Mortgage spreads have been blown out for a long time, with agency-backed mortgages trading at times more than 200 basis points above the respective Treasury yield. The mortgage REITs recognized this as an opportunity to buy government backed assets at unusually high yields. This article is not about Dynex (DX), but we will start there as they epitomize what is going on in agency mREITs right now. Terrence Connelly, CIO of Dynex, noted on the 2Q25 earnings call: “Increasingly, there's a need for more private ...

Core Insights - Annaly Capital Management (NLY) shares have increased by 20.6% over the past year, outperforming the industry average of 7.1% and its peers AGNC Investment (11.1% growth) and Arbor Realty Trust (1.3% decline) [1] Performance Drivers - Strategic Positioning: Annaly's disciplined diversification across the mortgage finance landscape, with a $89.5 billion investment portfolio as of June 30, 2025, primarily in $79.5 billion of highly liquid Agency MBS, enhances its risk-adjusted returns [5][6] - Adaptability: The company's structure allows it to adjust to market changes, with MSRs gaining value in rising interest rate environments, offsetting declines in agency MBS valuations [6][7] - Mortgage Rate Impact: Declining mortgage rates are improving housing affordability, increasing loan demand, and boosting net interest income (NII) to $493.2 million in the first half of 2025, up from $47.1 million a year ago [8][9] Financial Position - Strong Liquidity: As of June 30, 2025, Annaly had $7.4 billion in total assets available for financing, including $4.7 billion in cash and unencumbered Agency MBS, supporting its liquidity during adverse market conditions [11] - Dividend Yield: The company maintains a monthly dividend payout with a yield of 13.2% and a payout ratio of 99% [11] - Share Repurchase Plan: Annaly has a $1.5 billion share repurchase plan, which has not yet been utilized, but its liquidity position supports future capital distributions [13] Investment Considerations - Income Opportunity: Annaly is positioned as an attractive option for income-focused investors due to its high dividend yield and diversified portfolio that mitigates interest rate volatility [14] - Valuation Concerns: The company is trading at a forward 12-month price-to-tangible (P/TB) multiple of 1.1X, higher than the industry average of 1.07X, suggesting a premium valuation [15]

Financial Data and Key Metrics Changes - For Q2 2025, the company reported a GAAP net loss applicable to common stockholders of $900,000 or $0.03 per diluted share, with a comprehensive loss of $600,000 or $0.02 per diluted share [17][19] - The book value per common share decreased to $3.34 from $3.58 as of March 31, 2025, reflecting a decline in NAV of approximately $6.2 million or 2.7% [7][19] - Earnings available for distribution (EAD) attributable to common stockholders were $3.2 million or $0.10 per share, impacted by the maturity of a significant hedge [17][19] Business Line Data and Key Metrics Changes - The mortgage servicing rights (MSR) portfolio had an unpaid principal balance (UPB) of $16.6 billion and a market value of approximately $225 million, representing about 43% of equity capital [12] - The residential mortgage-backed securities (RMBS) portfolio accounted for approximately 36% of equity capital, with a prepayment speed of 6.1 CPR [12][14] - The RMBS net interest spread was reported at 2.61%, lower than the previous quarter due to the impact of a maturing swap position [14] Market Data and Key Metrics Changes - The ten-year treasury yield ended the quarter at 4.23%, slightly higher than the previous quarter, with the Agency MBS sector experiencing negative performance due to mortgage basis underperforming [6] - The economic environment showed resilience with low inflation, and the company is closely monitoring the Fed's potential shift towards a rate cut cycle [6][9] Company Strategy and Development Direction - The company entered a strategic partnership with RealGenius LLC, a digital mortgage technology firm, to enhance its investment strategy and explore unique growth opportunities [7][9] - The management indicated a potential shift towards a more risk-on investment strategy as the economic environment stabilizes, while maintaining strong liquidity and prudent leverage [9][10] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the economic recovery and the potential for rate cuts by the Fed, which could positively impact refinancing incentives and portfolio performance [9][13] - The company plans to proactively manage its portfolio and adjust its capital structure to enhance shareholder value through improved performance and earnings [15] Other Important Information - The company raised approximately $9 million of capital through its common ATM program and ended the quarter with $58 million of unrestricted cash [7] - Operating expenses for the quarter were reported at $3.4 million, and dividends were declared for both common and preferred stockholders [20] Q&A Session Summary Question: What caused the lower servicing costs this quarter? - Management noted that lower servicing costs were due to deboarding fees from a prior quarter related to the Mr. Cooper acquisition, and a decrease in loan count [24] Question: What is the expectation for leverage moving forward? - Management expects leverage to gradually increase as the year progresses, influenced by economic conditions and potential Fed actions [26][28] Question: Can you provide details on the partnership with RealGenius and its projections? - The partnership is expected to be profitable within the first six to seven months, with dividends anticipated within the first year [33] Question: Are there any updates on the current book value? - The book value per share as of July 31 is expected to remain flat compared to June 30, prior to any third-quarter dividend accrual [39]

