Annaly Capital Management, Inc. (NLY) Q2 2025 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call summary and Q&A indicate positive sentiment with strong financial metrics, increased dividends, and a modest economic return. Despite an uncertain market outlook, the company has a diversified portfolio, proactive risk management, and expects to maintain or exceed its dividend. The Q&A reveals confidence in dividend sustainability and economic returns, with no significant negative trends or concerns. The company's strategic decisions and strong liquidity position suggest a positive stock price movement over the next two weeks, likely in the 2% to 8% range.
Key Financial Performance
Economic Return 0.7% for the second quarter, marking the seventh consecutive quarter of positive economic return. Year-to-date economic return is 3.7%. This was achieved despite market volatility and was supported by diversification across three housing finance strategies.
Earnings Available for Distribution (EAD) per Share Increased by $0.01 to $0.73, exceeding the dividend of $0.70. This increase was driven by higher yields on the investment portfolio (5.41% compared to 5.23% in the prior quarter) and lower average repo rates (4.53%, a decline of 3 basis points).
Book Value per Share Decreased by 3% from the prior quarter to $18.45. The decline was partially offset by a dividend of $0.70.
Net Interest Spread (ex PAA) Increased to 1.47% in Q2 2025 compared to 1.24% in Q2 2024. This improvement reflects higher yields on investments and disciplined financing strategies.
Net Interest Margin (ex PAA) Improved to 1.71% in Q2 2025 from 1.58% in Q2 2024, driven by higher yields and lower financing costs.
Agency Portfolio Market Value Increased by 6% quarter-over-quarter to nearly $80 billion. This growth was supported by capital raising and attractive spread levels in the agency sector.
Residential Credit Portfolio Remained relatively unchanged at $6.6 billion in market value. The Onslow Bay platform achieved record securitization activity, generating $913 million of high-yielding proprietary assets.
Mortgage Servicing Rights (MSR) Portfolio Unchanged at $3.3 billion in market value. Valuation improved modestly due to a steepening yield curve and lower implied volatility.
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Operating Highlights
Onslow Bay Securitization Activity: Achieved highest quarterly securitization activity to date, closing $3.6 billion across seven transactions in Q2 2025. Priced an additional two securitizations in July, bringing cumulative 2025 activity to $7.6 billion across 15 transactions.
Agency MBS Portfolio Growth: Increased agency portfolio by $4.5 billion in notional terms, ending Q2 2025 at nearly $80 billion in market value, up 6% quarter-over-quarter.
Residential Credit Market Leadership: Onslow Bay's expanded credit correspondent channel remained the industry leader, generating $5.3 billion of locks and funding $3.7 billion of loans in Q2 2025.
Housing Market Trends: Available-for-sale inventory increased, leading to four consecutive months of negative HPA. Majority of the housing market expected to turn modestly negative year-over-year in the near term.
Funding and Liquidity Enhancements: Expanded non-mark-to-market capacity from $150 million in 2023 to $1.9 billion in Q2 2025, representing 45% of total capacity. Added $5 billion of repo principal and upsized several resi credit warehouse facilities.
Earnings and Returns: Generated earnings available for distribution of $0.73 per share, exceeding the dividend of $0.70. Achieved a positive economic return of 0.7% for Q2 2025 and 3.7% year-to-date.
Portfolio Strategy: Maintained conviction in generating strong risk-adjusted returns. Overweight agency sector in the near term due to attractive spread levels, with plans to strategically grow residential credit and MSR portfolios over the long term.
Hedging and Risk Management: Operated within a narrow interest rate risk band, maintaining a 60-40 hedge allocation between swaps and treasuries to manage volatility and optimize returns.
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Risk or Challenges
Trade-related uncertainty and market volatility: The U.S. economy is facing considerable trade-related uncertainty and resulting market volatility, which could impact growth and financial stability.
Elevated treasury yields and funding large deficits: Longer-term treasury yields remain elevated, and the market will need to continue funding large deficits, particularly with the passage of the recent tax and spending bill, which could strain financial resources.
Muted demand for Agency MBS: Demand for Agency MBS from overseas and the bank community has remained muted, potentially impacting the recovery and performance of this sector.
Housing affordability challenges: Elevated mortgage rates, high home prices, and increased property taxes and insurance premiums are creating affordability challenges, leading to a buyer's market and negative home price appreciation (HPA).
Regulatory and market risks in Agency MBS: Uncertainty around regulatory reform and the potential for further tightening of swap spreads could impact Agency MBS spreads and market dynamics.
