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EPISODE TRANSCRIPT:

Laura Dinan Haber:

Are you ready to take a step out of the risk spectrum? Special guest Byron Boston, Chief Executive Officer, and Co-Chief Investment Officer of Dynex Capital joins the conversation to share insights on real estate investment trusts, another potential source of income in retirement. Also, do you want to get regular updates on news from Byron and other guests of our show? Subscribe to our newsletter under the receive update section below. We hope you enjoy our conversation.

Ramsey Smith:

Today’s show is sponsored by our friends at The Index Standard. As many of you who listen to our show certainly know, fixed index annuities and [inaudible 00:00:38] are getting more complex and technical, just when fiduciary rules are getting stricter. So how do you choose the right indexes and allocations? You should consider The Index Standard. They’re an independent provider of ratings and forecasts on all indices and ETFs used in the US insurance space. Their process is designed to be systematic and unbiased with the goal of identifying robust and well-designed indices. We all know finance is complex. The Index Standard has a clear rating system and users approachable language to demystify this complexity. Visit theindexstandard.com for more information.

Intro:

Welcome to That Annuity Show, the podcast that will make you an expert in explaining annuities to your clients. Give us 30 minutes each week and we’ll shave hours from your client presentations. Now here’s your hosts.

Laura Dinan Haber:

Hello, and welcome to another episode of That Annuity Show. Paul Tyler is traveling this week, so I’m your co-host today. Let me introduce myself. I am Laura Dinan Haber, Innovation Program Manager for Insurtech Incubator, Nassau Re/Imagine. On with us today, we have some familiar individuals. Mark, how was your weekend?

Mark Fitzgerald:

Weekend was great, Laura. How are you?

Laura Dinan Haber:

I’m doing well. Thanks so much. Ramsey, always nice to see you.

Ramsey Smith:

Always glad to be here.

Laura Dinan Haber:

Absolutely. We’ve had the opportunity to kind of cross paths in a few different ways. This is my first time on That Annuity Show. Happy to be here and congratulations again to all of you on being over 100 episodes. We’ll be curious to see how many hundreds of more come down the pipeline. It’s exciting.

Mark Fitzgerald:

Absolutely.

Laura Dinan Haber:

So with that, Ramsey, I’ll turn it over to you to introduce our guest.

Ramsey Smith:

All right. Thanks a lot, Laura. Look, we’ve got a fantastic guest today. We’ve got Byron Boston, who’s the Chief Executive Officer, and Co-Chief Investment Officer of Dynex Capital, which is a mortgage REIT. So what we’re going to do today is we’re going to learn a number of things. We’re going to learn what a mortgage REIT is, we’re going to learn what it takes to run one, and we’re going to learn what one of the best is doing to make it work.

Ramsey Smith:

Now, I’ve known Byron for a very long time. I first met Byron in the 80s when I was a summer intern at First Boston and Byron was one of a handful of African-American professionals that I, as a young guy looked up to and dreamed of someday having a career on Wall Street, which ultimately ended up happening.

Ramsey Smith:

Byron has been a leader for a very long time. He worked at, after leaving Credit Suisse, well, first Boston became Credit Suisse. After leaving Credit Suisse, he went to Lehman Brothers and worked in a number of areas. But the two things think are most significant. One is joining one of the major GSCs and helping them launch one of their retained portfolios and then ultimately taking over Dynex 14 years ago. With that, we’re very lucky to have you on Byron today. We’re going to learn about another type of income that we haven’t talked about as much. So with that, I’ll turn it over to you. And I guess first off, tell us a little bit about your journey and how you got here.

Byron Boston:

Well, it’s been a very fortunate journey because I’m one of those lucky college students who found this way into a career that really fits. So when I introduce myself, I say, I’m a fish in water, and I’m very happy. I’m an economics nerd from an undergrad at Dartmouth College. And I came straight to Wall Street in 1981, where I was trained very well in credit at Chemical Bank. That was my first job as a banker. I went back to grad school after that, to the University of Chicago and studied finance and account, and came back to Wall Street again, this time as a mortgage-backed security trader, and one of the best mortgage-backed securities trading desks at the time, which was that First Boston and it was run by Larry Fink who eventually left to start BlackRock.

