10-Q: Annaly Capital Management Reports Strong Q2 Earnings Rebound Amidst Market Volatility

Annaly Capital Management, a leading diversified capital manager, reported a significant rebound in its second-quarter net income and earnings available for distribution, driven by increased net interest income and gains on investments, despite a challenging economic backdrop.

Summary

• Net income attributable to Annaly for Q2 2025 was $57.099 million, a substantial improvement from a net loss of $9.483 million in Q2 2024.
• Net income available to common stockholders for Q2 2025 was $19.839 million, up from a loss of $46.641 million in Q2 2024.
• Basic earnings per share (EPS) for Q2 2025 was $0.03, compared to -$0.09 in Q2 2024.
• For the six months ended June 30, 2025, net income attributable to Annaly was $181.323 million, down from $453.409 million in H1 2024, primarily due to significant net losses on derivatives.
• Earnings Available for Distribution (EAD) per average common share (non-GAAP) increased to $0.73 in Q2 2025 from $0.68 in Q2 2024, and to $1.45 in H1 2025 from $1.32 in H1 2024.
• Total assets increased to $112.1 billion at June 30, 2025, from $103.6 billion at December 31, 2024.
• Total stockholders' equity rose to $13.381 billion at June 30, 2025, from $12.609 billion at December 31, 2024.
• Book value per common share decreased to $18.45 at June 30, 2025, from $19.25 at December 31, 2024.
• Dividends declared per common share increased to $0.70 for Q2 2025, up from $0.65 for Q2 2024.
• The economic leverage ratio increased slightly to 5.8:1 at June 30, 2025, from 5.5:1 at December 31, 2024.
• The company increased its capital allocation to the Agency mortgage-backed securities (MBS) business to 62% and grew its Agency portfolio by nearly $5 billion in Q2 2025.
• The Onslow Bay platform achieved its highest quarterly securitization activity, closing $3.6 billion across seven transactions, contributing to cumulative 2025 securitization issuance of $7.6 billion.
• The company upsized an existing credit facility for residential mortgage loans by $100 million in July 2025.
• The U.S. economy expanded at a 1.0% annualized rate in H1 2025, with inflation moderating to 2.5% SAAR in Q2 2025.
• Long-term Treasury yields remained elevated, with the 30-year Treasury bond yielding 4.77% at the end of June 2025.
• The Federal Open Market Committee (FOMC) maintained the Federal Funds rate at 4.25%-4.50% and forecasts two 25 basis point interest rate cuts for 2025.
• Housing affordability remains challenged, leading to four consecutive months of negative month-over-month home price appreciation according to Zillow indices, with expectations for further softening.
• The company issued 39.7 million shares for net proceeds of $761.2 million under its At-The-Market Sales Program in Q2 2025, and 63.0 million shares for $1.3 billion in H1 2025.

Sentiment

Score: 6

Explanation: The sentiment is moderately positive. While H1 GAAP results show a significant decline due to derivative losses, Q2 performance demonstrates a strong rebound in net income and a notable increase in EAD per share, indicating improved operational profitability. Strategic moves like increased Agency MBS allocation and robust securitization activity are positive. However, the decline in book value per share and ongoing market uncertainties, particularly in the housing market and long-term interest rates, temper the overall outlook, suggesting a cautious but improving trajectory.

