# Dear fellow shareholders

_Source: `DeepSeekOCR_Ardian_pruned_1k/real-estate-reit-mortgage/NYSE_DX_2017/NYSE_DX_2017.mmd` · pages 2-8_

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Dear fellow shareholders

January of this year marked my tenth anniversary with Dynex. I joined the Company shortly after the worst financial crisis since the 1930s had begun to unfold. Fortunately, senior management and the Board of Directors at the time had wisely avoided the major pitfalls of the 2004 - 2007 period leaving Dynex with a solid foundation. In 2008, we were in a position to create a business strategy built around housing finance and to put Dynex on the path for long-term success. Our mission was to grow into a thriving mortgage REIT that generated above average cash dividends without exposing investors to unnecessary risks, which required us to create a corporate strategy, establish new credit relationships and raise equity to increase our capital base. Critically, we had to cautiously navigate through these steps in the midst of the great financial crisis.

As I reflect on the last ten years, I am reminded of Winston Churchill's wise words, "To build may have to be the slow and laborious task of years. To destroy can be the thoughtless act of a single day." This resonates as we have for the last decade stayed true to a methodical and disciplined strategy emphasizing risk management, strategic capital allocation, balance sheet diversification and our team remains dedicated to the core values we established in 2008. Since then we have had to remain focused on the long-term and not be distracted by the many surprising global developments and events that could have derailed the implementation of our business strategy and harmed our shareholders.

![](images/2_0.jpg)

As we look back, we take note of several key achievements over this period. From January 2008 – December 2017 we generated a compounded total shareholder return of 143% versus 131% for the Russell 2000 and 126% for the S&P 500. We have dynamically allocated our capital in RMBS (residential mortgage-backed securities), CMBS

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(commercial mortgage-backed securities) and CMBS IO (interest only securities), taking advantage of more favorable relative return opportunities at any given time. We have declared cash dividends on our common stock of approximately $392 million, or $9.67 per share over this period. Most importantly, our mission established in 2008 remains intact today, and we continuously work to provide our shareholders above average risk-adjusted returns. I am proud that we have developed a culture of ownership throughout the entire organization. We have remained organized in a shareholder friendly manner and continue to have an internal management structure with significant insider ownership. Everyone on our management team is your co-investor in Dynex, and our interests are directly aligned with yours.
We have always been very disciplined in our capital allocation decisions and 2017 was no exception. We reallocated capital into more liquid, higher return investments by transitioning from hybrid ARMs into 30-year fixed-rate agency securities. Emphasizing liquidity in our asset selection we maintained a diversified portfolio between securities backed by residential property loans and commercial property loans. In whole, 2017 was a strong year for Dynex and our shareholders. We declared dividends of \(0.72 per common share, earned \)0.73 in core net operating income and generated a 12.3% total economic return for our shareholders. We added hedges to limit the impact of Federal Reserve interest rate hikes on funding costs and were able to produce earnings without materially increasing leverage. In addition to the return generated from spread income we also added a 2.2% increase in our book value during the year.

## OUR CORE VALUES

GENERATE
DIVIDENDS
FOR
SHAREHOLDERS

EMPLOY
THE HIGHEST
ETHICAL
STANDARDS

MANAGE
LEVERAGE
CONSERVATIVELY

DEMONSTRATE
STRONG
RISK MANAGEMENT
CULTURE

RETAIN OWNER-
OPERATOR
MENTALITY

MAINTAIN
BEST IN CLASS
RISK MANAGEMENT
PROCESSES

MAINTAIN
A CULTURE
OF INTEGRITY

FOCUS ON
LONG-TERM
SHAREHOLDER
VALUE

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## Long-Term Value is Driven by Above Average Dividends

![](images/4_0.jpg)

Source: SNL Financial

Ten years ago, we had a clear understanding that we were in the middle of a massive global financial correction that was exacerbated by excess debt and poor credit underwriting. We correctly assumed that, in such a global crisis, interest rates were more prone to decline and that a flat to inverted yield curve was not feasible in such a crisis environment. We also assumed that the U.S. Government would intervene to support the financial system. However, we did not expect that 10 years later we would still be mired in a financial environment that is driven by global central bank emergency strategies.
Our macroeconomic thesis has been at the core of our top down investment process at Dynex. We still believe that government policy will drive returns, a core tenet of our investment thought process over the past 10 years. We continue to believe the markets are in a transitional period that will ultimately lead to an attractive return environment for mortgage REITs. In our view, continued rapid growth in global debt will create a drag on global economic growth, which could be worsened by any sudden exogenous shock. We feel that rapid rate increases will ultimately have a negative impact on equity valuations and economic activity, especially given the absolute amount of global debt outstanding. Where our strategic

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We enter 2018 much more nimble and opportunistic than ever before, and stand ready for the challenges and the opportunities that a complex environment creates.

macroeconomic views are mostly unchanged, we continue to adjust our portfolio tactically to deal with the evolving marketplace.

Our core philosophy today is that the return environment will improve as rates and/or spreads widen. We believe that any meaningful move higher in rates from current levels will be marked by a steepening yield curve, which will be a positive for our potential future investment opportunities. We also believe that as the Government continues to reduce its balance sheet that mortgage assets will offer returns attractive for private capital to invest creating opportunities supporting our business model. Regulatory policy is continuing to become less restrictive and Washington has implemented an aggressive fiscal policy driven by debt. This along with other secular trends such as substantial global demand for yield and U.S. demographic trends driving housing demand are favorable to long-term business opportunities for mortgage REITs. We will continue to adjust our hedges and balance sheet size appropriately as the market environment shifts; fine-tuning the key variables of duration and leverage as necessary if the return environment warrants such action. Discipline will remain vital to managing through this transitional period and into the future.
We enter 2018 well aware of the challenges facing the industry, but confident about how we are positioned. We have slowly and methodically built-up the Company over the last decade. We believe that we have made wise capital allocation decisions and have a best-in-class portfolio, rock solid balance sheet and an energized and talented team throughout our organization. While Dynex has been publicly traded for 30 years, our current investment strategy was in its infancy in 2008. We enter 2018 much more nimble and opportunistic than ever before, and stand ready for the challenges and the opportunities that a complex environment creates. With a few more years of collective experience, but plenty of pep in our step, the Company's best years are ahead of us. On behalf of the Dynex team, we look forward to continuing to grow this Company together with you, our shareholders, and we thank you for your support.

## Byron L. Boston

BYRON L. BOSTON
Chief Executive Officer
President
Co-Chief Investment Officer
March 2018