Byron Boston:

And then after 11 years on Wall Street, I always had a desire to go to the buy-side. And I moved to the buy-side by going to one of the GSCs that really was in the process of developing a securities’ portfolio strategy. I wrote a comprehensive business plan to increase the diversity of assets that were owned within the portfolio. That was a major point in my career because I learned how to be a public company senior officer. And that’s very, very important. A lot of people believe they can do it. It is a skillset. I learned how to, I got board exposure while I was at Freddie Mac. I got extensive senior management type of exposure in running a public company.

 

Byron Boston:

In 2004, when I had an opportunity to start my own company, I was ready. And I started a mortgage read in January 2004. We took it public in March of 2004. It’s called Sunset Financial. And a couple of years later, we received a takeover bid from Wachovia. And ultimately we sold the company to another entity in October of 2006. That was about a three-year run with that first IPO. The great thing about Dynex Capital and one of the things I’m most proud of is that 40% of my shareholders in Sunset were investors in Dynex Capital and they invited me to join them at Dynex and help them rebuild Dynex Capital. So I came, wrote again a comprehensive business plan for building out this mortgage REIT, starting in January of 2008. And for the last 14 years, that’s what I’ve done here at Dynex and it’s been successful and we’re pretty excited about the things that we’ve done, not only just for ourselves, but for our shareholders and for the community.

Laura Dinan Haber:

Oh, that’s fantastic. And Byron for our listeners who may not know what a mortgage REIT is, what is it and how does it work?

Byron Boston:

First and foremost, we’re a real estate investment trust, just like other REITs. The real differential is where do our assets sit? Where do we deploy our capital? Versus an equity REIT that owns buildings and they generate their income from whether it be some type of a brand or some other type of fees off of real estate. We are a lender. If you take back in my career, I started my career as a lender with Chemical Bank. That’s what I’m still doing today. In effect, we lend money to the housing finance system and to other parts of commercial real estate. So our assets out of our balance sheet, they’re either loans or security against the real estate. And Dynex is the oldest mortgage REIT. We’ve been doing this since 1988. We were one of the earlier innovators in the non-agency securitization space, which means we made direct loans between 1988 and 1998, and we financed ourselves with non-agency debt or non-agency securities.

Byron Boston:

Today, our balance sheet is all securities, a very minimal, just residual loans on the balance sheet, but the securities all backed by loans that are either to a residential real estate or generally multifamily properties today.

Ramsey Smith:

Can you talk a little bit about if one buys a mortgage REIT, what is the investment rationale and what is delivered?

Byron Boston:

Let me continue on with your first question, Laura, because I didn’t totally complete it with that. If you compare Dynex to a bank or compare Dynex to a REIT that owns property, we’re in between because we’re lending money against the property. And in effect, we’re looking to borrow money, just like a bank, at a lower cost, the interest rate than we actually lend money or where we ultimately buy a security. If an investor is looking at a Dynex, how do you place a Dynex in a portfolio of annuities, a bank or an equity REIT? Dynex is another entity generating income, understand that we are using leverage to increase the cash return to our shareholders. And the unique skill set that we bring to the table at Dynex Capital is we’ve got a long-term track record in our personal careers and as a company in lending money. And most importantly, we’ve got a long-term track record in managing leverage and using leverage to increase returns to our shareholders.

Ramsey Smith:

I’m going to nudge a little bit more on that. There’s a transformation there, right? You’re buying mortgage-backed securities, which yield roughly what, like two and a half, three, 4%, what is the general range there?

Byron Boston:

Look, I’ll call it between 1% and 3% you can find security.

Ramsey Smith:

So 1% and 3%, and you borrow money to buy those and to get that leverage. And then what is the typical dividend yield one can expect when one buys a mortgage REIT? That’s the transformation-

Byron Boston:

[crosstalk 00:10:13] Let me go back. Let just say this again. 1% to 3% above, let’s say a treasury rate. If you look at a treasury tenure, the yield, maybe 150. So we may be 100 basis points or 300 basis points above it, but let’s put in street man’s language, we’ll call that 250 to 450.

Ramsey Smith:

So two and a half to four and a half percent total yield?

Byron Boston:

Right. That’s correct.

Ramsey Smith:

So treasuries plus the spread, total yield. Got it, got it.

Byron Boston:

That means our dividend, if you compare it to our dividend, which is your question, that dividend now is 8% on our common stock. And it’s about, call it 670, 680 on our preferred stock. I think your question was, well, how do you get there? How do you go from a bond that yields 250 to get to that level? We use leverage. We take the capital of a company. We have a total balance sheet today of equity plus preferred of like 761 million. But the size of our balance sheet will range between four to 6 billion. So we own more securities than we actually have issued in terms of stock and preferred stock. And the way we do that is simply borrow money to own more securities. And we’re still earning a spread between where we borrow the money and where we actually lend the money. And then the next thing that our shareholders depend on us is to manage that balance sheet that we have created.

