity that may evolved here for investing our capital and fixed income markets, I take a little bit of a different view than maybe I took five or six months ago because I do think there are going to be some really attractive opportunities on the fixed income side we have been disciplined about it to say, let’s just look at really where the return opportunity comes in but from a long term operational perspective of company such as ours, the opportunity sets have changed versus six months ago when our stock was cheap and spreads were really, really tight.

Okay that's helpful thank you.

Our next question will come from Jay Weinstein from BELR please go ahead.

Hello.

Jay?

Can you hear me?

Yes, good morning.

Okay, good morning. I will kind of suggest you change the word complex which you have used to something along the lines of even less predictable than it normally is environment, but that's a different issue.

That's actually that is the result of it is that when you say even less predictable it means surprises or very likely and Jay I had a lot of conversations in 2014, when I first start to using that word complex. I was challenged on that issue I don't no one is really challenging me on it at this point with that a ton of surprises through the year 2014 and 2015 and I think the bottom line is it's really less predictable.

Yes, the previous call is actually, ask a lot of really good questions that pre-ended a lot of mine. So, a couple of questions. One. You sure seem to trade at a bigger book discount than most of the competitors that I sort of mark you against. And I know that it's never an apples to apples comparison because portfolios are different and leverage is different, etcetera. But that seems to be relatively persistent. Comments or thoughts on why?

I don’t, Jay, I don’t know that we have seen that type of differential over time.

I mean, just really talking about the last couple of years I would say.

I don’t know, I mean, that may be something we'll have to take offline and look.

Okay.

Because when we look that, we haven’t seen that type of differential. I know a certain time period because, I've just [indiscernible].

Right.

Some one person may try to move a large positioning, see some adjustment in it. But I don’t know that we have seen that. I would love to get with you offline to take a look at that with you, we'll show you what we look at.

It's about 25% as of you know five minutes ago. So, I thought that was a bit higher than most of the rest of the industry. But again I'll have to double check in. Given that you did take a lot of risk off the table in 2014, are you sort of surprised still by how difficult it's been to maintain book value since then, I mean, if you would with a much higher quality, average portfolio that you kind of ran with after that?

Here's the decision that we could have made. At the end of 2014, we had sold assets and we were down to about 3.1. Yes. We're down to about 3.1 billion in assets. So, the main way you protect against spreads, if you're taking spread, we just have to liquidate the assets. So, at that point, we could have chosen to just sit there with a much lower portfolio with the proceeds in cash, we would have earned less money. And as I look at 2015, I scratched my head multiple times looking at it, we would have had a small amount of CMBS, we would have had a larger percentage of hybrid ARMS, we still would have taken the markdown on the short hybrid ARMS, which we don’t think is a long-term issue. And then which is more of a technical issue. And then the CMBS, we would still have on the balance sheet is would have been high quality, we were still taking some lagging on it, I'm not sure that we would have ended up in the exact thing. We had lower earnings to offset a smaller move in book value, but it probably ended up in the same place, some were between zero and negative-2% loans we had. Those asset plans is on the balance sheet. I think what asset class would probably perform better, probably the [30 or 15] [ph] fix from just a spread basis. We've been in a relatively narrow range, heavily supported, obviously from the fed balance sheet. And we've chosen instead of that product, you invest in the CMBS agency which did obviously lead to a larger book value move. Where we surprised by the move? The big surprise is really into evidence, is what happened in the swaps market or swaps, spreads, type and became in the correlations and the relationships changed in 2015. So, that was a surprise. And so, we have said we anticipate surprise and what we don’t want to do is take too much risk that would obviously take us out of the ballgame.

I'm sorry. I think the last caller definitely has the right question about now when you do have a variety of choices and when capitals always limited and just kind of how do you view reinvestment and investment kind of going forward. That will be I think one of the many problems that you'll be facing, because you doing [indiscernible]. As you say you actually have a range of attractive choices but a limited amount of money that you all obviously have to work with.

That too. And it was interesting. We have not been reinvesting money recently, because I don’t think there is any hurry right now. I'm going to have these choices. I'm going to have these just like in 2011. So, we kept investing, spread became widen, kept investing. We're actually all the way to the wide and so we bought the lines. Because we continued to stay involved in the market place. At this point, I think we have time to think about what's the optimal point or selective in terms of what we put to work. And again because we got that big CMBS portfolio, yes, we're getting cash every month, but it's not like owning 30 or 15 year fix, or you're getting probably a ton of cash, and just forced up to pull out a lot of money back in the market place. We've, already and selective. Long winter way -- we're being very disciplined and it's elective in the process. I do think the CMBS opportunities got to be 2016 and '17. After that on a long-term basis, you may find that the product drops off.

[Indiscernible], it's been very difficult again to kind of track credit spreads for sort of types of things in your portfolio. Is there a decent way other than bothering you all the time on how to actually just keep track of where they've gone, for instance year-to-date, I assume they widen, but again I don’t know the last couple of weeks. Probably been a little bullish. I just don’t know how to track it.

That one may be another one, Jay, for us to follow-up with you.

Okay.

Just trying to think of the CMBS product in the hybrid ARM product. We are in a little bit of an off the run sector. So, let's put our heads together on it.

Okay. It's not that good. Well, anyway, I appreciate it as always. I'll probably catch up very soon.

Thanks, Jay.

[Operator Instructions] Ladies and gentlemen, this will conclude our question and answer session. I would like to turn the conference back over to Mr. Boston for any closing remarks.

As I said before, we look toward the future with great anticipation. And with that, we thank you so much for joining our conference call. We look forward to speaking with you next quarter. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.