Financial Data and Key Metrics Changes - The economic book value decreased by 1% to $13.69 per share, while GAAP book value also fell by 1% to $13.12 per share [14] - Distributable earnings (DE) for the quarter were $0.24 per share, down from $0.29 per share in the previous quarter, primarily due to credit losses [17] - GAAP earnings were $33.2 million or $0.22 per basic common share, driven by an increase in net interest income to $61.3 million [14][15] Business Line Data and Key Metrics Changes - The company sourced $876 million in loans and securities, including $500 million in non-QM loans and $217 million in business purpose loans [12][20] - The delinquency rate for loans over 60 days decreased from 7.5% to 7.3% [15][24] - Lima One originated $217 million in business purpose loans, with an increase in mortgage banking income from $5.4 million to $6.1 million [23] Market Data and Key Metrics Changes - The market for securitized mortgage credit assets continues to deepen, with increased liquidity and strong investor appetite [6][9] - Mortgage credit spreads widened in April but retraced to levels seen at the end of Q1 by the end of the second quarter [6][22] - The company completed its eighteenth non-QM securitization in May, selling $291 million of bonds at an average coupon of 5.76% [21] Company Strategy and Development Direction - The company aims to continue focusing on non-QM loans, business purpose loans, and agency securities, with plans to grow the business purpose loan originations [20][23] - The management is optimistic about the economic return potential of the portfolio, indicating that the economic earnings power is closer to a 10% dividend yield [29] - The company is actively resolving non-performing loans and expects to utilize additional loan sales to accelerate the resolution of underperforming assets [16] Management's Comments on Operating Environment and Future Outlook - The management noted that the economic and macro environments appear clearer as the year progresses, with resilient growth despite slower than expected rates [8][9] - There is a consensus for two rate cuts later this year, which is favorable for mortgage REITs [9] - The management expressed confidence in the current earnings power of the portfolio and the sustainability of the common dividend [18] Other Important Information - The company expects to lower its G&A expenses by 7% to 10% per year from 2024 levels due to ongoing expense reduction initiatives [18] - Subsequent to the quarter end, the economic book value is estimated to have increased by approximately 1% to 2% [19] Q&A Session Summary Question: Economic return for the portfolio - Management discussed the economic return of the portfolio and indicated that the economic earnings power is much closer to a 10% dividend yield, with potential upside as capital is redeployed from troubled loans [28][29] Question: New loan officers at Lima One - The new hires are focused on the West and Midwest, with expectations for aggressive growth in the latter half of the year as they ramp up [40][41] Question: Capital allocation trends - Management indicated that they would continue to deploy capital across non-QM, HC, and business purpose loans, with a preference for increasing business purpose loan originations [33][49] Question: Distribution potential for new transitional loans - Management noted that they have been selling rental loans and expect to grow originations, with a balance between securitization financing and loan sales [56] Question: Execution risk for developers - Management stated that they are not seeing material pressure on rental income and exit prices, tracking these metrics month to month [65][66] Question: Relative risk of loan vintages - Management indicated that the 2023 vintage for multifamily loans was tougher, but overall LTVs are low, minimizing concerns about losses [67] Question: Callability of non-QM portfolio - Management explained that lower interest rates could lead to more callable deals, but the impact would be marginal due to offsetting swaps [70][72]