Mark Fitzgerald:

So Byron, for a typical investor that’s looking to supplement income in retirement, how are the dividends paid out? Is it quarterly? Is it monthly? Is there also a capital return that goes along with that?

Byron Boston:

There are all of the above. We have a preferred stock that pays dividends on a quarterly basis. We have a common stock that pays dividends on a monthly basis. And we structured our dividend payment trying to be more attractive to the individual who is managing his money on a monthly basis. So we offer both. There are times where there’s capital gains, that the dividends may be classified as capital gains. There are other times when they’re classified as ordinary income, and it’ll vary depending on how that income is generated. And for the average investor, I’d say over the long term, you may find the income falling in either of those buckets over time. And it will change from year to year.

Mark Fitzgerald:

And how about from that perspective of liquidity? How does that structure work if the client were to try to redeem shares of it?

Byron Boston:

Well, that’s the great thing. Because we’re a public company, a client can buy and sell our shares at any point in time. There’s great liquidity in our stock for a customer who wants to say I want to own a mortgage REIT. Because we’re public, there’s not a mutual fund, there’s not a funky price at the end of the day or anything of that nature. You simply buy our stock. We are a public company, we’re transparent and we’re regulated by the SEC. So we have to provide you with information regarding the risks that we take. But from a liquidity perspective, an investor can come in and out of our stock, I don’t want to say in a nanosecond, but it is close to that. It’s trading any other equity.

Laura Dinan Haber:

How would someone know whether or not a REIT is right for them? We talked about investors can use it as supplemental, but how do I know if it’s right for my personal portfolio?

Byron Boston:

Obviously, when there’s an individual, you have to think about your risk tolerance. Let’s start with where an annuity starts. Annuity is a guaranteed income. I’m going to think about my dad. Let me just plug my dad. I always like to plug my dad, World war II vet, decorated World War II vet, didn’t really finish high school, but a great American citizen. He did the right things. He came out of World War II, got one job, a union man, worked there for the next 35, 40 years. Now he retires. And what he is looking for, he’s at his retirement at this US still sub. He’s looking for this check every single month that’s paying him a certain level of income.

Byron Boston:

Now, my dad wasn’t on the wealthy end of the world or to some substantial amount, but he was really great. He saved a lot of money. His other money that he could have had in his portfolio away from that guaranteed money, he may say, I’d like to live a little better. I’d like to get a little more money and I’d like to diversify. So you think about a REIT being further out the risk spectrum. You are taking more risk. We’re not guaranteeing you this income. I’d like to look back in hindsight, 10 years from now, look back at hindsight and you say, boy, Byron, you delivered me a steady stream of income. That’s our goal, but I can’t guarantee you that beforehand. And so you should be thinking of it as a step out on the risk spectrum. Because we use leverage, I like to put us in a bucket of really an alternative asset, meaning that you want to really understand the strategies that we’re using as a management team. I think you want to understand the resumes or the backgrounds of the professionals who’s managing your money.

Byron Boston:

And please understand, when you buy the stock of Dynex Capital, you are giving your money to Dynex to manage, and we take that responsibility very seriously. The first thing you’ll see in our purpose statement is we are careful stewards of individual savings. And we take that role very, very seriously. But as an investor, you should be thinking of us as moving out the risk spectrum away from a guaranteed income of an annuity. But again, put it in my dad’s perspective, my dad had had a guaranteed income from all of his years, working all of his service to the United States in the military, his savings, which he was very good at saving money, he could have moved out the risk spectrum, added more income portfolio and lived a better life. But he was a simple man. He wasn’t really interested in living too much of a flamboyant lifestyle.

Ramsey Smith:

Is that the typical profile of your investors? Are your investors typically retirees or are they in some cases, institutions? Who are the folks that buy Dynex and other mortgage rates?

Byron Boston:

For us, 50% of our investors are individuals and then 50% are institutional. And within the institutional bucket, you’re probably half passive and half active. And so if you look at our top shareholders, our top shareholders is an active manager, Fidelity, and then followed by BlackRock, Vanguard, [inaudible 00:17:15]. Then we have another active manager, which is LCM Capital. And then I would’ve liked everyone to know that if you add up the amount stock owned by our total employees of Dynex and our board, we’re probably one of the top five shareholders in Dynex Capital. So we’ve got skin in the game. I want to make sure everyone understands that.

