Katie Perry (00:00):
You might not know this company's name, but you're about to know their game. Today we are talking to Dynex Capital. They're a mortgage REIT company with a current dividend yield of more than 12.5%. They also just surpassed a billion dollars in equity value. The potential fed rate cut is almost as anticipated as reputation tailors version, and so it's a great time to dive in with that. This is After earnings, the show brought to you by Morning Brew and Stakeholder Labs. We bring you up close and personal with the executives behind the world's most interesting public companies. I'm Katie Perry, your host for today. And we're here with Smriti Popenoe co. CEO, president and Chief Investment Officer at Dynex Capital.
Disclosure (00:39):
Wow. This is not investment advice. The information provided is for informational purposes only and should not be construed as a solicitation or recommendation to buy, sell, borrow, or lend any securities. Viewers should consult with a qualified financial advisor or tax professional before making any financial decisions. The presenters disclaim any liability for loss or damage resulting from the use or reliance on this information. Investing involves risk and past performance is not indicative of future results.
Katie Perry (01:09):
Hello everyone. Welcome to After earnings. We are here with Smriti Popenoe, who is the co-Chief Executive Officer, the president and the Chief Investment Officer for Dynex Capital. Welcome to the show.
Smriti Popenoe (01:26):
Thank you, Katie. It's a pleasure to be here this morning,
Katie Perry (01:28):
And I know there's exciting news swirling first, you guys just had earnings a couple days ago, which we'll get into. And also you just stepped into this new role as CO CEO. So congratulations and we'll get into all of that, but wanted to call that out. What a big achievement
Smriti Popenoe (01:46):
It is and I'm super proud of myself. I'm super happy to be here. One of these things at this point, human capital management is so important when you think about who leads a company and how they lead a company, this co CEO structure I'm really excited about and onwards and upwards for dynex.
Katie Perry (02:07):
Awesome. So let's get into, I think we got a lot of investors who listen to this show. A lot of us probably have exposure to REITs, which real estate investment trust companies. So can you, for people who are less familiar, break down, what's a REIT and where does DYNEX specifically fit within REITs?
Smriti Popenoe (02:29):
Sure, yeah. And just for information, there's a great website called reit.com that breaks all this down if you want to dig into it further. But a REIT is basically a real estate investment trust, and these were created by Congress in the 1950s to democratize investment in real estate. And so you can think about a reit, kind of like a mutual fund that allows an average investor to own real estate. Typically it's really expensive, buy a building or buy a series of buildings. So REITs were created to really democratize that process and it's been an incredible innovation. The other thing about REITs is that they actually do not go through double taxation. Just like a lot of corporations, you pick taxes at the corporate level and then the individual who gets income has to pay income taxes. Again, REITs are a tax pass through vehicle as long as we distribute 90% of the income that we generate tax free, so you don't get double taxed.
(03:33)
So that's another advantage Dynex itself. Within the scope of REITs, there are many types of REITs, some that are called equity REITs and others that are called mortgage REITs. Equity REITs will typically invest in the properties themselves, so they'll actually go buy properties, manage those properties, and you are getting more of what I would call the equity aspect of that cashflow. The mortgage REITs folks like ourselves invest in both commercial and residential real estate, but we're not actually investing in the properties. We're investing in the mortgages that back the properties. So we play more of a financing role in the markets, and there's a different way of making money in that situation where you're not exposed to the property value fluctuations. It's more of a steady cashflow.
Katie Perry (04:23):
That's such an important distinction, and I've never heard anyone lay it out that way before. So that's super helpful. And I know a big part of your business and REITs in general is this concept of yield, which seems to be the hot new thing among retail investors, which is kind of funny. If you think about GameStop A MC and now everyone's moving to yield, which I think is great, but talk a little bit about how you guys view yield, what kind of yield you guys have offered and what that trend's looking like at Dynex.
Smriti Popenoe (04:53):
Absolutely. Look, in any portfolio at any given time, yield is important, right? And yield is basically something where you can count on a return on your capital as opposed to the return of your capital. When you make an investment in an equity instrument, you're not always sure that you're going to get back what you put in, right? Because equities go up and down in the bond world, if you buy a bond, especially if you buy government bond or government back bond, there's no question you're going to get your money back. So then you're really concerned about the return on your money. So Dynex has made a business right now of investing in securities where the return of your capital is assured because it's basically government guaranteed. So then we focus on generating yield from that, that we do through the use of borrowings. So if you think about when you're an equity investor and you can borrow on margin on your margin account, Dynex does the same thing with their investments.
