Annaly Capital Management, Inc. Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Macro Landscape: U.S. economy perseveres through trade uncertainty, growth ~1% annualized, unemployment 4.1%, inflation slowest in 3 quarters. Fed likely to deliver two rate cuts in 2025.
• Company Performance: Q2 economic return 0.7%, earnings available for distribution $0.73, seventh consecutive quarter of positive economic return. Raised ~$750 million accretive capital, leverage 5.8x. Year-to-date economic return 3.7%, total shareholder return over 10%.
• Agency: Portfolio up 6% QoQ, added $4.5 billion in notional Agency MBS, managed duration through volatility, preferred pools over TBAs for repo financing.
• Residential Credit: Onslow Bay had record securitization activity, tightened credit standards, housing market deceleration with increasing inventory.
• MSR: Portfolio unchanged, measured new purchases, valuation improved slightly, solid fundamental performance with 3-month CPR 4.6% and escrow balances up.

Segment Performance

• Agency: Portfolio ended the quarter at nearly $80 billion in market value, up 6% quarter-over-quarter. Added roughly $4.5 billion in notional Agency MBS, with purchases evenly split across 4.5s, 5.5s, and 6s, and marginally preferring pools over TBAs.
• Residential Credit: Portfolio was relatively unchanged at $6.6 billion in market value. Onslow Bay had highest quarterly securitization activity, closing $3.6 billion across seven transactions in Q2, with cumulative 2025 activity at $7.6 billion. Lock pipeline has 764 weighted average FICO, 68% LTV, and over 95% first lien. Housing market has increasing available-for-sale inventory and expected modest negative HPA.
• MSR: Portfolio ended at $3.3 billion in market value. Acquired approximately $30 million in market value, with 3-month CPR of 4.6%, serious delinquencies at 50 basis points, and escrow balances up 6% year-over-year.

Guidance

• Expect the Fed to deliver the two interest rate cuts projected for 2025.
• Overweight agency in the near term.
• Strategically grow residential credit and MSR portfolios long term.
• Confident in generating strong risk-adjusted returns, with year-to-date economic return 3.7%.

Risks

• Trade-related uncertainty and resulting market volatility.
• Impact of tariffs on inflation potentially affecting Fed rate cuts.
• Housing market deceleration negatively impacting residential credit.

Question and Answer

Q: Update on book value quarter-to-date?

A: As of last night, pre-dividend accrual book was up about 0.5%, so call it, 1.5% economic return.

Q: Comfort level with the dividend?

A: Raised the dividend earlier, outearned the dividend, expect to cover and potentially outearn for remainder of year, with economic return conducive to achieving close to dividend yield given lower volatility and cheap asset spreads.

Q: How you thought about managing the portfolio through Q2 and comfort with leverage rise during volatility?

A: Came into the quarter with good liquidity, managed rate exposure, let leverage drift higher but kept rate risk close to home, disciplined with rate risk bands, feeling better positioned than in April with more clarity on tariffs and tax bill.

Q: Expectation on GSE reform and impact on business?

A: Expect GSE reform to be on front burner, GSEs need to raise capital before privatization, optimistic about lower supply in agency sector and ability to compete on resi side.

Q: Demand picture for Agency MBS and impact on spreads?

A: Fixed income funds had inflows, CMO issuance strong, but demand from banks and overseas accounts muted; fundamentals supportive, MBS spreads can tighten 3-5 basis points to treasuries even without additional demand, with potential for more demand from banks and overseas if Fed cuts or regulatory reform materializes.

Q: Expectations for resi credit securitizations in 3Q and margin outlook?

A: Year-to-date gross issuance strong, tracking high issuance year, non-agency market resilient; margins on correspondent channel retain 11-12% of transactions with mid-teens returns on capital deployed, credit box changes unlikely to impact volumes meaningfully.