Byron Boston:

So we think about our investors very carefully. We know the individual investors are really looking for income. So just like with you with annuity, the individual, you’re not buying us to compete against Tesla. You’re buying Dynex Capital for income, and you’re buying Dynex Capital because you trust the management team that will generate that income and likewise protect your capital over the long term.

Byron Boston:

The next couple of buckets, generally, when I look at the fund that we sit in at Fidelity, that also is an income fund. My guess is, ultimately, that ultimate borrower at the end, I’m sorry, the investor in that fund is someone that’s looking for income. And we found in many of the other active management funds that we may be part of, that their ultimate investor is actually looking for income also. Then you get back to the passive funds which would be the BlackRocks, the Vanguards. That’s very important to understand that that is a force to be reckoned with within the equity world today, but their goals, their ultimate evaluation methods are very different than the individual stockholders in Dynex and the active managers. So we think about this very carefully because we want to make sure we-

Mark Fitzgerald:

[crosstalk 00:18:53] So your objective is really to keep your share price very stable and then just generate the income off of that going forward. Correct?

Byron Boston:

I want to say it a little different than you, because when we start using words like stable, I don’t want to mislead anyone because we are using leverage, which means we do have the probability of some book value volatility. What I like to say is we are over the long term, what you just described, Mark is correct over the long term. Our goal, our sweet spot, we can generate eight to 10% over the long term and keep with that, including keeping your combination of your book value and your dividends. And that’s what you say, 10 years from now, you look back and say, I got eight to 10%. That’s pretty good deal and it generated cash income for me, that’s a winner for us.

Byron Boston:

There are times when we can generate more income than eight to 10%. For example, last year we had a, I think a 17% total economic return. It was a great time to be invested and generate income. But in other situations like when the fed was tightening in 2018, returns are smaller. So over the long term, we are looking to keep that book value and share price relatively stable and generate an eight to 10% off of that from a theoretical perspective.

Mark Fitzgerald:

Very different environments in the marketplace. Going back to the 80s, very high-interest rates. 2007, 2008, the crisis that took place. Currently, long-term, low-interest rates. What does the current environment look like from your perspective and going forward if we start to have rising rates upon us?

Byron Boston:

I will say this, let me say this about myself. Let you get to know me better. One, I think my career has been fascinating. I’ve loved it. I am an economics nerd. I am a history nerd. I think that’s the only way to be great at the job that I do and that my team does. It is important. Things have changed quite a bit. My first mortgage-backed securities that I traded were probably anywhere from 12% to 18% coupons. And for the last 40 years, we’ve been on a steady, downward move in interest rates and a steady or lumpy refinancing of the American homeowner. That American homeowner had an 18% mortgage, got an opportunity to refinance to a 12%, then an opportunity to refinance until a nine, then a seven, then a five. And low and behold, we’re inside of 3% for many of our mortgages, mine will be struck at 2.65. And for those who want floating rates or mortgages down to under 2%, maybe like 1.75. These are fascinating levels for mortgages.

Byron Boston:

The one thing I will say about the 2020s in general, at Dynex Capital, we believe we are in a transitional period as a globe on many fronts, on the economic front, on international, country relationships. We are in a major transitioning period, and just individual relationships amongst people. We are in a major transitioning period. And these, I don’t know where it will go. At Dynex Capital, we believe we can make money in any of those environments, given the strategy we’re running today, which is emphasizing liquidity and emphasize high-quality assets. But we are leaning upon our past history to understand what has taken place.

Byron Boston:

Ramsey, you mentioned March, 2020, what happened in March, 2020 was not new. Similar thing happened in the great financial crash. Similar thing happened in the fall of 1998 for long term capital crisis. I could take you back to the 1980s, and I can point out similar risk situations, where if you look at the SNLs, who were leveraged and were not edging and whatsoever, and they became a problem. So history and understanding these other situations would’ve allowed you to realize in March, 2020, we don’t consider it a black swan event at Dynex Capital. It was a risky event. It was a surprise, but it was not a black swan event.

Ramsey Smith:

How do you prepare for that? What had you done leading into that event that softened the blow? And then once it happened, what were the actions you took to manage risk once the wave was hitting?

Byron Boston:

First off, and I appreciate Mark’s first question. It was history that led us about five years ago to go up in credit and up in liquidity.