(06:07)
So we're able to leverage our very safe investments and that's how we generate that yield. And why yield is important today is because you have a lot of concentration in markets. I mean, your listeners are probably thinking about the MAG seven, all the news about Tesla this week, the NASDAQ is breaking through some highs, but it's also very volatile at this point. So you want to think about yield as also a way to diversify your risk. And at this point in the demographics of the world, Katie, you'll be amazed to learn that in the US actually our demographics are skewed towards the older generations. Like a lot of our populations actually sitting between the ages of 45 and above. And as those people are thinking through their investment strategy, the need for cash income is just getting higher. So in that sense, yield is important as well. Just in terms of if you are thinking you're 5, 10, 15, 20 years away from retirement, yield starts to become important because of the effect of compounding also. So if you earn something 5% a year for over 10 years, 15 years, 20 years, that makes a difference.
Katie Perry (07:24):
Yeah, I love that breakdown of a younger person using it to cushion what might be more volatile investments in their portfolio, someone farther on in their investment journey, moving more of their money to equities that are producing yield so that they can have that steady compound interest. And you talk about the consistency of yield a lot at Dex, and it seems like you're in real estate lots going on there. There's lots going on macroeconomic policy wise. How is it that you all have been able to so consistently produce a yield for your investors? What goes into that?
Smriti Popenoe (08:03):
So this is actually a very unique thing about the environment today. I'm going to break it down to what's happening today and what could go on going forward versus what's happened since, let's just say 2008. So one thing you want to remember from 2008 to probably sometime around 2018, interest rates were close to zero. So can you imagine producing a return north of zero when interest rates are close to zero? That was hard to do, but the reason we could do it in the past was because the great financial crisis happened and assets at that time were so cheap that you could generate double digit levels of returns and Dynex did and has over that period of time. So you didn't really need interest rates to be high to generate a yield because the valuation of assets was actually cheap enough. Now, fast forward to today, we've just been through the fastest, most rapid and most incredible fed tightening cycle basically since the seventies.
(09:13)
So there's a different way that we're generating that yield today. And the yield today is being generated from assets that have repriced because the Fed has tightened so much to the cheapest levels that I've seen since 2008. So for a long time, the Fed was involved in the markets. You might've heard the term quantitative easing. Quantitative easing is basically the Fed coming in and buying mortgage backed securities, treasury assets. Guess what happens when a company or an entity like the Fed starts to buy all of these assets, a price of it goes up. Guess what happens when an entity elect the Fed stops buying those assets? Price goes down. So that's the opportunity and that's where we're earning that incremental yield today. And then the other piece of this is when you're managing for the longterm, it's super easy to say, oh look, assets are cheap. And so our dividend yields should rise, but in Dynex didn't make those types of decisions. We just said, what do we think the long-term returns are going to be? Let's set our dividend yield according to that. Let's make sure that over time our investors, when things are good, they get that dividend yield. When things aren't so good, we don't want to cut it as much. So we've been more judicious about that and that long-term perspective helps us to maintain that steady dividend.
Katie Perry (10:41):
Yeah, I noticed in your recent earnings call from a couple days ago, that was actually the last line. I thought that was a smart use of real estate where it was like, alright, thanks everyone. Goodbye. Remember, we're focused on the longterm. Okay, see you later. I haven't seen people use that sign off as a way to reinforce the message before. I thought that was pretty clever.
Smriti Popenoe (11:01):
Look, we focus a lot on messaging. Interestingly, our company has doubled in size in the last five years. We've had the best track record in this industry in the last five years. Investors are showing us competence by doing that. And when you say to them that we are stewards of your capital, we are thinking about the longterm, the short-term fluctuations are going to happen in the market. That is normal. We expect it, we plan around it. But when you're thinking long-term, you give investors some confidence about how you're managing.
Katie Perry (11:37):
Yeah. I want to go back to something you alluded to because it's interesting. It sounds like you've been in this industry for a long time with Dynex for a long time. You referenced back to 2008. What was that like working in this industry that time? I think a lot of us have seen the movies, we've seen the Hollywood version. What was that experience like? And I guess what did you take from that that changed the way you do things now?
