8-K: Annaly Capital Management Reports Q2 2025 Results with Positive Economic Return Amidst Mixed Financials

Annaly Capital Management, Inc. announced its second quarter 2025 financial results, reporting a GAAP net income of $0.03 per average common share and a positive economic return of 0.7% for the quarter.

Summary

• GAAP net income was $0.03 per average common share for the quarter ended June 30, 2025.
• Earnings available for distribution (EAD) reached $0.73 per average common share for the quarter.
• The company achieved an economic return of 0.7% for the second quarter and 3.7% for the first half of the year.
• Book value per common share stood at $18.45 as of June 30, 2025.
• GAAP leverage increased to 7.1x from 6.8x in the prior quarter, while economic leverage rose to 5.8x from 5.7x.
• A common stock cash dividend of $0.70 per share was declared for the second quarter.
• The total portfolio amounted to $89.5 billion, including a $79.5 billion highly liquid Agency portfolio.
• The Agency portfolio increased by 6%, representing 62% of dedicated capital, with accretive capital deployed into specified pools and TBAs.
• The hedge portfolio remained defensively positioned with a 92% hedge ratio.
• The Residential Credit portfolio was relatively unchanged at $6.6 billion, driven by record quarterly securitization issuance totaling $3.6 billion.
• The MSR portfolio remained unchanged at $3.3 billion in market value, representing 19% of dedicated capital.
• Financing capacity increased by $500 million for the Residential Credit and MSR businesses through new and expanded credit facilities.
• Total warehouse capacity across Residential Credit and MSR businesses reached $6.2 billion, including $2.6 billion of committed capacity.
• The average GAAP cost of interest-bearing liabilities decreased by 1 basis point to 4.76%, while the average economic cost increased by 6 basis points to 3.94%.
• Annaly raised $761 million of accretive common equity through its at-the-market sales program during the quarter.

Sentiment

Score: 6

Explanation: While the company reported a positive economic return for the seventh consecutive quarter and strong EAD, the significant drop in GAAP net income and book value per share, coupled with increased leverage, indicates underlying challenges despite management's positive framing of strategic execution.

Positives

• Achieved its seventh consecutive quarter with a positive economic return (0.7% for Q2 2025, 3.7% for H1 2025).
• Earnings available for distribution (EAD) increased to $0.73 per average common share, up from $0.72 in the prior quarter.
• The Agency portfolio grew by 6% (nearly $5 billion) to $79.5 billion, effectively deploying accretive capital.
• The Residential Credit Group recorded a record quarterly securitization issuance of $3.6 billion.
• Increased financing capacity by $500 million for Residential Credit and MSR businesses through new and expanded credit facilities.
• Maintained a strong hedge portfolio with a 92% hedge ratio, actively managing interest rate risk.
• The common stock cash dividend remained stable at $0.70 per share.
• Net interest margin (excluding PAA) improved to 1.71% from 1.69% in the prior quarter.
• Net interest spread (excluding PAA) improved to 1.47% from 1.35% in the prior quarter.

Negatives

• GAAP net income per average common share significantly decreased to $0.03 from $0.15 in the prior quarter.
• Book value per common share declined to $18.45 from $19.02 in the prior quarter.
• GAAP leverage increased to 7.1x from 6.8x in the prior quarter.
• Economic leverage increased to 5.8x from 5.7x in the prior quarter.
• Annualized GAAP return on average equity decreased to 1.82% from 4.04% in the prior quarter.
• Average economic cost of interest-bearing liabilities increased by 6 basis points to 3.94% quarter-over-quarter.

Risks

• Changes in interest rates.
• Changes in the yield curve.
• Changes in prepayment rates.
• Availability of mortgage-backed securities ("MBS") and other securities for purchase.
• Availability of financing and, if available, the terms of any financing.
• Changes in the market value of the Company’s assets.
• Changes in business conditions and the general economy.
• The Company’s ability to grow its residential credit business.
• The Company's ability to grow its mortgage servicing rights business.
• Credit risks related to the Company’s investments in credit risk transfer securities and residential mortgage-backed securities and related residential mortgage credit assets.
• Risks related to investments in mortgage servicing rights.
• The Company’s ability to consummate any contemplated investment opportunities.
• Changes in government regulations or policy affecting the Company’s business.
• The Company’s ability to maintain its qualification as a REIT for U.S. federal income tax purposes.
• The Company’s ability to maintain its exemption from registration under the Investment Company Act of 1940.
• Operational risks or risk management failures by the company or critical third parties, including cybersecurity incidents.