Ramsey Smith:

What does that mean to go up in credit and up in liquidity?

Byron Boston:

Here is what it means. In 2008, we bought lower credit assets. We bought BBB rated assets. We bought a single A rated assets, we still had loans on our balance sheet. We brought a broader set of assets. We were very innovative coming out of 2008, because there were just so many opportunities to invest money. Spreads were very wide. And from a street man’s perspective, what I mean is the opportunity to earn more yield versus a treasury across multiple asset classes was a mortgage board of opportunities. So we use more illiquid assets in our strategy.

Byron Boston:

Now, when you are using leverage in any investment strategy, you must be concerned about liquidity. So as the war became more complex, I just told you that we believe we’re in a transitioning period as a globe. We became concerned probably five years ago, and we started to talk about the world being more complex, the risk environment being more complex. And therefore, we sold our illiquid assets and we went from triple B to single A and to agency back, our government back assets. And then we left the AAA sector for the most part except for the small sector. And we’re pretty much all in a government-backed security. That’s what I mean by we went up in credit quality of the assets.

Byron Boston:

We also started to carry more liquidity on our balance sheet. At the end of 2019, going into 2020, we had about 225 million of either cash or unleveraged assets, liquid assets on our balance sheet. If you compare that to call it 2012, 2013, that number may have been between 75 million to 100 million. We were more than twice as much liquidity on our balance sheet. That was a respect for the macroeconomic environment. We believe the globe has become more complex and very much so interconnected in ways that I haven’t met that many, I met very few people who fully understand, no one understands the connectivity. Let me just say that right off the bat. No one fully understands it. But I’ve also haven’t met a to lot people who are acknowledging the risk of the connectivity across the globe, across assets. And so we’re not afraid at Dynex Capital, we’re just respecting the risk environment. What we do is we don’t make large market calls, we adjust our risk profile.

Byron Boston:

What happens is in 2020? Coming in 2020, we’re up in credit, up in liquidity. We are also saying that we’re concerned. We’re saying surprises are highly probable. That’s a phrase we use over and over within Dynex. In January, 2020, what happens, a general is killed in Iraq, Iranian general. We bombed a general way. That’s a major, potential risk flare moment that took place simultaneously, there was this virus that had broken out in China. Well, at Dynex Capital, we had talked about the movie Contagion. You familiar with the movie Contagion? The movie Contagion outlines a pandemic just like the pandemic unfolded last year. That’s why I say this was not a black swan event, because there were those amongst the medical community, especially after the Ebola and the SAR situations who were concerned about a pandemic. So as that pandemic unfolded, these are public statements we made. You can listen to our first quarterly conference called the 2020 and you’ll hear us talking about this concern of ours. So now, we start with more liquidity and we start becoming more liquid.

Byron Boston:

When the 10 year interest rate broke below 136, which had held for years, we increased our liquidity again. We sold all of our agency, residential pass through securities, because we were now at new interest rate lows, we were concerned about what’s going to happen with prepayments. So our first move was generally near the end of February, 1st of March, we sold most of our residential pass through securities. We increased the liquidity on our balance sheet. Now we’re prepared for March, 2020. We didn’t know what was going to happen. We were still surprised by the amount of risks that unfolded. I applaud the Federal Reserve Bank. The system was going to fail without their help and all the other governments around the world that really stepped in to save the global economy and the financial system.

Byron Boston:

But again, we had liquidity, we were operating in a situation from a position of strength. The only negative is, and it’s positive, negative. The Federal Reserve stepped in and saved the system, but they also stepped in front of us. So we didn’t get a chance to buy as many assets really, really cheap, like we did back in 2009, 2010, 2011, but the whole system survived and it’s better for everyone around the globe. That’s the case. I hope I gave you a better understanding of what’s up in credit and up in liquidity, you really want to look at us coming out of 2008. We had a completely different strategy based on a different risk environment.

Laura Dinan Haber:

To drill down a little bit deeper and the current market environment, what would you say the best opportunity is right now?

Byron Boston:

From our perspective, we’re making really solid money in the most liquid high quality real estate assets. Let me say this. most of the 14 years I’ve been at Dynex, we’ve generally run a combination of commercial, so assets backed by commercial properties and assets backed by residential. We’re mainly running a strategy today backed by residential. We’re concerned on the commercial side, that we’re still not sure that the result of all of these moratoriums or what we call in street man’s language, what happens when someone doesn’t pay rent. We’re not sure what happens when someone doesn’t pay rent, somebody has to take a loss someplace. So we moved ourselves out of the position of taking that loss on the commercial real estate side. We reduced our multifamily portfolio last year, and now we’re probably 98% to 95% in the residential real estate space.