Smriti Popenoe (12:10):
So the movie Margin Call, yes, margin call was every day for a year and a half. Wow.
(12:22)
So margin Call, that whole process started really in late 2007. And when I talked to investors, when I talked to my shareholders, I say, Hey, I spent three years, 2006 to 2009 working at what used to be Wacovia Bank. And in those three years I had 20 years worth of work experience. That's how intense it was. So you worked really hard. There were things that were happening that you would never expect to happen. And in investment parlance, we say correlations went to one that means everything moved in the same direction, which if you go back to all your investment theory says, well, diversification means you have an asset goes up, something else goes down, so your portfolio stays balanced. That did not happen and it did not happen for two years. So living through that, understanding how things can happen, and the other piece of that was just the government intervention that needed to happen in order to avert a much worse crisis.
(13:31)
And so if you really think about, if you're against big government, and this is not a political statement at all, it's just more this saying, the reality is when stuff like that happens, you actually need really good government. You needed the Fed, you needed the treasury department, you need all of these people to work together to prevent a much worse disaster from happening. And yes, it took time, and yes, it took time for us to get out of it, but without those actions, I don't think we'd be here as an economy. So living through that really helped me understand a lot of how risks work, how does risk work, how does leverage work? What happens when you really don't have money, liquidity? Those are really good long-term lessons to learn. And fortunately, I had an amazing bird's eye seat on all of it, and so learned a ton.
Katie Perry (14:26):
Yeah, I can't even imagine that. And it's interesting you bring in the policy because on your earnings call, you talk about navigating these exogenous events and you can't control policy from where you sail. All you can do is sort of map out potential scenarios. And even in the US last couple of weeks, a lot of the landscape has shifted. And so curious how you guys think about being ready for any scenario when it seems like especially this cycle, things are changing so fast and it is really hard to predict what's going to happen in November and onward.
Smriti Popenoe (15:03):
And I love the word predict because I'm going to tell you that's something we don't do at our company. So we say we don't predict, we prepare our team. One of the really interesting things about this macroeconomic environment is that you could be really good at understanding the components of GDP. You could be really good at understanding whether inflation's going to go up or down, and yet you would only have 30 to 40% of the real macroeconomic picture. So now as a person that's investing in the markets, you not only have to be really good at what we call the fundamentals, right? You've got to be good at knowing where the money's coming from. We call that technicals. Where are the money flows are non-US investors buying or selling? Then you've got this psychology part, which is how is the market thinking? Are people up on the mag seven down on the mag seven?
(16:02)
Do they value whatever? That's another piece. But the biggest piece outside of these things is these, what I call even noneconomic factors, non-economic factors, but they're actually starting to become economic factors. What are they? Human conflict, right? Human conflict at every level that we see in the US outside the US that's affecting things like who we elect to be, our government officials and who we elect to be our government officials affects policy and policy affects economics. So it is all economics in the end, right? Because when you connect it, it's like economics actually a lot about people. And so we spend a lot of time understanding people and how people make decisions, what decisions are people making, how that policy could flow through. And it is actually very difficult to hedge policy risk. It is binary in many cases. So you have to think more in terms of scenarios. Do you say, can my portfolio perform in a Republican sweep and a democratic sweep and something in between? What might be the policies? What should I be ready for? So we think in those terms, and we adjust our liquidity position, we adjust our hedge positions to reflect our assessment of that risk.
Katie Perry (17:28):
So interesting you talk about the human element because I think from my seat, in a lot of investors, we think people in your shoes, it's spreadsheet, it's models, it's algorithms, and yes, all of those things. But you're right, there is at the end of the day, there's a human component and how people are feeling, thinking, and eventually voting is really going to change the course of the next step for the company. So really interesting to hear that layer. I want to turn to your latest earnings call. A lot happened, there were a lot of news drop, you were leveled up to co CEO as I mentioned before, you had some new hires on the financial side. What are some of the takeaways from investors that you all emphasized during the call?
