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Q&A: REITs, Yield, and the Fed’s Next Move with Dynex co-CEO Smriti Popenoe

Courtesy: The Morning Brew

Dynex co-CEO, President, and Chief Investment Officer Smriti Popenoe joined Morning Brew and Stakeholder Labs’ After Earnings show, which brings investors up close and personal with the executives behind the world’s most interesting companies. Here’s a summary of Smriti’s conversation with After Earnings host Katie Perry.

Key Takeaways:

  • REIT Landscape: Dynex Capital is a mortgage REIT focused on investing in government-backed mortgages, generating steady cash flow without property value risk.
  • Yield Consistency: Despite market volatility, Dynex maintains consistent yields by leveraging government-guaranteed securities and taking a long-term investment approach.
  • Crisis Experience: Lessons from the 2008 financial crisis inform Dynex's focus on scenario planning and risk management rather than predicting market movements.
  • Cultural Impact: Dynex’s values-based leadership, emphasizing respect and integrity, contributes to long-term corporate performance and resilience during crises.
  • Leadership Model: The co-CEO structure at Dynex thrives on mutual trust and a shared vision, enabling effective decision-making and minimizing blind spots.

Stream or watch the full interview at AfterEarnings.com. First aired August 1, 2024.

How does Dynex Capital fit into the REIT landscape?

A REIT, or Real Estate Investment Trust, is a vehicle created to democratize real estate investment. Instead of directly buying properties, investors can buy into REITs. Dynex Capital is a mortgage REIT, which means we invest in the mortgages that back properties rather than the properties themselves. This allows us to generate steady cash flow without being exposed to property value fluctuations. Our focus is on generating yield, which has become increasingly important, especially given the current market conditions.

How does Dynex Capital maintain a consistent yield for investors, especially in such a volatile market?

Maintaining a consistent yield has been challenging, but we’ve managed to do so by investing in government-guaranteed securities and leveraging those investments. This approach ensures that the return of capital is secure, and we can focus on generating yield. When the Fed raised rates sharply and announced they would no longer purchase significant quantities of mortgages, the market repriced, creating opportunities to generate higher yields. We maintain a long-term perspective, which allows us to provide steady dividends to our investors, even during market fluctuations.

What was it like working in the finance industry during the 2008 financial crisis? How has that experience shaped your current approach?

The 2008 crisis was incredibly intense—every day felt like the movie Margin Call. I was working at Wachovia Bank during that time, and the experience taught me valuable lessons about risk, leverage, and the importance of government intervention during crises. It also highlighted the need to prepare for scenarios rather than predict them. This mindset has influenced how I approach managing Dynex today, focusing on scenario planning and understanding broader macroeconomic factors.

How does Dynex Capital prepare for economic uncertainty, especially with potential Fed rate cuts on the horizon?

We don’t predict market movements; we prepare for them. The current macroeconomic environment is complex, with many non-economic factors like human conflict influencing policy and economics. We prepare by analyzing different scenarios—whether it's a Republican sweep, a Democratic sweep, or something in between—and adjust our portfolio accordingly. A Fed rate cut, which we believe is inevitable, would be beneficial for Dynex, as it would lower our financing costs and increase our net interest margin.

How does Dynex Capital’s “do well and do good” philosophy influence its operations and performance?*

Doing well for our shareholders is a given, but we believe that doing good—treating people with respect, integrity, and kindness—actually contributes to better performance. This philosophy is embedded in our company culture, which we believe is crucial for long-term success. A strong, values-based culture helps teams perform well during crises, which is when companies like ours need to be at their best.

Can you discuss the co-CEO structure at Dynex and how it works for you and your co-CEO, Byron Boston?

The success of a co-CEO structure hinges on the lack of ego. Byron and I share a common vision and trust each other completely, which is why this structure works for us. We complement each other’s strengths and minimize our blind spots by working closely together. This level of collaboration is essential for making well-rounded decisions that benefit the company in the long term.

What should investors know about the current opportunities at Dynex Capital?

Dynex is in a strong position, having recently raised significant capital and reached over a billion dollars in total capitalization. We’re seeing what we call a “generational opportunity” with the current valuation of assets, similar to what we saw in 2008. Our stock offers a dividend yield of about 12.5%, providing significant downside protection. Investors who are looking for a steady, long-term return should consider the value Dynex Capital offers in this environment.

This interview first aired on August 1, 2024.