Byron Boston:

Because when people don’t make their mortgage payments, we’ve got an idea of what happens, because we’ve got the great financial crash as an example. But when governments tell renters, you don’t have to pay rent, or when stores and malls decide I’m not going to pay rent, I’m going to sue the landlord so I don’t have to pay rent, we don’t know where this goes yet at Dynex. I’m sure there’s some smarter people out there in the world. They know exactly what’s going to take place. We believe this is still an evolving health and economic environment, so we believe the safest place for us to be is to be invested in assets that are backed by residential properties.

Mark Fitzgerald:

Do you see any impact, obviously recently existing home prices have gone up pretty substantially in the last several months. The cost of lumber for building new homes has gone up close to 40%. A lot of times people are looking at, from the home value standpoint, like what’s my monthly expense. And luckily we’re in very low rate environments right now. Do see that impact changing going forward if rates start to rise?

Byron Boston:

Let me just say, if rates start to rise, there will be an economic impact. I know you hear fed officials and other government talking heads, they all talk about let’s normalize rates. Let’s raise rates. There will be an economic impact if rates go up. And it depends on how high that happens to be. Why? Because there’s an enormous amount of global debt, and the debt is higher today than it was before the pandemic. So there is an impact. From a housing perspective, here’s the way I like to look at housing.

Byron Boston:

I am a 62 year old man. I’m a baby boomer, and I’ve got two adult men now. But 10 years ago, 15 years ago, they were two young sons. Now, 10 years ago, 15 years ago, we were one household, four people. Today, we have the potential to be four people, three household. I’m still married and happy to be married by the way. But I do have friends and they are already, 10 years ago, they were one household, four people, today they’re four household because the husband and wife got divorced and the two kids are now out of college and they now have their own households. They’re either renting or they have bought a home.

Byron Boston:

So there’s more people. There’s a larger amount of household formation. It’s been there in the numbers for years. We saw it. Tip my hat to Mike, Fred and Tony at the Mortgage Bankers Association, who’s done phenomenal research on this housing industry where he showed that about five years ago, and that was the first place I took notice of this huge wave of people now who are in the system, all the baby boomers and baby boomers kids are in adulthood at this point. There’s a lot of people here looking for either rental properties or homes. So there are some real numbers behind the growth and housing values.

Byron Boston:

On the other hand, global asset prices are high, and that is a major risk in our opinion at Dynex Capital. The global asset prices, whether it’s housing, whether it’s cars, whether it’s stocks, whether it’s Bitcoin, art, baseball cards, there’s an enormous amount of liquidity in the global system. And global asset prices are high and they’re being supported by an enormous bed of debt and large Central Bank balance sheets.

Byron Boston:

So when you ask the question, Mark, what will happen if interest rates go up, with a situation like that, if you say I’m freely increasing the amount of global debt and, Hey, by the way, I’m going to increase the cost of that debt. Well, you know what? You’re going to have an economic impact and that economic impact is not going to be positive. It’s just how much of an impact will it be? How high will rates go? What will that look like? Any academic who tells you any conversation about normalizing rates, and it’s somewhere around 3% on the short end, they’re out of their brains. There’s no way in the world that the global economy can handle it. Something will break before they ever get there.

Mark Fitzgerald:

Interesting. Thank you.

Ramsey Smith:

So are we in a bit of a trap?

Byron Boston:

I don’t know. I don’t know the answer. I ask people this all the time. I asked the very [inaudible 00:34:15], how does the Federal Reserve and the other central banks get out of this? They built these huge balance sheets. The entire global asset price structure of the world is sitting on top of huge amounts of government debt, corporate debt, and these large central bank balance sheets. That’s what’s supporting the price levels. So why are we up and credit and up in liquidity at Dynex? Because we can’t answer the question you just asked, Ramsey. And I want our shareholders to understand that our goal is to take care of them, no matter what happens in the future. No matter what.

Ramsey Smith:

All right. So you’re talking to the fed chairman and you’re saying, look, if you bump rates up too much, it’s disastrous. You can’t take rates down too much lower because that that creates other issues. If you were advising the fed, what is the path you would recommend? I assume it’s like sort of maybe slow gradual rising interest rates or see if you can have extension on your mortgage backed securities or, what works?