Residential credit headwinds: Tightened credit standards and headwinds in the housing market, including increased supply and affordability issues, could impact the performance of residential credit portfolios.
MSR valuation risks: MSR valuations remain firm, but any adverse changes in market conditions or valuation metrics could impact the portfolio's performance.
Economic growth slowdown: The U.S. economy's growth is running at around 1% annualized, well below the pace of recent years, which could impact overall market conditions and investment returns.
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Guidance & Outlook
Economic Return and Portfolio Outlook: The company expects its portfolio to continue generating strong risk-adjusted returns in the current environment. Declining macro volatility and potential Fed rate cuts are anticipated to benefit the portfolio, particularly in the mortgage sector. Near-term focus will be on overweighting agency investments due to attractive spread levels, while strategically growing residential credit and MSR portfolios over the long term.
Agency Sector Projections: Optimism remains in the agency sector due to sound fundamentals and potential catalysts such as Fed rate cuts and regulatory reforms. The company expects increased activity from overseas and bank community participants, which could improve Agency MBS technicals.
Residential Credit and Housing Market: The housing market is expected to face challenges with affordability due to elevated mortgage rates, high home prices, and increased property taxes and insurance premiums. The company anticipates modestly negative year-over-year housing price appreciation (HPA) in the near term. However, the stable labor market, low consumer delinquencies, and expansionary fiscal policy provide a balanced outlook. The company plans to leverage its Onslow Bay platform to maintain a strong position in residential credit.
MSR Business Expansion: The company aims to expand its flow servicing relationships and capabilities, as well as subservicing and recapture partnerships. This will enable the company to capitalize on MSR opportunities across bulk and flow channels as relative value dictates.
Financing and Liquidity: The company has diversified its funding sources, enhancing liquidity and operational flexibility. Non-mark-to-market capacity has significantly increased, and the company is well-positioned to navigate market volatility and capitalize on opportunities.
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Shareholder Return Plan
Dividend per share: $0.70
Earnings available for distribution per share: $0.73
Economic return for Q2 2025: 0.7% positive
Economic return for the first half of 2025: 3.7% positive
Shareholder return through ATM program: Raised over $750 million of accretive capital in Q2 2025
Total shareholder return through Q2 2025: Over 10%
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Key Q&A
Q:Can I get an update on book value quarter-to-date?
A:As of last night, pre-dividend accrual book was up about 0.5%, equating to a 1.5% economic return.
Q:Can you discuss your comfort level with the dividend and how it ties in with the economic return from the portfolio?
A:The dividend was raised earlier this year with confidence that it was earnable. The company has outearned the dividend and expects to cover and potentially out-earn it for the remainder of the year. The portfolio aims to generate an economic return approximating or exceeding the dividend, despite hedging costs. Positive economic returns have been achieved for the past seven quarters.
Q:How did you manage the portfolio through the second quarter, especially with leverage during volatility?
A:The company entered the quarter with strong liquidity and low leverage, allowing flexibility during volatility. Rate exposure was the primary focus, and leverage was allowed to drift higher. The company maintained discipline in managing rate risk and feels better positioned now compared to earlier in the quarter.
Q:How do you balance investing in an attractive market with increasing leverage or accessing fresh capital?
A:Capital raising decisions are made to be accretive to book value and earnings. The company prefers raising capital over increasing leverage during uncertain times. Current leverage levels are low, providing flexibility and smoother returns. The company has not raised capital this quarter but may do so if opportunities arise.
Q:Can you discuss the dynamics of the credit portfolio, including insulation on the credit side and potential impacts of higher speeds?
A:The credit portfolio is of high quality, with a mark-to-market LTV of around 62%. Stress scenarios show resilience, with only 4% of the portfolio potentially underwater in a 20% home price decline. Proactive changes since 2022 have improved credit standards. The portfolio has a gross WAC of 6.55% and a 1-month CPR of 13%, with prepayment protection in place.
Q:Is there a breakout by vintage for the credit portfolio to understand cohort exposure and HPA by year?
A:This information is not disclosed but can be discussed offline for potential future disclosure.
Q:What is your expectation for GSE reform and its impact on opportunities in the private credit markets?
A:The company expects GSE reform to be prioritized soon, with potential benefits including lower agency sector supply and opportunities to compete for non-core loan originations.
Q:How do external factors like M&A activity and lower rates impact the valuation of the MSR portfolio?