Financial Data and Key Metrics Changes - The book value per share decreased by 3% from the prior quarter to $18.45, while earnings available for distribution per share increased by $0.01 to $0.73, exceeding the dividend for the quarter [20][21] - The economic return for Q2 was 0.7%, marking the seventh consecutive quarter of positive economic returns, with a year-to-date economic return of 3.7% and total shareholder return exceeding 10% [9][20] - The investment portfolio yield increased to 5.41% from 5.23% in the prior quarter, while average repo rates decreased to 4.53% [21][22] Business Line Data and Key Metrics Changes - The Agency portfolio's market value rose to nearly $80 billion, a 6% increase quarter-over-quarter, with a $4.5 billion growth in notional terms [10][11] - The residential credit portfolio remained stable at $6.6 billion in market value, with Onslow Bay achieving record securitization activity of $3.6 billion across seven transactions [13][14] - The Mortgage Servicing Rights (MSR) portfolio ended the quarter unchanged at $3.3 billion, with solid performance metrics including a three-month CPR of 4.6% and serious delinquencies unchanged at 50 basis points [17][18] Market Data and Key Metrics Changes - The U.S. economy is projected to grow at around 1% annualized for the first half of the year, with an unemployment rate of 4.1% [6][8] - Inflation is expected to run at the slowest level in the past three quarters, with the Fed anticipated to deliver two interest rate cuts in 2025 [7][8] - Agency MBS spreads widened by 5 to 10 basis points during the quarter, despite improvements in market sentiment [9][10] Company Strategy and Development Direction - The company aims to maintain a strong focus on the agency sector while strategically growing its residential credit and MSR portfolios [18] - The management is optimistic about the agency sector fundamentals and potential catalysts for improvement, including GSE reform [12][18] - The company has diversified its funding sources significantly, enhancing liquidity and operational flexibility [23][24] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the ability to cover and potentially out-earn the dividend for the remainder of the year, citing a conducive environment for achieving close to the dividend yield [28][29] - The company is well-positioned to navigate macroeconomic uncertainties, with a focus on managing rate risk and maintaining low leverage [34][40] - The outlook remains positive, with expectations for continued strong risk-adjusted returns in the current environment [18][19] Other Important Information - The company raised over $750 million of accretive capital in Q2, predominantly deployed in the agency sector, leading to a modest increase in leverage to 5.8 turns [9][10] - The MSR portfolio's valuation improved modestly due to a steepening yield curve and lower implied volatility [17][18] Q&A Session Summary Question: Update on book value quarter to date - The pre-dividend accrual book was up about 0.5%, indicating a 1.5% economic return [27] Question: Comfort level with the dividend - Management expressed confidence in covering the dividend, with expectations to out-earn it for the remainder of the year [28] Question: Managing the portfolio through volatility - The company maintained a good liquidity position and managed exposure carefully, allowing leverage to drift higher while focusing on rate risk [33][34] Question: Expectations for GSE reform - Management expects GSE reform to be prioritized, which could create opportunities for the company in the origination space [56] Question: Demand for Agency MBS - Demand from fixed income funds has been strong, with expectations for MBS spreads to tighten even without additional demand from banks [75][76] Question: Outlook for residential credit issuance - The company anticipates robust issuance in the second half of the year, tracking to be the highest since 2021 [81] Question: Impact of tariffs on inflation - Management acknowledged that inflation will pass through due to tariffs, but they remain optimistic about achieving the expected Fed cuts [92][96]

Financial Data and Key Metrics Changes - The book value per share decreased by 3% from the prior quarter to $18.45, while earnings available for distribution per share increased by $0.01 to $0.73, exceeding the dividend for the quarter [19][20] - The economic return for Q2 was 0.7%, bringing the year-to-date economic return to 3.7% [7][20] - The net interest spread excluding PAA increased to 1.47% in Q2 compared to 1.24% a year ago, and the net interest margin excluding PAA was 1.71% in Q2 compared to 1.58% in Q2 2024 [21] Business Line Data and Key Metrics Changes - The Agency portfolio ended the quarter at nearly $80 billion in market value, up 6% quarter over quarter, with a growth of approximately $4.5 billion in notional terms [9][10] - The residential credit portfolio remained relatively unchanged at $6.6 billion in market value, with Onslow Bay achieving its highest quarterly securitization activity to date, closing $3.6 billion across seven transactions [12][13] - The MSR portfolio ended the quarter unchanged at $3.3 billion in market value, with solid fundamental performance and a three-month CPR of 4.6% [15][16] Market Data and Key Metrics Changes - The U.S. economy is expected to grow around 1% annualized for the first half of the year, with an unemployment rate marginally lowered to 4.1% [5][6] - Inflation is likely to have run at the slowest level in the past three quarters, with the Fed expected to deliver two interest rate cuts in 2025 [6][7] - Agency MBS spreads widened by 5 to 10 basis points on the quarter, despite a positive reversal in sentiment towards risk assets [7][9] Company Strategy and Development Direction - The company remains optimistic about the agency sector, citing sound fundamentals and potential catalysts for improvement in Agency MBS technicals [11] - The focus is on further building out flow servicing relationships and expanding subservicing and recapture partnerships to capitalize on MSR opportunities [17] - The company plans to strategically grow its residential credit and MSR portfolios while maintaining a flexible investment approach with low leverage and ample liquidity [17] Management's Comments on Operating Environment and Future Outlook - Management noted that the macroeconomic environment has shown resilience, with a balanced labor market and muted layoffs, affirming the Fed's wait-and-see stance [5][6] - The company expects to be overweight in agency investments due to historically attractive spread levels, while also anticipating growth in residential credit and MSR portfolios [17] - Management expressed confidence in covering and potentially out-earning the dividend for the remainder of the year, given the current economic return [27][28] Other Important Information - The company raised over $750 million of accretive capital in Q2, predominantly deployed in the agency sector, with leverage increasing modestly to 5.8 turns [8] - The company has diversified its funding sources significantly, with non-mark-to-market capacity growing from $150 million to $1.9 billion [22][23] Q&A Session Summary Question: Update on book value quarter to date - The book value was up about 0.5% pre-dividend accrual, indicating a 1.5% economic return [26] Question: Comfort level with the dividend - Management expressed confidence in covering the dividend, expecting to out-earn it for the remainder of the year [27][28] Question: Managing the portfolio through volatility - Management was comfortable allowing leverage to rise due to a strong liquidity position and focused on managing rate exposure [32][34] Question: Dynamics of the credit portfolio - The quality of the credit portfolio is high, with proactive measures taken to tighten credit standards [45][46] Question: Expectations for GSE reform - Management expects GSE reform to be prioritized now that the tax bill is completed, which could create opportunities for the company [56] Question: Demand for Agency MBS - Demand from fixed income funds has been strong, and the company expects MBS spreads to tighten even without additional demand from banks [76][77]