Positives

• Net income attributable to Annaly significantly improved to $57.099 million in Q2 2025 from a loss of $9.483 million in Q2 2024.
• Net income available to common stockholders rebounded to $19.839 million in Q2 2025 from a loss of $46.641 million in Q2 2024.
• Basic EPS turned positive to $0.03 in Q2 2025 from -$0.09 in Q2 2024.
• Net interest income saw a substantial increase to $273.200 million in Q2 2025 from $53.558 million in Q2 2024, and to $493.171 million in H1 2025 from $47.107 million in H1 2024.
• Net servicing income increased to $127.099 million in Q2 2025 from $107.898 million in Q2 2024, and to $253.421 million in H1 2025 from $210.766 million in H1 2024.
• Net gains on investments and other improved significantly to $83.503 million in Q2 2025 from a loss of $568.745 million in Q2 2024, and to $894.315 million in H1 2025 from a loss of $1,562.872 million in H1 2024.
• Earnings Available for Distribution (EAD) per average common share (non-GAAP) increased to $0.73 in Q2 2025 from $0.68 in Q2 2024, and to $1.45 in H1 2025 from $1.32 in H1 2024, indicating strong operational performance.
• Total assets grew to $112.1 billion at June 30, 2025, from $103.6 billion at December 31, 2024, reflecting portfolio expansion.
• Total stockholders' equity increased to $13.381 billion at June 30, 2025, from $12.609 billion at December 31, 2024.
• Dividends declared per common share increased to $0.70 for Q2 2025, demonstrating continued shareholder returns.
• The company increased its capital allocation to the Agency MBS business to 62% and added nearly $5 billion to its Agency portfolio in Q2 2025, indicating strategic growth in a key segment.
• The Onslow Bay platform achieved its highest quarterly securitization activity to date, closing $3.6 billion across seven transactions, generating $913 million of high-yielding, proprietary assets.
• The company upsized an existing credit facility by $100 million for residential mortgage loans in July 2025, enhancing financing flexibility.
• Inflation moderated in Q2 2025 to 2.5% SAAR, down from 3.5% SAAR in Q1 2025, with shelter inflation decelerating.
• The labor market remains stable, with the unemployment rate at 4.1% at quarter-end, and consumer delinquencies are low.

Negatives

• Net income attributable to Annaly for the six months ended June 30, 2025, was $181.323 million, a significant decline from $453.409 million in H1 2024.
• Net income available to common stockholders for H1 2025 was $106.906 million, a substantial decrease from $379.190 million in H1 2024.
• Basic EPS for H1 2025 was $0.18, significantly lower than $0.76 in H1 2024.
• Net losses on derivatives were substantial at $388.785 million in Q2 2025 (vs $430.487 million gain in Q2 2024) and $1,366.652 million in H1 2025 (vs $1,807.631 million gain in H1 2024), significantly impacting GAAP profitability.
• Other income (loss) worsened to a loss of $289.470 million in Q2 2025 from a loss of $113.467 million in Q2 2024, and shifted to a loss of $449.127 million in H1 2025 from a gain of $292.917 million in H1 2024.
• Book value per common share declined to $18.45 at June 30, 2025, from $19.25 at December 31, 2024.
• The economic capital ratio decreased to 14.3% at June 30, 2025, from 14.8% at December 31, 2024.
• Long-term Treasury yields remain elevated, with the 30-year Treasury bond yielding 4.77% at the end of June 2025, driven by increased term premia and investor concerns over government budget deficits.
• Housing affordability remains challenged due to elevated mortgage rates, high home prices, and increased property taxes and insurance premiums.
• The housing market has shifted, with sellers materially outweighing prospective homeowners, leading to four consecutive months of negative month-over-month home price appreciation according to Zillow indices.
• Expectations are for home prices to potentially soften further, turning modestly negative on a year-over-year basis in the next couple of months.

Risks

• Changes in interest rates, the yield curve, and prepayment rates can adversely affect net interest income and asset values.
• Availability and terms of financing can impact the company's ability to fund investments.
• Changes in the market value of the company's assets can lead to declines in book value and potential margin calls.
• Changes in business conditions and the general economy, including a decelerating housing market, can impact performance.
• Credit risks related to investments in credit risk transfer (CRT) securities, residential mortgage-backed securities, and residential mortgage credit assets.
• Risks related to investments in mortgage servicing rights (MSR), including adverse impacts from rising borrower delinquencies.
• The company's ability to consummate contemplated investment opportunities may be hindered by market conditions.
• Changes in government regulations or policy affecting the company's business, including tax reform.
• 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.
• Exposure to counterparty risk from repurchase agreements and derivative contracts, including potential losses if counterparties fail to perform or if pledged collateral cannot be recovered.
• Dependence on third-party service providers (e.g., mortgage loan servicers and sub-servicers) introduces operational and compliance risks.
• Cyberattacks or other information security breaches of the company's, service providers', or counterparties' systems or networks could affect business, reputation, and financial condition.

