# LETTER TO
SHAREHOLDERS

_Source: `DeepSeekOCR_Ardian_pruned_1k/real-estate-reit-mortgage/NYSE_DX_2020/NYSE_DX_2020.mmd` · pages 3-9_

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LETTER TO
SHAREHOLDERS

Dear Fellow Shareholders,

I joined Dynex Capital in 2008 with a distinct philosophy of how to manage a mortgage REIT for the long term and that philosophy guides our investment approach

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today. Dynex continues to prioritize risk management, disciplined capital allocation, and liquidity. These principles positioned the Company to not just withstand, but to drive positive results from the unprecedented market volatility of 2020. Our global top-down macroeconomic process identified an intensifying global risk environment and the
potential for a substantial increase in market volatility. We positioned accordingly with higher levels of liquid assets and overall liquidity. No other year has demanded as much active decision-making for the Company as 2020. Nevertheless, we maintained our disciplined investment process and excelled.

## 2020 – Discipline and Focus Resulted in Industry-Leading Returns

In February 2020, as the markets rapidly priced COVID-19 in Asia, we reduced our exposure to falling interest rates, selling assets with prepayment risk, and increasing liquidity before conditions deteriorated. These actions positioned us to weather the extraordinary market events of March 2020 and provided flexibility to rebalance our investments throughout the year to take advantage of the recovery in asset prices.

As a result of these decisions and the hard work of our skilled and experienced team, I am very proud to report that we delivered a 17.0% total shareholder return and a 15.2% total economic return to common shareholders \( ^{1} \) , including 1.66 per share in common dividends and an increase in book value of 1.07 per share.
The Dynex team has now delivered industry-leading performance on a 1-, 3- and a 5-year basis for the period ended December 31, 2020. Over the past decade, we have generated a total shareholder return of 188.7% through December 31, 2020, outperforming the returns for the S&P 500 Financials Index and the Russell 2000 Value Index for the same period.

## 2021 – Transition to a More Favorable Return Environment

Our macroeconomic view leads us to prepare for a transition to a steeper yield curve as one of the more probable scenarios for 2021. While financing costs are expected to stay close to zero through 2023 – we anticipate the longer end of the yield curve will face pressure from Treasury issuances, possible increases in realized inflation and expectations for inflation as the economy begins a path to recovery and gains traction in second half of 2021 – likely resulting in higher long term treasury yields.

As the yield curve steepens, Agency RMBS spreads tend to widen and prepayments slow, improving yields on our existing investments and offering improved returns on new investments. These are very positive factors for net interest spread and return expansion. This occurred during the first quarter of 2021 allowing us to manage the capital from our recent secondary offerings to make accretive investments, driving book value per common share growth.

Dynex maintains an investment thesis of "up-in-liquidity," "up-in-credit," and remains heavily allocated to Agency MBS. Why? Agency MBS are some of the most liquid, deeply traded securities in global markets. This positioning reflects our macroeconomic view and risk opinion and provides us the maximum flexibility to deploy our capital as we transition through the COVID-19 health and economic crisis to the post-pandemic macroeconomic environment.

We remain cautious on credit investments that require recourse repo leverage to meet our risk-adjusted return hurdle. Cash flows on credit investments in this environment

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The Dynex team has now delivered industry-leading performance on a 1-, 3- and a 5-year basis for the period ended December 31, 2020. Over the past decade, we have generated a total shareholder return of 188.7% through December 31, 2020, outperforming the returns for the S&P 500 Financials Index and the Russell 2000 Value Index for the same period.

have been difficult to predict and losses are still uncertain. When spreads are tight, leveraging illiquid credit assets appears attractive in the short term, but too often backfires when liquidity dissipates during a crisis. This is what happened in 2020 when the prices of illiquid assets dropped dramatically as the COVID-19 pandemic intensified and creditors demanded more cash or margin in response.

## A Focus on Growth and Capital Structure

Since the beginning of 2020, we strategically focused on our investment strategy and capital allocation, simplifying, and enhancing our capital structure. We have embarked on a strategy to grow the Company to drive operating leverage and to improve our common stock's liquidity while balancing our equity capital structure. To this end, we issued new Series C preferred stock and retired our higher cost Series A and Series B preferred stocks. Since the beginning of December 2020, we have also raised nearly $150 million in common equity, and our market capitalization is approximately $570 million as of the date of this letter. These efforts have lowered our preferred capital cost and reduced our operating costs. These savings fall directly to our bottom line. Our goal is to increase the liquidity of our equity and offer investors the opportunity to invest in Dynex via our fixed dividend preferred stock and our higher-yielding common stock.

