# LETTER
TO SHAREHOLDERS

_Source: `DeepSeekOCR_Ardian_pruned_1k/real-estate-reit-mortgage/NYSE_DX_2019/NYSE_DX_2019.mmd` · pages 2-8_

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LETTER
TO SHAREHOLDERS

Normally in my annual letter to you I review the results for the recently completed year and provide some guidance regarding our outlook for the coming year. However, as you all well know, today is anything but normal. As I write this letter from my home office, we are in the midst of a pandemic, which has led to an unprecedented, nearly complete shutdown of global commerce. In the United States, initial jobless claims, a measure of near-term economic activity, have exceeded 26 million in the last four weeks, which represents more than 15% of our domestic workforce. Near-term oil futures have traded below zero for the first time ever. While we at Dynex had warned of intensifying global risks and the potential for an exogenous shock to the global economy, we never envisioned the devastation being wrought by the current COVID-19 crisis.
Given the enormous impact of this crisis on our business, our industry and our outlook for the future, I will briefly comment on 2019 results before focusing on our response to the crisis and our views on the potential impacts for the balance of 2020 and beyond.

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Calendar year 2019 was a solid year—our total economic return was a respectable 10.6%. As we entered 2019, the investment environment was favorable and we raised $46.3 million in new common capital in January, our first raise since 2013. Over the balance of the first half of the year, the yield curve flattened, putting pressure on our net interest spread and our overall performance. This challenging outlook led us to reduce our dividend in July 2019. In the second half of the year, the yield curve steepened as the Federal Reserve eased short-term interest rates in response to

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## OUR CORE VALUES

GENERATE DIVIDENDS
FOR SHAREHOLDERS

MANAGE LEVERAGE
CONSERVATIVELY

RETAIN OWNER-OPERATOR
MENTALITY

MAINTAIN A CULTURE
OF INTEGRITY

EMPLOY THE HIGHEST
ETHICAL STANDARDS

DEMONSTRATE STRONG
RISK MANAGEMENT CULTURE

MAINTAIN BEST IN CLASS
RISK MANAGEMENT PROCESSES

FOCUS ON LONG-TERM
SHAREHOLDER VALUE

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slowing global growth, lower inflation and market concerns over U.S.-China trade tensions. Coupled with timely investments and adjustments to our hedge position, our net interest spread, and total return performance improved over the balance of the 2019 year. As a result, we entered 2020 with an improved outlook on a better interest rate environment for our business.

By now we all know the origins of COVID-19 and the route taken as it has circled the globe. In mid-March 2020, markets seized up across all asset classes—including Treasuries—in an unprecedented manner. The world reacted in fear to a major exogenous shock that had markets fearing another depression or worse yet, a health crisis like the 1918 flu pandemic. Fortunately, we entered this period in a position of strength. Our approach prior to March 2020 had assumed that a crisis was possible, as noted above. Though we did not predict this catalyst, nor the severity of the market reaction, we were prepared for a market disruption. We had allocated our capital principally to highly liquid Agency RMBS and CMBS, which also happened to provide superior risk-adjusted returns. We also favored investing in Agency MBS as we believed that in the event of a crisis, the Federal Reserve would step in and buy these assets. We did not hold lower rated, credit sensitive assets financed with mark-to-market facilities, which contributed to the liquidity issues faced by others in our industry. We also have spent years cultivating relationships with our business partners and lenders, as well as with industry participants who we felt confident would stand by us based on our principles and reputation. Last, we have a strong, experienced leadership team, from our Board to our management, who has managed public mortgage REITs through multiple high volatility market events.

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Throughout March and mid-April 2020, we reduced the size of our investment portfolio, reducing leverage and risk, while at once being both opportunistic and defensive. Today, we believe that we are tactically positioned to evaluate the market environment without undue pressure on our balance sheet and capital position. As of the date of this letter, our liquidity is approximately $275 million, and our leverage is a modest 4x total shareholders' equity. We are in position to think clearly about the risk and reward environment which has dramatically changed since the beginning of this year. Asset opportunities are again dominated by government policy and are bifurcated between areas supported by the Federal Reserve and those that are not currently supported by government or central bank intervention. We believe that the demographics behind the housing sector continue to support our investment thesis of investing in high quality, U.S.-based housing, with the key focus for Dynex being centered on which risks we want to take on given the current environment. As we evaluate our various investment alternatives, and the associated risks and returns using our usual disciplined approach, our focus remains on generating solid cash flows and preserving capital.

Long-term our macroeconomic opinions have not changed...the global economy is fragile and is supported by central banks and an enormous amount of debt, and it remains vulnerable to sudden shocks. Long-term our macroeconomic opinions have not changed...the global economy is fragile and is supported by central banks and an enormous amount of debt, and it remains vulnerable to sudden shocks. Our current short-term view, however, has been impacted by the health crisis, the resulting economic crisis, and a host of new policy risks that have been introduced in order to support the global economy. For now, the current crisis remains a health and economic crisis, but the full story has not been written. What is clear today is that the economic toll will be very heavy, including on the real estate finance markets. The Federal Reserve has taken actions to support the markets in order to prevent a financial crisis, and Congress and the U.S. Treasury have acted to reduce the economic impact of the pandemic. The efficacy and outcome of these actions are unknown and the risk for policy mistakes is very high. We have already seen the impact of policy decisions on asset pricing. The markets for those assets that are being supported by the Fed have stabilized. Those asset classes that have not benefited from government or central bank support continue to suffer from lack of liquidity. We believe that the slow pace of regulatory help in the mortgage finance arena—including, for example, the lack of support for credit risk transfer

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We believe that we are in an excellent financial position today with ample liquidity and capital to deploy.

securities and mortgage servicing—may have long-term impacts on the availability of, and the cost of, home ownership in the future. Though we do not own these assets, as a participant in the real estate finance markets, we are concerned about the liquidity of these instruments. We are working closely with our industry partners to advocate for policy changes.

To summarize, we believe that we are in an excellent financial position today with ample liquidity and capital to deploy. It is important to note that given the level of uncertainty in the current environment, we are taking a balanced and measured approach to the future, so that we are prepared to manage our business under a variety of scenarios. We see opportunities to invest capital today, but we are going to take some time to evaluate the best risk and return, given the extraordinary market environment.
In closing, I would like to express my deep appreciation to all of the employees of Dynex Capital who have consistently risen to the occasion and worked tirelessly in order to preserve the value that has been created for our shareholders over the years. The team has faced these times of adversity with grace and fortitude. I would also like to thank Valerie Mosley who is leaving the Board this year. Individuals with Valerie's combination of character, wisdom and experience are few in number and are, as a result, in high demand. Valerie has a unique perspective on our business, and I will miss her wise counsel. We are in good hands however, with the support and expertise of our remaining Board members.

Be safe.

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BYRON L. BOSTON
President, Chief Executive Officer
and Co-Chief Investment Officer

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