Byron Boston:

Well, it is slow and gradual because we don’t know. We’re in an experimental period that we’ve never been in. And so I would, if they want to be slow. They’re saying and they have to be slow. And when they see something breaking or cracking, be prepared to adjust your thought process. Don’t get yourself so wedded and don’t believe all the academics. Academics sit in a classroom. They don’t feel the pain of the actions. I’m sitting here as an investor. I’m playing the game. I’m a football player, I’ll use this example. I’m on the field playing the game. Academics are sitting up in the top of the stands, trying to write what they think they see on the field. What I would say to the chair is be very careful, make sure you understand how much risk there is today in this system. A lot of it starts from the fact that so much debt and a lot of the asset price levels are there because of your buying of assets. So be very careful as you try to withdraw that process.

Byron Boston:

The other thing I would advise is to say in that withdrawal process, there’s probably someone who’s going to lose money. Someone will have to take some plane somewhere in the global system. And at some point they’re going to have to allow someone to take that pain, but I would also urge them to protect the financial system as a whole. Their actions last year were correct. It’s not over. They’re fully involved in the capital markets. They’re a major player in the capital markets. They cannot go to sleep, but their actions could generate some real pain.

Byron Boston:

I know there’s a lot of conversation around leverage and leverage players. And since I’m a leverage player I’m concerned of about that. I don’t know that the world can handle all this debt without leverage players actually being willing to take some risks, to own some, whether it’s treasuries or mortgage-backed securities or corporate debt or Lord knows those who want to buy the emerging market debt in other places around the globe.

Byron Boston:

So what did I say? I said, it said go slow, make sure J Powell you understand or try to understand the risk in the system, and keep telling yourself that even though your mighty powerful central bank, you have a lot of information, the central bank have been caught off guard. They were caught off guard in 2008, they were caught off guard again in March, 2020, they were caught off guard in 1987. And we can go back on and on and on. And so be very intellectually curious about what is the risk that exists in the system and, big one is, how is it interconnected across borders and across industries and across from corporates to individuals, to the government.

Laura Dinan Haber:

Let’s pretend you have a magic ball or a lens into the future best case scenario, three to five years from now, what does that look like?

Byron Boston:

You’re still going to have a ton of debt. Interest rates are going to be low. The fed will never have been able to raise rates as high as the academics have talked about. You’re not going to be able to do it. I don’t believe you’re able to do it. Not without paying. I don’t believe. And at Dynex, we are going, right now again, I like a diversified portfolio, but we’re up in credit, up in liquidity. I can’t see when we’re going to exit that position because I believe this could be a potentially rocky road in the central banks doing something they’ve never done before.

Byron Boston:

Remember, every one of those central bankers put their pants on just like you and I do every single day. They’re just a human being. They’re another human being. They make mistakes. They have good intentions. So at Dynex, we are managing other people’s savings. We take it seriously. So we are well aware we don’t know everything, but we do with a liquid position, a liquid strategy and being embraced and prepared for surprises. We believe we can carry our shareholders through any of these environments. But three to five years, rates, everyone talks about normalization. They’ll realize that the normalized rate is much lower than they think today. Our star is they all like to talk about it in the theoretical academic terms, our star may be zero.

Ramsey Smith:

All right. I think we’re coming up on time here. Any closing thoughts or questions, Laura, Mark? I have one more for Byron before we go.

Mark Fitzgerald:

No, I just think, number one. Thank you, Byron. I think it’s been great for our listeners. Obviously you’ve got a lot of things, changing the environment. You’ve got a lot of baby boomers going into retirement where the need for securing income in retirement is more and more critical, whether it be guaranteed income through annuity products or dividend income from portfolios like your structuring. And I think that more and more people need to take a look at different ways to generate income.

Byron Boston:

We agree with you. And I would welcome anyone to look at our website, dynexcapital.com. And I would say go first to our mission and objectives page and look at, we take this seriously. We’re managing other people’s money. And it’s not just their money, it’s their savings. The reason I like to think about my dad, because again, my dad is America. We didn’t come from the privileged side of the railroad tracks. So I like to think of it as his money. It’s my money. It’s our retirement plan, Dynex Capital, but we are different than an annuity and we should just be part of a portfolio. We shouldn’t be all of the portfolio, and we are generating income. We don’t need to hit home runs. By 2030, Dynex doesn’t need to hit a home run to make its shareholders happy. We need to generate a solid level of cash income and a solid total return experience. And we’re going to have to hold their hand through other risk flares, which are bound to happen given the structure of the world.