Future Outlook

Management remains encouraged by opportunities across its three investment strategies (Agency, Residential Credit, and MSR) and believes its diversified housing finance portfolio can continue to generate industry-leading risk-adjusted returns.

Management Comments

• "Despite significant intra-quarter volatility across financial markets, Annaly delivered its seventh consecutive quarter with a positive economic return, underscoring the benefits of holding our Agency, Residential Credit and MSR strategies together on balance sheet."
• "Our Agency portfolio grew by nearly $5 billion as we were able to deploy accretive capital raised into the sector."
• "Residential Credit experienced another record quarter of origination and securitization activity as Onslow Bay furthers its leadership across the non-Agency market."
• "Meanwhile, our MSR portfolio continued to generate substantial cash flow while we expand our flow, subservicing and recapture partners."
• "Looking forward, we remain encouraged by opportunities across our three investment strategies and believe our diversified housing finance portfolio can continue to generate industry leading risk-adjusted returns."

Industry Context

The filing highlights Annaly's position as a leading diversified capital manager in mortgage finance, with investment strategies spanning Agency, Residential Credit, and MSR. Its record securitization issuance and stated leadership in Prime Jumbo and Expanded Credit MBS within the non-bank sector suggest strong operational performance relative to specific market segments. The company's emphasis on a diversified portfolio indicates a strategic approach to mitigate risks inherent in a volatile interest rate environment, a common challenge for mortgage REITs, aiming to generate consistent risk-adjusted returns.

Comparison to Industry Standards

• Annaly remained the largest non-bank issuer and the second largest issuer overall of Prime Jumbo and Expanded Credit MBS year-to-date (from 2024 to Q2 2025), according to Inside Nonconforming Markets.
• The company delivered its seventh consecutive quarter with a positive economic return, which management highlights as a benefit of its diversified strategy.
• Management believes its diversified housing finance portfolio can continue to generate industry-leading risk-adjusted returns.

Management Changes

Stakeholder Impact

• Shareholders: Experienced a positive economic return and a stable dividend, but faced a significant decline in GAAP net income and book value per share, alongside potential dilution from the $761 million capital raise.
• Employees: No direct impact mentioned, but continued growth in portfolio and business lines suggests stability and ongoing operational activity.
• Customers/Clients: Strong correspondent channel activity and record securitization issuance indicate continued robust service and access to capital for borrowers and originators.
• Creditors: Increased GAAP and economic leverage might warrant attention, though the increase in financing capacity suggests continued access to funding sources.

Next Steps

• A second quarter 2025 earnings conference call will be held on July 24, 2025, at 9:00 a.m. Eastern Time.
• An audio webcast of the call will be available on www.annaly.com, with a replay available for one week following the conference call.
• The company will continue to use its website (www.annaly.com) and LinkedIn account (www.linkedin.com/company/annaly-capital-management) as channels for distributing company information.

Key Dates

Recommendation

The company demonstrates operational resilience with a consistent positive economic return and robust Earnings Available for Distribution (EAD), indicating a healthy core business. However, the notable decline in GAAP net income and book value per share, coupled with an increase in leverage, presents a mixed financial picture. The recent capital raise, while described as accretive, also introduces potential dilution for existing shareholders. Given these conflicting signals of underlying operational strength versus GAAP accounting outcomes and balance sheet metrics, a 'hold' recommendation is prudent for a seasoned investor to allow for observation of future trends and market conditions before making a more definitive investment decision.

Keywords

Mortgage REIT, REIT, Agency MBS, Residential Credit, Mortgage Servicing Rights, MSR, Securitization, Financial Results, Earnings, Dividend, Leverage, Book Value, Net Interest Margin, Hedging, Capital Management, Fixed-to-Floating Rate Preferred Stock