Annaly(NLY) - 2025 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements This section presents Annaly Capital Management's unaudited consolidated financial statements for Q2 2025, covering financial condition, income, equity, and cash flows, with detailed notes Consolidated Statements of Financial Condition Total assets increased to $112.1 billion as of June 30, 2025, from $103.6 billion at December 31, 2024, primarily driven by growth in securities and assets transferred to securitization vehicles, with total equity also rising to $13.5 billion from $12.7 billion Consolidated Balance Sheet Highlights (in thousands) | Metric | June 30, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Total Assets | $112,141,892 | $103,556,384 | | Total Liabilities | $98,667,529 | $90,859,432 | | Total Equity | $13,474,363 | $12,696,952 | | Securities | $73,500,626 | $69,756,447 | | Loans, net | $3,722,272 | $3,546,902 | | Repurchase agreements | $66,541,378 | $65,688,923 | Consolidated Statements of Comprehensive Income (Loss) The company reported a net income of $60.4 million for Q2 2025, a significant turnaround from a net loss of $8.8 million in Q2 2024, driven by a substantial increase in net interest income, with diluted EPS at $0.03 compared to a loss of ($0.09) Quarterly Income Statement Highlights (in thousands, except per share data) | Metric | Q2 2025 | Q2 2024 | | :--- | :--- | :--- | | Net Interest Income | $273,200 | $53,558 | | Total Other Income (Loss) | ($289,470) | ($113,467) | | Net Income (Loss) | $60,371 | ($8,833) | | Net Income (Loss) Available to Common Stockholders | $19,839 | ($46,641) | | Diluted EPS | $0.03 | ($0.09) | Consolidated Statements of Stockholders' Equity Total stockholders' equity increased to $13.4 billion at the end of Q2 2025, supported by net income and the issuance of common stock, which added over $1.2 billion in additional paid-in capital, partially offset by dividend payments - For the six months ended June 30, 2025, the company issued common stock resulting in $1.26 billion in additional paid-in capital[16] - Dividends declared on common stock totaled $876.1 million for the first six months of 2025, compared to $654.6 million for the same period in 2024[16] Consolidated Statements of Cash Flows For the six months ended June 30, 2025, net cash from financing activities was a significant inflow of $6.2 billion, primarily from net proceeds from stock offerings and repurchase agreements, funding net cash used in investing activities of $5.6 billion, with minimal net cash from operating activities at $24.5 million Six-Month Cash Flow Summary (in thousands) | Activity | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $24,474 | $2,174,962 | | Net Cash used in Investing Activities | ($5,649,603) | ($4,305,740) | | Net Cash from Financing Activities | $6,195,947 | $2,305,738 | | Net Increase in Cash | $570,818 | $174,960 | Notes to Consolidated Financial Statements The notes provide detailed disclosure on the company's business structure, accounting policies, and the composition and valuation of its financial instruments, including securities, loans, mortgage servicing rights (MSR), derivative instruments, and secured financing arrangements - The company operates through three primary investment groups: Annaly Agency Group, Annaly Residential Credit Group, and Annaly Mortgage Servicing Rights Group[22] - The company has elected to be taxed as a Real Estate Investment Trust (REIT)[22] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q2 2025 economic environment, operational results, and financial condition, covering performance drivers, portfolio changes, capital management, risk, and non-GAAP measures Overview Annaly is a leading diversified capital manager in mortgage finance, operating as an internally-managed REIT, with its primary business objective to generate net income for stockholders by investing in real estate-related assets and earning the spread between asset yields and financing costs - The company's principal business objective is to generate net income for distribution to stockholders and optimize returns through prudent management of its diversified investment strategies[178] Business Environment In Q2 2025, the U.S. economy showed resilience with a 4.1% unemployment rate and moderating inflation, while Annaly generated an economic return of 0.7%, increased capital allocation to Agency MBS to 62%, and raised economic leverage slightly to 5.8x, growing its Agency portfolio by nearly $5 billion - The company generated earnings available for distribution of $0.73 per share and an economic return of 0.7% for Q2 2025[183] - Economic leverage increased from 5.7x to 5.8x, with capital allocation to Agency MBS rising to 62%[183] - The Onslow Bay platform had its highest quarterly securitization activity, closing $3.6 billion across seven transactions[188] Results of Operations The company's GAAP net income was $60.4 million ($0.03/share) in Q2 2025, a significant improvement from a loss of $8.8 million (($0.09)/share) in Q2 2024, driven by higher net interest income, while non-GAAP Earnings Available for Distribution (EAD) were $489.9 million ($0.73/share), up from $377.1 million ($0.68/share) Key Performance Metrics (Q2 2025 vs Q2 2024) | Metric | Q2 2025 | Q2 2024 | | :--- | :--- | :--- | | Net Income (Loss) | $60.4M | ($8.8M) | | Diluted EPS | $0.03 | ($0.09) | | EAD per Average Common Share (Non-GAAP) | $0.73 | $0.68 | | Net Interest Margin (GAAP) | 1.04% | 0.24% | | Net Interest Spread (excluding PAA, Non-GAAP) | 1.47% | 1.24% | Reconciliation of GAAP Net Income to EAD (Q2 2025, in thousands) | Description | Amount | | :--- | :--- | | GAAP net income (loss) | $60,371 | | Adjustments for realized/unrealized (gains) losses | $491,581 | | Other adjustments (amortization, TBA income, etc.) | ($65,908) | | Premium amortization adjustment cost (benefit) | ($3,862) | | Earnings available for distribution | $489,906 | Financial Condition As of June 30, 2025, total assets stood at $112.1 billion, with the investment portfolio valued at $107.5 billion, Agency MBS comprising 62% of net equity allocation, Residential Credit and MSR segments each allocated 19%, and the company maintaining a GAAP debt-to-net equity ratio of 7.1:1 - Total assets increased to $112.1 billion at June 30, 2025, from $103.6 billion at year-end 2024[278] Net Equity Allocation and Leverage by Segment (June 30, 2025) | Segment | Net Equity Allocated (%) | Debt/Net Equity Ratio | | :--- | :--- | :--- | | Agency MBS | 62% | 7.7:1 | | Residential Credit | 19% | 11.8:1 | | MSR | 19% | 0.4:1 | | Total | 100% | 7.1:1 | Capital Management The company maintains a conservative capital strategy, targeting an economic leverage ratio below 10:1, with GAAP leverage at 7.1:1 and economic leverage at 5.8:1 as of June 30, 2025, and raised $1.3 billion through its ATM sales program in the first half of 2025 without any share repurchases Leverage and Capital Ratios | Ratio | June 30, 2025 | December 31, 2024 | | :--- | :--- | :--- | | GAAP Leverage Ratio | 7.1:1 | 7.1:1 | | Economic Leverage Ratio (Non-GAAP) | 5.8:1 | 5.5:1 | | GAAP Capital Ratio | 12.0% | 12.3% | | Economic Capital Ratio (Non-GAAP) | 14.3% | 14.8% | - During the first six months of 2025, the company issued 63.0 million shares under its at-the-market sales program for net proceeds of $1.3 billion[302] Risk Management Annaly's risk management framework addresses liquidity, investment/market, credit, counterparty, and operational risks, maintaining a diversified funding profile primarily through repurchase agreements with a 49-day weighted average maturity, and sensitivity analysis shows potential NAV declines of 3.1% from a 75 basis point interest rate rise and 9.9% from a 25 basis point MBS spread widening - The company's risk appetite statement specifies maintaining an economic leverage ratio generally no greater than 10:1[313] Portfolio Sensitivity Analysis (as of June 30, 2025) | Scenario | Estimated Change in Portfolio Value | Estimated Change as % of NAV | | :--- | :--- | :--- | | Interest Rate +75 bps | (0.4%) | (3.1%) | | MBS Spread +25 bps | (1.4%) | (9.9%) | - At June 30, 2025, the company had repurchase agreements with 36 counterparties, with the majority of exposure to North American and European firms[351] Critical Accounting Estimates Management identifies several critical accounting estimates requiring significant judgment, including the valuation of financial instruments (Residential Securities, Residential Mortgage Loans, MSRs, and Interest Rate Swaps), revenue recognition involving prepayment speed assumptions, and the consolidation of Variable Interest Entities (VIEs), all of which can materially impact reported financial results - Key estimates include the fair value of Residential Securities, Residential Mortgage Loans, MSRs, and derivatives, which rely on models incorporating inputs like prepayment rates, discount rates, and interest rate curves[365][368][371][373] - Revenue recognition for securities involves amortizing premiums and discounts based on projected prepayment speeds, which are a significant estimate[376][377] Quantitative and Qualitative Disclosures about Market Risk This section states that the required quantitative and qualitative disclosures regarding market risk are provided within the 'Risk Management' section of Item 2, Management's Discussion and Analysis - Disclosures about market risk are located in the "Risk Management" section of the MD&A[534] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period, with no material changes to internal controls over financial reporting during the quarter - The CEO and CFO concluded that disclosure controls and procedures were effective as of June 30, 2025[534] - No material changes in internal controls over financial reporting occurred during the quarter ended June 30, 2025[535] PART II - OTHER INFORMATION Legal Proceedings The company reports that it was not a party to any pending material legal proceedings as of June 30, 2025 - As of June 30, 2025, the company was not party to any pending material legal proceedings[538] Risk Factors There have been no material changes to the risk factors previously disclosed in the company's most recent Annual Report on Form 10-K - No material changes to the risk factors disclosed in the most recent Form 10-K have occurred[539] Unregistered Sales of Equity Securities and Use of Proceeds The company's Board authorized a $1.5 billion common stock repurchase program effective through December 31, 2029, with no shares repurchased under this program during the quarter ended June 30, 2025 - No shares were repurchased under the company's $1.5 billion common stock repurchase program during the quarter ended June 30, 2025[540] Other Information This section discloses that Anthony Green, Chief Corporate Officer and Chief Legal Officer, adopted a Rule 10b5-1 trading plan on May 5, 2025, for the potential sale of up to 44,999 shares of common stock - On May 5, 2025, Anthony Green, Chief Corporate Officer and Chief Legal Officer, adopted a Rule 10b5-1 trading plan to sell up to 44,999 shares of common stock[541] Exhibits This section provides an index of the exhibits filed with the Form 10-Q, including CEO and CFO certifications and XBRL data files - The exhibits filed with the report include CEO and CFO certifications pursuant to the Sarbanes-Oxley Act and XBRL data files[543]