Smriti Popenoe (18:17):
So for us, really it's about again, consistency of performance. Last quarter we actually went out and did the largest capital raise in our company's history. That was huge for us. That capital raise happened because investors gave us a vote of confidence by coming to us and basically saying, we have a demand for your stock. So the deal got done based on what we call in the market reverse inquiry. That means investors say, Hey, we have a demand for your stock. Can you issue us some because we think there's upside. That was an incredible win. The second thing that happened, our total capitalization went above a billion dollars for the first time. So being a billion dollar company makes a difference. And can you believe it? We're still considered a small cap company, right? Billion dollars is still small cap, but it makes a difference because in this day and age there's a lot of passive investing still going on, and passive investors basically allocate capital, not necessarily on performance, but just because you're there and you're big enough and therefore you're part of the index.
(19:30)
And so that offers a tailwind to our active investors. So that's important for us in terms of size. So those were really two very big things that happen in the quarter. And then the other piece that I emphasized is the return environment. So as I talked to you about, our primary investment is an agency mortgage backed securities. So these are securities that are backed by the US government. They're guaranteed by two entities, Freddie Mac and Fannie Mae. And so your return on capital is really the thing you're looking for. You are going to get your capital back. So we don't worry about that as much. And these securities were a primary part of the fed's portfolio, which the Fed is basically saying we don't want to own these private capital can come in and own these, and the levels at which these securities are trading, we haven't seen these types of levels since 2008 really.
(20:32)
So we're talking to our investors about the amazing investment opportunity that there is our ability to raise capital to deploy into that investment opportunity and also basically use our own capital that we already have to create these returns. So that was the second piece of this when we've been talking about this, Katie, it's like we talk about it as a generational opportunity. So maybe you call a generation like 15, 20 years, that's what's happening. So it's a big deal. I think if you're an investor really thinking about how do I allocate my money, whether you're a small investor, large investor, our stock pays a dividend yield of about 12.5% on a monthly basis, and that cushions a lot of downside. So if you can imagine a security that's paying you 12%, you have a 12.5% downside protection on that stock before you break even while you're really waiting for this for upside to happen. So we think it's a great value. I encouraged our investors to continue to support us in the way that we have and we're focused on making these returns at this point.
Katie Perry (21:46):
We have a visual pull up of just the value over time and the consistency. Can you put a little color on the 12 point a half percent Now what does that look like over the last several years? What's the range been or what's the average yield been during that time?
Smriti Popenoe (22:05):
It's been somewhere between 9%. I would say on the low side it can get as high as 15, 18%. And that only happens in times of stress. And when I think about times of stress, if you're ever seeing in a stressed out period, these stocks trade at really big dividend yields. It's telling you two things, either that there's too much risk and everybody's selling, which is probably happening and it's probably a buying opportunity for the right companies. So our SOC has traded up and down in this range whenever it has traded down. I'll be honest with you, my co CEO and I together own probably close to a percent and a half of Dynex in terms of how many shares we own as a percentage of the total shares outstanding. And that's an incredible, we've seen that as opportunity to add assets, add to our own personal positions. So yes, the dividend yield can go up and down. Typically it will go to these extremes when there's stress in the market. But on average, I would say we've consistently thought about a double digit yield over time.
Katie Perry (23:24):
Fascinating to hear the voiceover on your own moves and your co-CEOs, is that in terms of how you're investing and your ownership of the company? I think a lot of times retail investors will look at, are people selling shares? Are people buying shares? And obviously we can get that information publicly available, but rarely do we get the voiceover. So that was really fascinating. And I want to go back to the capital raise, and this is more of just an operational question. As someone who's less in the weeds on institutional investing, the demand that was coming in, what does that look like? Is it people calling you on the phone? How do you sort of gauge or measure that demand coming in and know that it's there prior to a capital raise?
Smriti Popenoe (24:14):
So one thing we have is incredibly good relationships with banks On Wall Street, we have several banks. We work with all the B bracket firms that you can imagine. And in this particular case, the firm that we were working with, they receive those calls and they're giving us that information to say, we see demand in your stock and that's how it works. And typically the institutional funds that would be interested in us, they're yield investors. They might run a dividend fund or a small cap value fund. They're looking for investment opportunities and they're looking at Dynex and saying, Hey look, this company trades at a discount to its future returns. Check this company pays a double digit yield check. This company is managed by ethical individuals who care about their money, right? Check this company has some upside to the extent the Fed could reduce interest rates and we should have a conversation about that. How does that affect us? And then last but not least, these valuations that I told you about how cheap things are, these things aren't going to stay this cheap forever. They're going to go up in value as people realize the value of these assets as they rotate out of other more risky assets. So that's the fifth source of upside. And when you look at all these pieces together, you say, wow, this is a great investment. And people have started to, that has started to resonate.
