Business Context and Reporting Period
Company: Annaly Capital Management, Inc. (NLY)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended June 30, 2025
Business Overview: Annaly is a leading diversified capital manager and Real Estate Investment Trust (REIT) investing in mortgage finance. Its portfolio includes Agency mortgage-backed securities (MBS), residential credit securities, residential mortgage loans, and mortgage servicing rights (MSR). The company operates three primary segments: Agency, Residential Credit, and MSR.
Key Financial Metrics
| Metric (in thousands, except per share) | Three Months Ended June 30, 2025 |
Six Months Ended June 30, 2025 |
Three Months Ended June 30, 2024 |
Six Months Ended June 30, 2024 |
|---|---|---|---|---|
| Net Interest Income | $273,200 | $493,171 | $53,558 | $47,107 |
| Net Servicing Income | $127,099 | $253,421 | $107,898 | $210,766 |
| Net Gains (Losses) on Investments | $83,503 | $894,315 | ($568,745) | ($1,562,872) |
| Net Gains (Losses) on Derivatives | ($388,785) | ($1,366,652) | $430,487 | $1,807,631 |
| Net Income (Loss) | $60,371 | $190,676 | ($8,833) | $456,341 |
| Net Income Attributable to Common Stockholders | $19,839 | $106,906 | ($46,641) | $379,190 |
| Diluted EPS (Common) | $0.03 | $0.18 | ($0.09) | $0.76 |
| Total Assets | $112,141,892 | $112,141,892 | $93,668,577 | $93,668,577 |
| Total Liabilities | $98,667,529 | $98,667,529 | $80,339,332 | $80,339,332 |
| Total Equity | $13,474,363 | $13,474,363 | $11,262,904 | $11,262,904 |
| Cash and Cash Equivalents | $2,058,845 | $2,058,845 | $1,587,108 | $1,587,108 |
Liquidity and Leverage:
- GAAP Leverage Ratio: 7.1:1 (June 30, 2025)
- Economic Leverage Ratio: 5.8:1 (June 30, 2025)
- Repurchase Agreements: $66.5 billion outstanding with a weighted average maturity of 49 days.
- Unencumbered Assets: Approximately $6.0 billion available to support liquidity needs.
Material Changes vs. Prior Period
- Net Income Volatility: GAAP Net Income for the six months ended June 30, 2025 ($190.7 million) decreased significantly compared to the same period in 2024 ($456.3 million). This decline was primarily driven by a reversal in derivative performance. While 2024 saw a $1.8 billion gain on derivatives, 2025 recorded a $1.4 billion loss, largely due to unfavorable changes in unrealized gains on interest rate swaps and futures.
- Investment Gains: Net gains on investments and other improved dramatically from a $1.6 billion loss in the first half of 2024 to an $894.3 million gain in the first half of 2025. This was driven by favorable unrealized gains on Agency MBS and securitized residential whole loans.
- Net Interest Income (NII): NII expanded significantly to $493.2 million for the six months ended June 30, 2025, compared to $47.1 million in the prior year period. This increase reflects higher coupon income from increased portfolio balances and purchasing securities higher up the coupon stack, partially offset by higher interest expense on securitized debt.
- Portfolio Growth: Total assets increased by approximately $8.5 billion from December 31, 2024, to June 30, 2025. This growth was fueled by a $5.0 billion increase in securitized residential whole loans (consolidated VIEs) and a $3.7 billion increase in securities.
- Capital Raising: The company issued 63.0 million shares of common stock under its at-the-market sales program during the first six months of 2025, generating net proceeds of $1.3 billion.
Guidance, Outlook, and Risks
Management Commentary and Outlook:
- Market Environment: Management notes that the U.S. economy rebounded in Q2 2025 with GDP rising 3.0% SAAR, though inflation remains above the Fed's 2% target. Long-term Treasury yields remain elevated, and swap spreads have tightened significantly.
- Strategy: Capital allocation remains focused on the Agency MBS business (62% of capital), with incremental investment added at attractive spreads. The Residential Credit portfolio remained relatively unchanged, while the MSR portfolio saw modest valuation improvements.
- Dividends: The company declared dividends of $0.70 per common share for the quarter ended June 30, 2025. Earnings Available for Distribution (EAD), a non-GAAP measure, were $0.73 per share for the quarter and $1.45 per share for the six-month period.
Risks and Contingencies:
- Interest Rate Risk: The company is exposed to changes in interest rates which affect net interest income and asset values. A 75 basis point increase in rates is estimated to decrease portfolio value by 0.4% and economic net interest income by 3.6%.
- Liquidity Risk: Reliance on repurchase agreements creates liquidity risk if counterparties demand additional collateral or refuse to roll over funding. The company maintains unencumbered assets to mitigate this.
- Derivative Risk: Significant unrealized losses on derivatives (swaps and futures) impacted GAAP earnings. The company uses these instruments to hedge interest rate risk, but mark-to-market volatility can be substantial.
- Credit Risk: While Agency MBS are guaranteed, the company faces credit risk on non-Agency securities, residential mortgage loans, and CRT securities. Delinquencies on the MSR portfolio were stable at 50 basis points.
Key Facts for Investor Verification
- Derivative Impact: Verify the magnitude of the $1.4 billion unrealized loss on derivatives for the six months ended June 30, 2025, and its specific composition (swaps vs. futures) to understand the divergence between GAAP Net Income and Earnings Available for Distribution (EAD).
- Securitization Activity: Confirm the $5.0 billion increase in "Assets transferred or pledged to securitization vehicles" and the associated $24.1 billion in debt issued by securitization vehicles, noting these are non-recourse liabilities excluded from economic leverage.
- Capital Structure: Review the $1.5 billion common stock repurchase program (authorized Jan 2025) and the $2.0 billion at-the-market sales program to assess future equity dilution or buyback potential.
- Prepayment Speeds: Monitor the weighted average experienced Constant Prepayment Rate (CPR) of 7.9% for the six months ended June 30, 2025, as changes in prepayment speeds directly impact premium amortization and net interest income.
- Preferred Stock: Note the existence of $1.54 billion in preferred stock (Series F, G, and I) with floating rates tied to SOFR, which impacts net income available to common shareholders.