8-K: Annaly Capital Management Reports Strong Q2 2025 Earnings, Exceeding Dividend

Annaly Capital Management reported second quarter 2025 earnings available for distribution exceeding its dividend, alongside a strong economic return for the first half of the year, driven by strategic capital allocation and robust securitization activity.

Summary

• Earnings available for distribution (EAD) were $0.73 per average common share for the second quarter of 2025.
• The declared quarterly common stock cash dividend was $0.70 per share, which was exceeded by EAD.
• Book value per common share stood at $18.45 as of June 30, 2025.
• Annaly delivered an economic return of 0.7% for the second quarter and 3.7% for the first half of 2025.
• Economic leverage increased slightly to 5.8x from 5.7x in the first quarter.
• Total assets available for financing reached $7.4 billion, including $4.7 billion in cash and unencumbered Agency MBS.
• Annaly Residential Credit Group priced 15 residential whole loan securitizations totaling $7.6 billion in proceeds year-to-date 2025.
• Financing capacity for Residential Credit and MSR businesses increased by $500 million, bringing total warehouse capacity to $6.2 billion, including $2.6 billion of committed capacity.
• The average GAAP cost of interest-bearing liabilities was 4.76%, down 1 basis point quarter-over-quarter, while the average economic cost was 3.94%, up 6 basis points quarter-over-quarter.
• Raised $761 million of accretive common equity through the company's at-the-market sales program during the quarter.
• The total portfolio was $89.5 billion, with the highly liquid Agency MBS strategy comprising $79.5 billion (89% of total assets and 62% of dedicated capital).
• The Agency portfolio increased by 6% during the quarter, with capital allocated to specified pools and TBA securities across 4.5% through 6.0% coupons.
• The Residential Credit portfolio remained relatively unchanged at $6.6 billion, with correspondent channel lock volume and total funded volume in line with the prior quarter at $5.3 billion and $3.7 billion, respectively.
• The MSR portfolio was unchanged at $3.3 billion in market value, representing 19% of dedicated capital.

Sentiment

Score: 8

Explanation: The filing presents a strong financial performance with earnings exceeding dividends, robust securitization activity, successful capital raising, and strategic portfolio management in a resilient, albeit slowing, economic environment. While book value slightly declined and economic cost of liabilities increased, the overall tone and key metrics are positive.

Positives

• Earnings available for distribution of $0.73 per average common share exceeded the declared quarterly common stock cash dividend of $0.70 per share.
• Achieved a strong economic return of 0.7% for the second quarter and 3.7% for the first half of 2025.
• Maintained low economic leverage (5.8x) and ample liquidity, with $7.4 billion of total assets available for financing.
• Annaly Residential Credit Group remains the largest non-bank issuer and the second largest issuer overall of Prime Jumbo and Expanded Credit MBS, pricing 15 residential whole loan securitizations totaling $7.6 billion in proceeds year-to-date.
• Increased financing capacity by $500 million through new and expanded credit facilities for Residential Credit and MSR businesses.
• Successfully raised $761 million of accretive common equity through the at-the-market sales program.
• Strategically allocated incremental capital to Agency MBS given attractive return opportunities.
• Agency MBS spreads remain attractive relative to swaps, and declining rate volatility has decreased hedging costs.
• Strong fundamental asset performance continued to support MSR returns, characterized by low prepayments, muted delinquencies, predictable and declining servicing costs, and high levels of float income.
• Proactively tightened credit standards in the Residential Credit portfolio given deceleration in the housing market to preserve portfolio characteristics.

Negatives

• Book value per common share decreased to $18.45 from $19.02 in the first quarter of 2025.
• Economic leverage slightly increased to 5.8x from 5.7x in the prior quarter.
• The average economic cost of interest-bearing liabilities increased by 6 basis points quarter-over-quarter to 3.94%.
• GAAP net income per average common share was low at $0.03 for the quarter.
• Industry consolidation and technological advancements could have a negative impact on the convexity profile of the MBS sector.

Risks

• Changes in interest rates and the yield curve.
• Changes in prepayment rates.
• Availability of mortgage-backed securities (MBS) and other securities for purchase.
• Availability of financing and the terms of any financing.
• Changes in the market value of the company's assets.
• Changes in business conditions and the general economy.
• Ability to grow the residential credit business.
• Ability to grow the mortgage servicing rights business.
• Credit risks related to 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.
• Ability to consummate any contemplated investment opportunities.
• Changes in government regulations or policy affecting the company's business.
• Ability to maintain REIT qualification for U.S. federal income tax purposes.
• Ability to maintain 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.
• The timing and impact of tariffs on inflation data remains to be seen.
• Housing affordability remains challenged, despite increased inventory.