Katie Perry (25:46):
And I want to touch on the fed real quick. Fed seems to be what a lot of people are talking about is actually wild. I have friends texting me about love Island, USA and also the Fed, which is wild. But in the event that the rate cut happens, what does that mean for your business and what does it mean for investors in Dynex?
Smriti Popenoe (26:08):
So I'm going to tell you, Katie, I think the entire world is waiting for a fed cut and the entire world would actually benefit from a fed cut. The entire world needs a fed cut. That's just a completely different conversation about just where interest rates are and whether they're restrictive, how it affects the rest of the world. But the whole world is waiting for this. And I believe again, it's a matter of when and not if. It's a matter of when at this point. So are they going to cut next week? We think there's actually a pretty decent probability that they will cut unlike maybe the markets believe, but September definitely a possibility. But so we're in the zone now where a cut could come at any time. So how does that affect us? So Dynex, we go out, we buy these agency mortgage backed securities, but we have to finance those securities.
(27:01)
We do that in a market called the reverse repurchase agreement market. It's also called the repo market, not repossession of used cars like that kind of market, but the same word just means something different. So it's called the repo market and that those interest rates are more tracking the Fed funds rate. And if you can think about dynex and the way we invest, we're actually investing in assets that have longer dated maturities, but we're financing them with short-term interest rates and short-term debt. It's called maturity transformation. And our expertise is figuring out how to do that through all these different interest rate cycles, all different shapes of yield curves, and do it well and generate this consistent return. So right now, the way our portfolio is structured is you have these long dated assets and you have short dated interest rates. And amazingly, that curve is actually inverted.
(28:02)
So long dated interest rates are actually lower than short dated interest rates. Now when you add dynex investments on top of that, our yields are actually sitting up here. And so as these rates come down, shortened weights come down, we will earn more net interest margin between our assets and our liabilities. And that's the upside. So interest rate cuts are favorable for us, and we do something, we do hedge our interest rate risks. So we are not sitting here saying, wow, we actually need interest rate cuts to make this happen, but a portion of our portfolio is not fully hedged and that's why we expect to see upside.
Katie Perry (28:46):
Interesting coming soon. Everyone's on the edge of their seats. I want to also touch on how you run the business in addition to, because I think there's the scoreboard, right? There's the results, but there's always, we have a lot of conversations on the show about what goes into that, and there's different sort of DNAs at companies that people will credit as leading to those kinds of results. And I know you all have a mantra of do well and do good, and I'd love to hear your voiceover of what that means at dynex and how does doing good actually empower you guys to do? Well, at the end of the day,
Smriti Popenoe (29:27):
Look, I think doing well is why you're in business. You're in business to do well for your shareholders. That's table stakes. Everybody should be in business to do well for their shareholders or their stakeholders. That's a given, right? So performance is not a question. So the real, what's the connector is how do you get that performance right? And there's many ways you can get that performance. You can focus on technical things, you can focus on being the best at certain things. All of that also I believe are just sort of like actual table stakes to get the performance. But doing good actually we think contributes a great deal to our ability to do well. And what does doing good actually mean? Right? It starts with how do you treat people? We think of people as human beings. It doesn't matter where you came from, where you were born, what your background was.
(30:28)
So everyone's a human being. Treat everyone as a human being and you will be amazed what kind of results you get. That involves kindness. That's part of our core values, respect, integrity, all of those things go into how we treat people. And as a result, we're finding when you treat people well, you actually drive the performance of your corporation. A big part of really successful long-term corporations, and I would really challenge you to think about this, the longest living companies, the ones that actually make it through centuries of existing, have a really strong culture. And the culture is about people. And so when you have this culture, and our culture is based on stewardship, kindness, integrity, performance, trust, we actually have equality and inclusion as part of our core values. When you build your company, you start doing everything in your company based on these values that actually is a massive contributor to performance. It helps our teams coalesce during times of crisis. A lot of the performance in companies like ours actually doesn't come when the market is doing. Its very non-volatile thing. It comes when the markets are really volatile, and in those moments is when you want your teams to be the best. And our track record over the last five years is basically showing that
Katie Perry (32:07):
You guys are really well known for how diversity in your leadership team in the c-suite and the executives. And it sounds like I would love to go back to your relationship with your CO CEO, Byron, and it seems like you guys have an incredible relationship and have built this amazing thing together. So can you give us a little background on how you guys met and how you've been building up that team over the past almost three decades I think?