Financial Performance - Earnings available for distribution was $0.73 per average common share for Q2 2025[12] - The book value per common share was $18.45[12] - The economic return was 0.7% for Q2 2025 and 3.7% for the first half of 2025[12] Portfolio Composition and Strategy - The total portfolio was $89.5 billion, with $79.5 billion in Agency MBS, representing 89% of total assets and 62% of dedicated capital[12] - The Residential Credit portfolio remained relatively unchanged at $6.6 billion[12] - The MSR portfolio remained unchanged at $3.3 billion in market value, representing 19% of dedicated capital[12] Financing and Liquidity - Economic leverage was 5.8x, up from 5.7x in Q1 2025[12] - Total assets available for financing were $7.4 billion, including $4.7 billion of cash and unencumbered Agency MBS[12] Residential Credit Business - 15 residential whole loan securitizations totaling $7.6 billion in proceeds were priced year-to-date in 2025[12]

Financial Data and Key Metrics Changes - ARMOUR's Q2 GAAP net loss related to common stockholders was $78.6 million, or $0.94 per common share [4] - Net interest income was $33.1 million, while distributable earnings available to common stockholders were $64.9 million, or $0.77 per common share [4] - The quarter ending book value was $16.9 per common share, with an estimated book value of $16.81 as of July 21 [6] Business Line Data and Key Metrics Changes - ARMOUR raised approximately $104.6 million of capital by issuing about 6.3 million shares of common stock through an at-the-market offering program during Q2 [4] - Since June 30, an additional $58.8 million was raised by issuing approximately 3.5 million shares [5] - Monthly common stock dividends were paid at $0.24 per share, totaling $0.72 for the quarter [5] Market Data and Key Metrics Changes - The 30-year fixed mortgage rate was near 6.75% through late June and early July, dampening refinancing activity [10] - MBS to SOFR spreads widened by approximately 10 basis points quarter over quarter, remaining historically cheap [9] Company Strategy and Development Direction - ARMOUR's strategy focuses on growing and deploying capital thoughtfully during spread dislocations while maintaining robust liquidity and dynamically adjusting hedges for disciplined risk management [17] - The company is optimistic about structural demand for MBS improving later in the year due to evolving regulatory clarity and a potential resumption of Fed easing policy [15] Management's Comments on Operating Environment and Future Outlook - Management noted that the macro landscape is influenced by U.S. fiscal sustainability, Fed independence, and trade dynamics, which are expected to weigh on the market for some time [8] - The company believes that a resumption of the Fed cutting cycle this year could reignite liquidity flow into agency MBS [9] Other Important Information - ARMOUR's estimated net portfolio duration is closely managed at 0.46 years, with implied leverage at eight turns [12] - The MBS portfolio remains concentrated in production MBS with ROEs in the 18% to 20% range [13] Q&A Session Summary Question: Managing spread duration risk during volatility - Management expressed comfort with current leverage levels and noted that spreads remain historically attractive, indicating a potential for modestly increasing leverage [20][21] Question: Allocation to higher coupons and best value in the coupon stack - Management remains favorable towards 5.56 coupons, which are currently modeling the highest ROE, while the allocation to higher coupons has declined due to volatility [25][26] Question: Role of long treasury position within the portfolio - The five-year treasury position is used as part of the hedging strategy and as a proxy for Agency CMBS positions, allowing for tactical adjustments based on spread conditions [28][29] Question: Total expenses after fees waived - Management indicated that the higher expenses were due to increased professional fees and do not expect the same run rate going forward [33] Question: Balancing total return versus carry in the hedge portfolio - Management stated that they are positioned for a bullish steepener and are dynamically adjusting hedges based on macroeconomic views [37][38] Question: Expectations for leverage increase - Management noted that they are comfortable modestly increasing leverage given stable liquidity conditions and attractive spreads, while remaining cautious about making large bets [48][52]

