Annaly Capital Management, Inc. (NLY) Q3 2025 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
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.
Key Financial Performance
Economic Return 8.1% for Q3 2025, 11.5% year-to-date. Positive economic return for 8 consecutive quarters due to Annaly's diversified housing finance strategy.
Earnings Available for Distribution (EAD) $0.73 per share, consistent with Q2 2025. Out-earned dividend each quarter since the increase at the start of the year.
Capital Raised $1.1 billion in Q3 2025, including $800 million through the ATM program. First preferred issuance since 2019.
Agency Portfolio $87 billion in market value, up 10% quarter-over-quarter. Growth driven by capital raise deployment and market value appreciation.
Residential Credit Portfolio $6.9 billion in economic market value, representing $2.5 billion of the firm's capital. Increased due to securitization issuance and record-setting correspondent channel volumes.
MSR Portfolio $3.5 billion in market value, up $215 million quarter-over-quarter. Growth driven by bulk package purchases and stable cash flows.
Book Value Per Share Increased 4.3% from $18.45 to $19.25. Economic return of 8.1% for Q3 2025.
Net Interest Spread ex-PAA 1.5%, increased from the prior quarter. Driven by higher average yields and improved repo rates.
Unencumbered Assets $7.4 billion at the end of Q3 2025, up $1.4 billion from Q2 2025. Includes $5.9 billion in cash and unencumbered Agency MBS.
Efficiency Ratio 1.41% for Q3 2025, improved by 10 basis points. Year-to-date efficiency ratio at 1.46%.
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Operating Highlights
Economic Return: Generated an economic return of 8.1% for Q3 and 11.5% year-to-date, marking 8 consecutive quarters of positive economic return.
Agency Portfolio: Increased to $87 billion in market value, up 10% quarter-over-quarter. Growth driven by capital deployment in Agency MBS and market value appreciation.
Residential Credit Portfolio: Increased to $6.9 billion in economic market value. Achieved record-setting quarterly volumes in loan locks ($6.2 billion) and fundings ($4 billion).
MSR Portfolio: Increased by $215 million in market value to $3.5 billion. Purchased $17 billion in UPB across bulk packages and committed to an additional $9 billion subsequent to quarter end.
Residential Credit Market Leadership: Annaly is the largest nonbank issuer in the residential credit market and a top 10 issuer worldwide of asset-backed and mortgage-backed securities.
Agency MBS Market Dynamics: Agency spreads tightened by 8-12 basis points due to lower interest rate volatility and improved supply-demand dynamics.
Capital Raise: Raised $1.1 billion of accretive equity in Q3, including $800 million through the ATM program.
Operational Efficiency: Efficiency ratios improved to 1.41% for Q3, one of the lowest in the mortgage REIT sector.
Partnership with PennyMac: Announced a new partnership with PennyMac Financial Services, purchasing $12 billion of low note rate MSR with subservicing and recapture responsibilities handled by PennyMac.
Portfolio Positioning: Maintained a diversified housing finance model with historically low leverage and significant liquidity to guard against uncertainty.
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Risk or Challenges
Macroeconomic Environment: Lingering uncertainty around tariffs and immigration, elevated inflation near 3%, and weakening labor market conditions with slowing hiring and deteriorating sentiment around future hiring.
Interest Rate Volatility: Although interest rate volatility declined, it remains a risk factor that could impact portfolio performance and economic returns.
Housing Market Conditions: Relatively flat year-over-year home price appreciation (HPA) nationally, with potential for further depreciation during winter seasonals due to increased inventory and affordability challenges from elevated mortgage rates.
Credit Quality and Housing Affordability: Softer housing market conditions and affordability challenges necessitate maintaining a high credit quality portfolio, which could limit growth opportunities.
Regulatory and Policy Risks: Potential regulatory reforms and changes in monetary policy could impact the Agency MBS sector and broader investment strategies.
Operational and Funding Risks: Dependence on repo financing and warehouse facilities for funding, with utilization rates of 40% for Resi Credit and 50% for MSR, which could pose liquidity risks in adverse market conditions.
Competition and Market Dynamics: Strong competition for deposits and subservicing costs, as well as the need to maintain efficiency ratios, could pressure operational margins.
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Guidance & Outlook
Macro Outlook: The U.S. economy is expected to face growing downside risks to employment, with the Federal Reserve's forward guidance suggesting additional rate cuts. Declining macro volatility and a more accommodative monetary policy are anticipated to support fixed income demand and Agency MBS.
Agency MBS: Agency spreads have tightened, but the sector remains attractive due to improved fundamentals, including lower volatility and a steeper yield curve. Regulatory reforms and potential increased bank demand are expected to further support the sector into 2026.
Residential Credit: The private label market is expected to grow, benefiting Annaly's Onslow Bay correspondent channel and OBX securitization platform. The company anticipates significant embedded value in late '22 and '23 vintage NQM issues and expects modest cumulative depreciation in the housing market during the winter season.