Smriti Popenoe (32:31):
Yeah, it's a 27 year relationship, and I've been married for 31, so it's only slightly shorter than marriage. So we met at a company called Freddie Mac, which was a private company when we both worked there. They were a government sponsored enterprise, but both Fannie and Freddie Mac actually had publicly traded shares. They were public companies at the time. In 1997, I'm going to say. So I think, yeah, 97 was when we first met. And what was really what connected the two of us was, I'm just going to say it was one word, it was curiosity. So Byron came from Wall Street. He had just completed a stint trading at Credit Suisse, which used to be called First Boston back then. And he came to Freddie Mac as a portfolio manager. I was an analyst on the desk and I was curious about, Hey, what's it like to trade on Wall Street? What did you learn? What was it like? And he was curious. He said, Hey, you're not from here.
(33:40)
I'm actually an immigrant. I moved here in 1990, I was born in Bombay and I grew up in Africa and I've been educated on three different continents. So it was just an interesting, he was curious. And so we got to know each other and we became really good friends. But more than that, we really kind of complimented each other. We wrote a business plan together at Freddie Mac, which actually transformed the way mortgage backed securities are traded. And it evaluated all of that in the time that we were together. Then we left Freddie Mac together to go start a de Novo public company. We've been a team for the last 27 years. When you're on a team, you have strengths and weaknesses of each other. We've learned how to trust each other. We've learned how to count on each other. We've learned how to build on each other's strengths and basically fortify our weaknesses.
(34:39)
And together, I would say when you think about an executive team and how decisions get made, you want to minimize your blind spots. So if you've got a certain perspective, you're going to have some blind spots behind you. And when two people get together with a particular set of capabilities, those blind spots get actually narrowed down a fair amount. And so the thing he and I focus on a lot is what is our common blind spot? How can we build a team that the rest of this stuff that we don't see actually get seen? And then the other part of this is you have to be able to listen to your team. And so over the last 10 years since I've been at Dynex, since we've been methodically growing our company, our company has doubled in size over the last two, three years. And that's been an amazing story of just being able to say, I trust this strategy.
(35:38)
I have this strategy. I trust the strategy. We're going to execute the strategy. And now we're at this incredible position. You mentioned our earnings announcement. We announced my promotion to co CEO, our CFO, Rob Colligan became the chief operating officer as well. There's several people on our team that we've been able to elevate, and that is the name of the game is understanding your people and how you can build this company over time. But it all starts with strategy, strategic thinking, laying it out, thinking for the long term, and then you go and execute. Byron's a great strategic thinker, he's a great strategic thinker. He can imagine he's got an incredible imagination. The scenario planning that we all do, driving us towards risk management first, capital allocation second, all of these principles, we've actually put those principles into place and those two things compliment each other really well.
Katie Perry (36:38):
I love that articulation of, it's just like portfolio diversification, but with human capital it makes a lot of sense. And I know in the earnings call by and called out the global perspective you bring, and it sounds like that was something he really valued from the star of someone who's less insular in the US economy and was drawing from different experiences to put you guys in a position of strength.
Smriti Popenoe (37:03):
Look, if you are an investor in any country, but especially in the United States, given that our currency is the global currency, it's the reserve currency, it's the currency in which so many people transact. We have the best developed capital markets in the world. We have the best developed housing finance system in the world. And if you are sitting here believing that you don't need to focus on Japan or Europe or China or India, any of these places in order to invest, just because you're investing in the US housing market, you are liable to make a mistake. So knowing how these economies have been developing, knowing how the rest of the world even looks at the us, that's a perspective I think has been really important for us to have. And I believe that it has resulted in our ability to look outside the borders. Even our performance during Covid, we were super curious about, Hey, what was really going on in China? Who do we know that we can call and find out what's going on? It helped us adjust our portfolios a little bit differently. And so that curiosity I think has been really important to have as a perspective in managing this company,
Katie Perry (38:26):
The CO CEO thing, I think there's been a lot of debate about that as a structure, and it sounds like you and Byron seem like a team. What are the challenges of that that you think, and why are there instances where it doesn't seem to work out as well to have two people running the show?