Future Outlook

The U.S. economy is expected to expand at a slower rate, with higher unemployment and more persistent inflation over the next year, according to FOMC forecasts. The FOMC anticipates two 25 basis point interest rate cuts for 2025. The housing market is expected to soften further, with home prices potentially turning modestly negative on a year-over-year basis in the next couple of months, although a stable labor market, low consumer delinquencies, expansionary fiscal policy, and elevated asset prices are seen as balancing factors. The company believes it is well-positioned to navigate a modestly decelerating housing market by controlling its loan manufacturing strategy. Demand from overseas and bank communities for Agency MBS may increase if the Fed resumes cutting interest rates or if favorable regulatory reforms occur.

Management Comments

• "Against this backdrop, Annaly generated earnings available for distribution of $0.73 and delivered an economic return of 0.7% for Q2 2025 and 3.7% for the first half of 2025."
• "Incremental investment was allocated toward the Agency mortgage-backed securities (Agency MBS) business, with its capital allocation increasing slightly to 62%."
• "While relative value led us to underweight our non-Agency strategies during the quarter, diversification continues to be a strategic priority, as we believe it enhances the stability of risk-adjusted returns for our shareholders."
• "Agency MBS performance lagged behind these products, as demand from the overseas and bank communities has remained muted, but we believe these participants may become more involved should the Fed resume cutting interest rates in the second half of the year or should favorable regulatory reforms take place."
• "And as markets normalized, we steadily added Agency MBS at attractive spreads in line with our accretive capital raising, growing our Agency portfolio by nearly $5 billion during the quarter."
• "Within our hedge portfolio, we continue to favor holding interest rate swaps against shorter-term risk due to the positive carry profile, while maintaining a more balanced mix of Treasury and swap exposure in the intermediate and long-end of the yield curve."
• "Our Onslow Bay platform had its highest quarterly securitization activity to date, closing $3.6 billion across seven transactions."
• "Onslow Bay's expanded credit correspondent channel remained an industry leader, generating $5.3 billion of locks and funding $3.7 billion loans over the quarter, despite us tightening our credit standards once again given some of the headwinds in the housing market."
• "We expect home prices to potentially soften further, with home prices turning modestly negative on a year-over-year basis in the next couple of months."
• "We believe we should remain well positioned into a modestly decelerating housing market as we control all aspects of our loan manufacturing strategy."
• "Annaly's MSR valuation improved modestly quarter-over-quarter to a 5.9 multiple as interest rate volatility declined and the yield curve steepened."
• "Although prepayment speeds on the portfolio increased marginally in line with seasonal expectations, the underlying note rate of the portfolio remained very low relative to current mortgage rates at 3.24% as of Q2 2025, which we believe should help insulate us from a more material increase in prepayments."
• "We believe that it is prudent to maintain conservative GAAP leverage ratios and economic leverage ratios as there may be continued volatility in the mortgage and credit markets."

Industry Context

The U.S. economy is experiencing a period of moderation with slower growth (1.0% SAAR in H1 2025) compared to previous years, and inflation showing signs of deceleration in Q2 2025. However, long-term Treasury yields remain elevated due to increased term premia and concerns over government budget deficits, leading to a steepening yield curve. The Federal Reserve has paused interest rate cuts, with future cuts dependent on assessing the impact of tariffs. The housing market faces headwinds from high mortgage rates, home prices, and property taxes, resulting in negative home price appreciation. Despite these challenges, a stable labor market, low consumer delinquencies, and expansionary fiscal policy provide some balance. Annaly's strategy of increasing Agency MBS allocation and robust securitization activity aligns with a focus on stable, government-backed assets in a volatile rate environment, while its MSR business benefits from lower underlying note rates that insulate against prepayment risk.