Core Insights - AGNC Investment Corp. is adopting a proactive and defensive portfolio management strategy aimed at long-term growth by frequently adjusting asset allocations and hedging strategies to mitigate risks while seizing yield opportunities [1] Portfolio Management - The company has maintained a robust hedge position, covering 91% of its Investment Securities Repo, TBA positions, and other debt as of March 31, 2025, indicating a strong focus on protecting against interest rate volatility [2] - AGNC has strategically reduced its exposure to more volatile non-agency mortgage-backed securities (MBS) and shifted towards higher-coupon Agency MBS, which enhances prepayment probability and supports better cash flow visibility [3] Market Positioning - With spreads between Agency MBS and benchmarks reaching near-pandemic highs in early April 2025, AGNC's $77.9 billion Agency MBS portfolio is well-positioned for compelling forward returns, particularly on a leveraged basis, as these securities are backed by Government-Sponsored Enterprises (GSEs) [4] - Despite potential fluctuations in short-term earnings due to market volatility, AGNC's disciplined active management and defensive positioning provide a solid foundation for long-term growth [5] Competitive Landscape - AGNC competes with Annaly Capital Management (NLY) and Starwood Property Trust (STWD) within the mortgage REITs industry, with differing investment approaches among the companies [6] - Annaly pursues a diversified strategy combining traditional Agency MBS with non-agency and credit-sensitive assets, focusing on acquiring newly originated mortgage servicing rights (MSRs) to enhance returns [7] - Starwood focuses primarily on commercial real estate, including commercial mortgage-backed securities (CMBS) and real estate debt investments, maintaining steady income through principal repayments and targeted acquisitions [8] Performance Metrics - AGNC shares have gained 6.4% year to date, outperforming the industry's growth of 2.8% [9] - The company trades at a forward price-to-tangible book ratio of 1.08X, above the industry's average of 0.96X [13] - The Zacks Consensus Estimate for AGNC's 2025 and 2026 earnings implies year-over-year declines of 11.2% and 3.9%, respectively, with estimates remaining unchanged over the past 30 days [15]

Investment Rating - The report does not explicitly state an investment rating for the industry, but it suggests a neutral stance on basis exposure due to weak near-term demand outlook and macro uncertainties [36]. Core Insights - The demand for conventional MBS is muted, with overseas investors likely holding a similar amount of conventionals and Ginnies, contrary to common assumptions [3][25]. - CMO issuance has significantly increased, representing approximately 34% of MBS issuance year-to-date compared to just 9% in 2020-2021, indicating a shift in market dynamics [9][18]. - The GSEs may expand their investment portfolios, which could bridge the gap until bank demand returns, potentially tightening mortgage basis [30][36]. Market Recap - Rates have rallied sharply due to weak inflation and jobless claims, with CPI and PPI coming in below expectations [10]. - Mortgage spreads have not tightened consistently due to opportunistic buying from marginal buyers, particularly overseas investors [21]. Demand and Supply Dynamics - The report highlights that overseas investors have been quieter this year, impacting the demand side of the equation [21]. - Servicing transfer volumes have decreased, but in-the-money loans tend to have faster speeds post-transfer [9]. - The GSEs' retained portfolios have a significant gap compared to regulatory caps, which could lead to increased investment in mortgages if the GSEs focus on generating earnings [30][31]. Investor Composition - The estimated composition of conventional MBS holders includes 26% Fed, 33% US Banks, 10% Overseas, 27% Money Managers, 1% GSEs, and 3% REITs [27]. - For Ginnie MBS, the composition is 17% Fed, 37% US Banks, 31% Overseas, and 15% Money Managers [29]. CMO Issuance Trends - CMO issuance has averaged $32 billion per month this year, driven by demand for floaters as investors seek to minimize duration risk [18]. - The report notes that CMO issuance levels have decoupled from overall MBS issuance, which remains muted [21]. Regulatory Considerations - Potential changes to LLPAs could tighten the credit box for existing low-credit borrowers, benefiting the prepayment profile of credit-impaired stores [44].