Byron Boston:

We’re not afraid. We’re working tirelessly to prepare ourselves for potential surprises in the future to guide our shareholders through that, whatever may come our way.

Ramsey Smith:

You anticipated my question, the retirement plan comment you made. One of the things that you had said in a prior conversation with me is that at the end of the day, this Dynex will be your retirement plan once you retire from being CEO. And so, just very curious how you think about one, having skin in the game and keeping skin in the game for something that’s meant to be a really long term investment. And then two, how that drives the team you’re building or you have built to be there for the long haul?

Byron Boston:

We have a 30 year vision looking out into the future here at Dynex. And the reason it’s 30 years is because we celebrated our 30th year on a New York Stock Exchange in 2019. So we developed this vision. And the vision was personal for us. It was a dream of mine. I said, wow, what if I can create Dynex to succeed for next 30 years? I’m 62. And if God blesses me to live, I’ll be 92 and I will have been living off of this income the entire time. That’s a great idea. Then I took it to my team at the office and everyone bought into it. So everyone now we all have a 30 year vision. So when we think about markets, we think short, medium, long term, and we think about other strategies. We’re always thinking, well, is that going to be good from a long term perspective?

Byron Boston:

So what other things would I have to do? One, I have to be very serious about the succession plan, because otherwise I won’t make it 30 years. And when you talk about retirees, especially the baby boomers, it’s not only in the US. There’s a ton of older people in China, in Taiwan, in Singapore, in Korea, in Europe, there’s a ton of people in the globe who will need cash income. And so, for me to succeed at this, I have to train my team. I have to hire the right people and I have to think about the ages. I have to think about the ages.

Byron Boston:

We promoted Smriti Popenoe to president of Dynex Capital last December. Smriti is probably 10, 11 years younger than I am. She’s in a perfect position to ultimately succeed and rise through the company. She believes in the same philosophy. She’s been part of building Dynex for years. And then we have to think about the next generation below Smriti and the clump of people who were here after her. So we have to think about the ages and we have to think about training our people. I am a coach. I’m an athlete. I grew up an athlete. I grew up with great coaches.

Byron Boston:

So I am a coach. You work for me. I guarantee you, you will never do it with something wrong and I’m not going to say something. I’m going to say something, not that it is wrong, but I’m going to try to tell you here’s how to do it the right way. So I am a coach. For me to succeed with a 30 year team, you have to have a system where it’s focuses on the people. You have to build the right culture across the people. We have a no asshole policy.

Byron Boston:

So no assholes are coming in the door. None, zero. We’re drawing the line. We’re not compromising. You don’t have the right ethical standards. You’re not coming in the door. And I’m going to be pretty tough on this. And I’m not wavering on. I don’t give a damn how smart you think you are. We’re not wavering on this issue of an asshole. We don’t want our shareholders to feel at all concerned about who’s managing their money. This is our retirement plan. When I say our, I mean, everyone at Dynex Capital. We’ve all bought into this thought process and it aligns us with our shareholders because that’s what they want. They want to go to sleep every night, believing that there’s someone ethical at Dynex Capital looking out for their needs.

Ramsey Smith:

Before I hand it back off to Laura to wrap this up, we always look for like the quote of the day. And may be no asshole. I don’t know if we can get away with that.

Byron Boston:

We have a no asshole policy.

Mark Fitzgerald:

We [inaudible 00:45:59] on the front of the show.

Laura Dinan Haber:

I think it’s a great policy though, because honestly, when you build something that’s important and this strong, the people truly matter. So Byron, thank you so much for joining us today. Thank you for sharing your long term version, your insight, your experience. It’s been quite the conversation and I’m sure it’s the beginning of many.

Laura Dinan Haber:

Best way to reach you, we heard you mention it before, dynexcapital.com. Reach out, learn more. It’s such an interesting conversation and I’ve learned a lot today, myself. I look forward to having the next phase of it, but if you want to stay in-touch with us at That Annuity Show, please go to thatannuityshow.com and sign up for a weekly newsletter that we’ve just started sending and it’s insights and other information and news from guests just like Byron. Again, thank you all for listening today. Mark Ramsey, Byron, great to have you here and we look forward to our next episode. Thank you so much.

Byron Boston:

Thank you so much for having me.

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