## A Business as Strong as its Team

In my 2017 letter to you, I quoted Winston Churchill: "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 message resonates even more today as we assess the damage inflicted on other companies in our industry during the span of just a few short weeks in March 2020. This quote also speaks to our approach of managing our business for the long term, taking measured risks, and most importantly, employing a team of highly skilled and experienced individuals. In our opinion, Dynex has a unique collection of skills and experience in the mortgage REIT

2008-2020 TOTAL SHAREHOLDER RETURN
(Daily) (%)

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Industry-leading performance versus other income-oriented vehicles for 1-, 3-, and 5-years

CUMULATIVE TOTAL RETURNS  \( (1) \) 

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D Dynex (DX)
Agency REITs ( \( ^{2} \) )
Hybrid REITs ( \( ^{3} \) )
iShares Mortgage RE ETF (REM)
iShares 1-3 Treasury Bond ETF (SHY)
iShares US Real Estate ETF (IYR)
Invesco KBW High Div Yield ETF (KBWD)
 \( ^{1} \)  Ending period 12/31/2020
 \( ^{2} \)  Select Agency MREITs on an equal weight basis
 \( ^{3} \)  Select Hybrid MREITs on an equal weight basis
Source: Bloomberg. Assumes dividends are reinvested.

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industry, and we believe 2020 was a year in our industry when the quality of management teams mattered more than anything.

Our team has always operated with great integrity, an unwavering commitment to our values and a focus on supporting our community. Given our fiduciary responsibilities, our highest priorities are to be reliable stewards of capital, transparent in our actions, and good corporate citizens. Dynex is now a strong, diverse organization building on a 30-year vision to create a multigenerational organization that can stand the test of time.

From a human capital perspective, we believe we have a world class team with unmatched skills and experience. The diversity of our investment team is a critical component of our success. This diversity comes in many forms – skills, backgrounds, experiences, and thought. We have individuals on our team who have worked at global financial institutions in a variety of different roles, as well as individuals who have spent the majority of their careers at Dynex managing interest rate, prepayment, credit, and liquidity risk for a diverse pool of mortgage assets.

Our Board of Directors is similarly comprised of individuals with a rich array of talents, and we substantially augmented those capabilities with the additions of Julia Coronado, Ph.D. and Joy Palmer last year. We thank Barry Igaloff, who left the Board last year, for his many years of dedicated service. We also appreciated Valerie Mosley returning to the Board temporarily last year while we searched for new director candidates.

## A Broader Purpose

We believe our purpose is to make lives better by being careful stewards of individuals' savings, providing capital for home financing, and strengthening the communities where we do business. The capital that we manage – your capital – is critical to support housing markets and the broader real estate sector. We believe our business model will always remain relevant and critical – as long as real estate housing finance exists in America and savers seek yield.
As managers for the long term, our stewardship must go beyond our financial capital to include environmental capital, social capital, and governance. I am personally excited about our higher focus on environmental, social, and governance ("ESG") issues in recent years. We believe the practices and initiatives we are implementing are vital in sustaining and growing the Company and create value by improving the environment and lives of our employees, investors, business partners, and the community. I am proud to report that Dynex adopted the Sustainability Accounting Standards Board ("SASB") Conceptual Framework in 2020 and has committed to reporting within such framework in 2021. Moreover, we have established a Steering Committee, which is actively developing ESG guidelines and prioritizing measurable ESG goals for the Company for 2021.

We are committed to doing things the right way. Our internal management structure and significant insider ownership align our interests directly with yours. We strive to always manage our balance sheet to generate a total economic return that meets or exceeds our dividend. Beyond thinking solely about covering our dividend with core earnings, we focus on capital preservation and generating attractive total returns over the long term.

In closing, we are very pleased with our 2020 performance, which demonstrated our ability to effectively manage your capital and deliver industry-leading risk-adjusted returns – even during times of extreme market volatility. Our fundamental approach, discipline, and long-term thinking will always be our North Star regardless of what the future holds. Our management team, our Board of Directors, and I are personally committed to investing alongside our shareholders. We are optimistic about our future and our prospects for 2021 and beyond.

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## BYRON L. BOSTON

Chief Executive Officer and Co-Chief Investment Officer
March 2021

All forward-looking information in this letter should be read with, and is qualified in its entirety by, the cautionary language regarding forward-looking statements contained in Item 7 and the risk factors contained in Item 1A of our Form 10-K for the year ended December 31, 2020, included elsewhere in this report.