Comparison to Industry Standards

• Annaly's Agency MBS performance lagged behind comparable fixed income asset spreads, such as investment-grade rated corporate credit securities, which saw additional tightening due to robust risk sentiment in markets. This suggests Agency MBS demand from overseas and bank communities has remained muted.
• The company's economic leverage ratio of 5.8:1 is well within its stated target of generally less than 10:1, indicating a conservative leverage posture compared to its internal risk appetite.
• Annaly's Onslow Bay platform achieved its highest quarterly securitization activity to date, closing $3.6 billion across seven transactions, demonstrating strong performance in its residential credit segment compared to its own historical activity.
• Onslow Bay's expanded credit correspondent channel remained an industry leader, generating $5.3 billion of locks and funding $3.7 billion loans over the quarter, suggesting competitive strength in loan origination despite tightening credit standards.
• The MSR portfolio's underlying note rate of 3.24% is very low relative to current mortgage rates, which management believes helps insulate it from a more material increase in prepayments, potentially outperforming MSR portfolios with higher underlying note rates in a rising rate environment.

Legal Proceedings

• No pending material legal proceedings as of June 30, 2025.

Stakeholder Impact

• Shareholders: Increased dividends per common share ($0.70 for Q2 2025) and higher EAD per share ($0.73 for Q2 2025) are positive for income-focused shareholders. However, the decline in book value per share ($18.45 from $19.25) and significant H1 GAAP losses may concern growth-oriented investors. The At-The-Market Sales Program dilutes existing shares but provides capital for investment.
• Employees: General and administrative expenses increased, partly due to higher compensation expenses, suggesting continued investment in human capital.
• Customers (borrowers/loan originators): The Onslow Bay platform's expanded credit correspondent channel generated significant loan locks and funding, indicating continued support for the residential mortgage market, albeit with tightened credit standards.
• Creditors/Lenders: Total liabilities increased, but the company maintains a conservative economic leverage ratio (5.8:1) and has upsized credit facilities, suggesting stable access to financing. Investments pledged as collateral under secured financing arrangements totaled $73.5 billion.

Next Steps

• The FOMC is expected to assess the appropriate monetary policy response to tariffs, with a median forecast of two 25 basis point interest rate cuts for 2025.
• The company expects home prices to potentially soften further, turning modestly negative on a year-over-year basis in the next couple of months.
• The company will continue to focus on building out flow MSR, subservicing, and recapture partnerships, and expects to participate more meaningfully in the bulk MSR market as relative value improves.
• The company will continue to manage its duration through market volatility and steadily add Agency MBS at attractive spreads.
• The company will continue to operate within a narrow interest rate risk band given elevated volatility.
• The company will continue to maintain a 60/40 risk allocation between swaps and Treasuries in its hedge portfolio.
• The company will continue to monitor its REIT status and compliance with the Investment Company Act exemption.

Key Dates

Recommendation

Annaly Capital Management's Q2 2025 results show a strong operational rebound, with a return to GAAP net income and increased Earnings Available for Distribution (EAD) per share. This indicates effective management of its investment portfolio and hedging strategies in a volatile interest rate environment. The strategic focus on Agency MBS and robust securitization activity are positive steps. However, the significant GAAP losses for the first half of 2025, primarily driven by derivative performance, and the decline in book value per share, highlight ongoing challenges. The macroeconomic outlook, with elevated long-term Treasury yields and a softening housing market, presents continued headwinds. While the increased dividend is attractive for income investors, the mixed financial performance and persistent market uncertainties warrant a 'hold' recommendation, suggesting investors monitor future quarters for sustained improvements and clearer market direction before making a more definitive investment decision.

Keywords

REIT, Mortgage-Backed Securities, MBS, Residential Mortgage Loans, Mortgage Servicing Rights, MSR, Interest Rate Swaps, Securitization, Financial Services, Real Estate Investment Trust, Fixed Income, Leverage, Capital Management, Credit Risk Transfer, Non-Agency MBS, Onslow Bay, SEC Filing, 10-Q