Mortgage Servicing Rights (MSR): The MSR portfolio is expected to maintain highly predictable and durable cash flows, with supply remaining healthy. Annaly plans to opportunistically grow its portfolio, leveraging its low note rate positioning.
Overall Business Strategy: Annaly's diversified housing finance model is positioned to deliver strong results, with historically low leverage and significant liquidity providing flexibility in the current investing climate.
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Shareholder Return Plan
Dividend per share: $0.70
Earnings available for distribution per share: $0.73
Economic return year-to-date: 11.5%
Economic return for Q3: 8.1%
Capital raised in Q3: $1.1 billion
ATM program contribution: $800 million
Preferred issuance: First since 2019, reopening the mortgage REIT preferred market
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Key Q&A
Q:Can you talk about how Agency returns compare now with other areas for investment?
A:Agency returns still look very attractive due to lower volatility, expected Fed cuts, and a broader demand base. The company remains overweight in Agency investments and aims to increase Resi and MSR weightings to a combined 40%.
Q:Where is the bulk supply of MSR coming from, and how is the pricing?
A:The bulk supply is coming from large participants, some of whom were not previously sellers. Pricing has been stable throughout the year, and the company has opportunistically added to its portfolio.
Q:Can you break down Agency returns in terms of OAS returns versus swap spread?
A:The spread to swaps versus treasuries is around 35 to 40 basis points. With a hedge ratio of 65% swaps and 35% treasuries, the blended yield is about 160 basis points, equating to a 17% ROE. Low realized volatility has helped reduce hedging costs.
Q:How is book value faring quarter-to-date?
A:As of the latest update, book value pre-dividend accrual is up by upwards of 1%, and with dividend accrual, the economic return is 1.5% to 2%.
Q:Why did you rotate up in coupon and focus on specified pools this quarter?
A:The rotation was due to prepayment expectations on generic higher coupons increasing as rates rallied. Specified pools were more attractive because they offer long-term options for prepayment protection, unlike lower coupon TBAs.
Q:How is the MSR market breaking down between lower coupon MSRs and production coupons?
A:The company sees more opportunity in lower note rate MSRs for better convexity and prefers taking negative convexity risk in MBS rather than MSR. Increased bulk supply is due to higher mortgage origination levels.
Q:Would you expect the pace of lock volume and securitization issuance to remain elevated despite seasonal pressures?
A:Non-QM issuance has grown significantly, with market penetration reaching 8% in July. The company expects issuance to reach $65 billion to $70 billion this year, though seasonal factors may slow activity in Q4.
Q:What is the likelihood of the Fed shifting its primary policy tool to target tri-party repo?
A:The Fed is considering tri-party repo as a better indicator of short-term rates than Fed funds. This reflects the evolving market and does not imply any immediate policy changes.
Q:Do you envision a return to taking duration gap risk in the portfolio?
A:Currently, the company is maintaining a near-zero duration gap due to uncertainty in the rates market. While duration risk may be considered in the future, the current focus is on minimizing rate risk.
Q:How much of the potential for GSEs to become buyers of Agency MBS is priced into spreads?
A:There is some market expectation of GSEs becoming more active buyers, but the primary driver of demand has been money flowing into fixed income funds. The company is not banking on GSE activity but acknowledges its potential stabilizing effect on spreads.
Q:How confident are you that NII adjusted for PAA will remain stable over the next few quarters?
A:The company expects NII to remain stable due to low leverage, a stable swap portfolio, and anticipated Fed rate cuts, which will benefit funding costs.
Q:Has Annaly's risk appetite been tempered, as indicated by spread and rate sensitivity?
A:The company has slightly reduced risk exposure organically due to lower mortgage rates and tighter current coupon spreads. However, it maintains some dry powder for potential opportunities and does not have a more negative risk view.
Q:What are you seeing in terms of refi responsiveness in the non-Agency portfolio?
A:Prepayment speeds in the OBX portfolio have been slower than anticipated, even with loans 100 to 150 basis points in the money. This is attributed to prepayment penalties on investor loans and a flatter S-curve compared to Agency conforming and jumbo markets.
Q:Review of Unclear Management Responses
A:Management avoided giving a direct answer to the likelihood of the Fed shifting its primary policy tool to tri-party repo, stating it reflects market evolution without providing specific implications for MBS repo.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AAA basis
AI investment
Agency CMBS
Agency interest
Agency line
Agency portfolio
Agency return
Agency spread
Annaly housing
Annaly issuance
Annaly nonbank
CMBS share
CMO demand
CPR month
Co Chief
Credit asset
Credit exposure
Credit label
Credit portfolio
Director Sean
NQM
OBX security
Officer Co
PennyMac
UPB
capital raise
cash flow
class
convexity
depreciation
end yield
fundamental
housing finance
housing market
investment strategy
issuer
package
policy
purchase
rate volatility
sector
tariff
value firm
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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