Future Outlook

The U.S. economy has slowed but remains resilient, with limited signs of an imminent downturn. The labor market is balancing, and inflation surprised to the downside in Q2, though the impact of tariffs is yet to be seen. Interest rate markets stabilized after April volatility, with the yield curve steepening and more Federal Reserve cuts priced for 2026. Annaly expects continued bulk MSR activity in the second half of the year due to low origination margins and originator liquidity needs. Potential catalysts for Agency MBS include regulatory reform spurring bank demand and Federal Reserve cuts improving currency-hedged yields for foreign investors.

Management Comments

• Annaly continued to allocate incremental capital to Agency MBS during the quarter given opportunity for returns.
• Proactively tightened credit standards given deceleration in the housing market.
• Annaly remained overweight Agency MBS given robust relative returns while maintaining low leverage and ample liquidity.
• Focused on maintaining tight credit standards to preserve the characteristics of the portfolio in light of the housing market backdrop.
• Deployed targeted pricing to correspondents to reduce layered risk and ensure high quality production.
• Whole loans and retained OBX securities continue to be preferred avenue for growth relative to third-party securities.
• Favor a balanced strategy of adding generic collateral/TBA securities in intermediate coupons and specified pools with call protection higher up the coupon stack.
• Grew Agency CMBS portfolio, which remains supportive of overall portfolio returns and provides improved convexity profile.
• Continue to maintain prudent leverage with substantial liquidity and a conservative hedge portfolio.
• MSR portfolio activity was measured during the second quarter; the portfolio continued to benefit from positive fundamentals, and we remain well-positioned to be an opportunistic buyer as relative value improves.

Industry Context

The U.S. economy is slowing but remains resilient, with a balanced labor market and surprising downside inflation in Q2 2025, though tariff impacts are pending. Interest rates stabilized, and the yield curve steepened, with more Fed cuts anticipated in 2026. Financial conditions have eased to supportive levels. The housing market shows moderating home price appreciation and increased inventory, though still below pre-pandemic levels. Agency MBS spreads remain attractive, benefiting from declining rate volatility and improved asset carry. Non-Agency issuance volumes increased year-over-year, particularly in Non-QM. MSRs continue to perform strongly due to low prepayments and muted delinquencies.

Comparison to Industry Standards

• Annaly Residential Credit Group is the largest non-bank issuer and the second largest issuer overall of Prime Jumbo and Expanded Credit MBS, having priced 15 residential whole loan securitizations totaling $7.6 billion in proceeds in 2025 year-to-date.
• Onslow Bay, Annaly's correspondent channel, is the 9th largest Agency MBS servicer and 7th largest non-bank servicer, managing $218.6 billion in Unpaid Principal Balance (UPB).
• Annaly's MSR portfolio exhibits strong credit characteristics with a weighted average FICO of 757 and LTV of 70% at origination, and muted delinquencies at 0.5% D60+.

Stakeholder Impact

• Shareholders: Positive impact due to earnings exceeding dividends, strong economic return, and accretive common equity raise, suggesting potential for continued shareholder returns.
• Customers (borrowers/originators): Annaly's continued robust securitization activity and increased financing capacity support the broader mortgage market, though tightened credit standards may affect some borrowers.

Next Steps

• Monitor the timing and impact of tariffs on inflation data.
• Observe potential catalysts for Agency MBS, including regulatory reform spurring bank demand and Federal Reserve cuts improving currency-hedged yields for foreign investors.
• Expect the pace of bulk MSR activity to continue for the second half of the year due to low origination margins and originator liquidity needs.
• Continue to expand partnerships and position for opportunistic MSR acquisitions.

Key Dates

Recommendation

Annaly Capital Management demonstrated solid operational performance in Q2 2025, with earnings available for distribution exceeding its dividend and a strong economic return for the first half of the year. The company's strategic focus on Agency MBS and robust securitization activity in residential credit are positive indicators. However, the slight decline in book value per common share and the increase in economic cost of interest-bearing liabilities warrant caution. While the company is well-positioned to navigate current market dynamics, the broader macroeconomic uncertainties, including interest rate volatility and housing market deceleration, suggest a 'hold' recommendation. Investors should monitor future interest rate movements, the impact of tariffs, and the company's ability to maintain its book value and leverage ratios.

Keywords

Annaly Capital Management, NLY, REIT, Mortgage REIT, Agency MBS, Residential Credit, Mortgage Servicing Rights, MSR, Securitization, Prime Jumbo, Non-QM, Earnings Available for Distribution, Book Value, Economic Leverage, Dividends, Interest Rates, Yield Curve, Prepayment Risk, Capital Management, Financial Performance