Smriti Popenoe (38:47):
The number one ingredient for a co CEO structure to work is actually the lack of something, and it is the lack of ego. So when two people have a share a common vision and they're working towards whatever that vision is, but they don't really care which one gets the credit or they just care about getting there and making that result happen, you can do that when you're a team and when you've worked together as long as he and I have, and we've operated in this manner for so long, it's a very natural evolution for us. But the key ingredient of that is that neither one of us is sitting here saying, well, I should be the CEO or you should be the whatever. There's none of that. Neither of us have any attachment to the idea that, or we're the CEO and this means something in this way or that way.
(39:45)
We care a lot about our shareholders. We're personally invested in this company, and so we want it to work for ourselves. And in that way it's massively aligned with shareholders. So co CEO structures work when you really want that coalescence of talent and you're trying to minimize that blind spot that I mentioned. So when you do put a co CEO structure in place, you have to ask yourself if you're a board or company doing that, why am I doing this? Why is this something I really want to have happen? And when it fails is when you have two people that each feel like they should be the CEO or could be the CEO, and that's not a clear definition of what the duties are. That I think is harder. Then also what I always say, if you've ever played team sports and you've been part of a team, you understand what it's like to win with a team. It isn't about I, there really is no I in team. That mentality needs to be there in both people for that to work.
Katie Perry (41:03):
I love that makes so much sense, and I think the team is clearly clicking on all cylinders, and I think what's interesting about our conversation today was in addition to kind of giving us insight into how the business is run in performance, there's also a lot of education on REITs and the different types of REITs, and I'm curious for investors listening, it sounds like you guys have a lot of great thought leadership on this topic just for people who want to understand in general. Can you tell us a little bit about your efforts and where our listeners can get more information from you guys on the industry overall?
Smriti Popenoe (41:38):
Yes, and so thought leadership is a big piece of how we go about doing things here. The principle that I have in managing this portfolio has always been sort of top down macro economic thought processes. And when you work your process from the top down, you are actually making sure there's nothing in the macro environment that's going to mess up your micro decisions. So we do a lot of research and we've just started putting that research out. If you go on LinkedIn and search under hashtag dynex angle, you'll see some of our recent pieces. We try to put something out about once a month or once every six weeks on a relevant topic. That is where you'll find some of our thinking on the fed. Sometimes the markets and anything that's quirky going on and things that maybe investors may not necessarily be focused on but is actually important to focus on. And then the other place I would say in general to go look at is to go to reit.com. It is a really good resource. There's a section in there on what is a mortgage reit, how do invest in REITs, why do REITs make sense and what it means to earn a monthly dividend from a company like ours.
Katie Perry (42:54):
Yeah, great domain too. We'll be sure to link both of those resources in the show notes so everyone can check those out. And thank you so much again for coming on today. This was such an interesting conversation. Loved hearing about your business, your space, the leadership style. Really appreciate you taking the time.
Smriti Popenoe (43:15):
Thank you, Katie. It was a pleasure to be here and thank you for all the insightful questions.
Katie Perry (43:19):
There you have it. Smriti Popenoe co. CEO, president and Chief Investment Officer at Dynex Capital. She was recently elevated to the CO CEO position and as her co CEO put it, her skills and accomplishments over her career are as significant as anyone I've ever met in the markets. Certainly lived up to the hype. We talked REITs, we talked fed cuts, we talked yields. Dynex is current yield is about 12.5%. It's ranged from nine to 18% over the past few years. She says that a fed cut could be imminent and that it would be a good thing for them. I also loved how she talked about doing well and doing good, making a business case for values-based leadership. She also addressed the controversial CO CEO model head on saying that she and her co, CEO, Byron Boston work so well together because they have a shared commitment to performance and a shared curiosity. Wow. With that, thank you so much for listening in to after earnings today on Morning Brew. We'll be back next week with even more CEO interviews. Don't forget to like, subscribe, share, do all the things, and we'll see you next time.