A:Technological advancements and consolidation in the servicing sector are reducing servicing costs, benefiting MSR valuations. The company partners with leading servicers and benefits from their scale and liquidity. The MSR portfolio is conservatively priced and performing well.
Q:How should shareholders think about the value of pairing low coupon MSRs with higher coupons?
A:The company actively participates in all coupons and facilitates trades between low-yielding and higher-yielding MSRs. The MSR position provides a powerful carry generator with minimal structural leverage.
Q:What is the demand picture for Agency MBS, and how could it impact spread expectations?
A:Demand from fixed income funds is strong, with $50 billion in monthly inflows. CMO issuance is also robust, taking away 30% of gross supply. Demand from banks and overseas accounts is currently low, but MBS spreads could tighten 3-5 basis points even without additional demand. Regulatory reform and monetary easing could further increase demand.
Q:What are your margin expectations for resi credit given the Fed's pricing of rate cuts?
A:The non-agency market is robust, with tight spreads and healthy capital markets. The company retains 11-12% of transactions with mid-teens returns on deployed capital. Volumes are expected to remain stable, with a targeted credit box.
Q:What is your macro outlook, particularly regarding the impact of tariffs on inflation and the Fed's rate cuts?
A:Tariffs will contribute to inflation, with goods inflation increasing and services inflation decreasing. The Fed's forecast of 3.1% core PCE by year-end is reasonable, and two rate cuts are expected. If cuts are not delivered, the company is well-hedged for a flattening yield curve, and Agency MBS should perform well if volatility is contained.
Q:Review of Unclear Management Responses
A:Management avoided directly answering the question about providing a breakout by vintage for the credit portfolio to understand cohort exposure and HPA by year. They suggested discussing it offline and did not commit to disclosing this information in the future.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
Agency Rates
Agency basis
Agency recovery
Agency technical
BTIG LLC
Co Chief
Co Research
Inc
LLC Research
MSR valuation
Officer Co
Research Division
Serena Wolfe
Wolfe Chief
activity
affordability
agency sector
borrower
carry
condition
curve volatility
exposure
flow
housing finance
housing market
labor market
lock
majority
market Agency
market environment
market term
policymakers
purchase
reform
risk asset
sentiment
strategy
swap treasury
tariff
tax
tightening
NLY Transcript
Annaly Capital Management, Inc. (NLY) Q4 2025 Earnings Call Transcript
Positive1-29
The earnings call reveals strong financial performance with increased book value and net interest margins, alongside strategic growth in residential credit and MSR portfolios. Management's confidence in maintaining dividends and the potential for mid-teens returns further supports a positive outlook. However, some uncertainties in the macro environment and the unclear response on GSE portfolio caps suggest caution. Overall, the positive financial metrics and strategic positioning outweigh these concerns, indicating a likely positive stock price movement.
Annaly Capital Management, Inc. (NLY) Q3 2025 Earnings Call Transcript
Positive10-23
The earnings call reveals strong financial performance, with increased book value, improved efficiency ratio, and stable MSR growth. The Q&A section supports this positive sentiment, highlighting attractive agency returns, strategic portfolio adjustments, and stable pricing. Despite some uncertainties, such as Fed policy shifts, the company's strategic focus on agency investments and MSR opportunities suggests a favorable outlook. Overall, the company's financial health and strategic positioning indicate a positive stock price movement over the next two weeks.
Annaly Capital Management, Inc. (NLY) Q2 2025 Earnings Call Transcript
Positive7-24
The earnings call summary and Q&A indicate positive sentiment with strong financial metrics, increased dividends, and a modest economic return. Despite an uncertain market outlook, the company has a diversified portfolio, proactive risk management, and expects to maintain or exceed its dividend. The Q&A reveals confidence in dividend sustainability and economic returns, with no significant negative trends or concerns. The company's strategic decisions and strong liquidity position suggest a positive stock price movement over the next two weeks, likely in the 2% to 8% range.
Annaly Capital Management, Inc. (NLY) Q1 2025 Earnings Call Transcript
Unknown5-1
The earnings call summary shows mixed results: increased dividends and economic return are positive, but regulatory risks and housing market challenges pose concerns. The Q&A session reveals cautious management responses, especially regarding housing prices and regulatory impacts. The dividend increase and maintained earnings support a stable outlook, but uncertainties in spreads and leverage limit positive sentiment. With no market cap data, a neutral rating is prudent, balancing positive dividend news against regulatory and housing challenges.
NLY Slides
NLY Report
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