Annaly Capital Management Signals Confident 2025 Earnings Outlook

Annaly Capital Management ((NLY)) has held its Q4 earnings call. Read on for the main highlights of the call.

Annaly Capital Management Strikes Optimistic Tone Amid Strong 2025 Results

Annaly Capital Management’s latest earnings call struck a confident and broadly positive tone, underscoring a year of strong economic and shareholder returns, scaled portfolio growth and a fortified balance sheet. Management highlighted that disciplined risk management, ample liquidity and diversified business lines in Agency MBS, residential credit and mortgage servicing rights (MSR) more than offset challenges such as compressed Agency spreads, lower swap income and an uncertain macro and policy backdrop.

Strong Quarterly and Full-Year Performance

Annaly reported an economic return of 8.6% for the fourth quarter of 2025 and an impressive 20.2% for the full year, driven largely by spread tightening and lower market volatility. Total shareholder return reached 40% in 2025, a standout result in the mortgage REIT space. Management framed these numbers as evidence that the firm’s positioning and risk controls allowed it to capitalize on improving technicals across rates and mortgages, even as the environment remained complex.

Earnings Power Supports Dividend

Earnings available for distribution (EAD) in the fourth quarter edged up to $0.74 per share, a $0.01 increase quarter over quarter, and comfortably covered the $0.70 dividend. Executives emphasized that this income cushion underpins their confidence in the sustainability of the dividend into 2026. The modest but clear growth in EAD suggests that, for now, Annaly is maintaining a healthy margin between what it earns and what it returns to shareholders.

Book Value Growth and Strategic Capital Raises

Book value per share climbed 5% quarter over quarter to $20.21, reflecting both strong asset performance and accretive capital deployment. Annaly raised $560 million of common equity through its at-the-market program in the fourth quarter and a total of $2.9 billion in 2025, including the issuance of Series J preferred shares. While management acknowledged that today’s tighter spreads make new equity issuance less compelling than during wider-spread periods, they stressed that prior capital raises have been instrumental in scaling the platform and supporting future growth.

Portfolio Expansion with Conservative Leverage

The company’s investment portfolio expanded by roughly 30% year over year, yet economic leverage actually ticked down to 5.6x. This combination of growth and stable-to-lower leverage signals a cautious approach to funding and risk, even as the firm takes advantage of market opportunities. Management portrayed this as a key differentiator, enabling Annaly to remain nimble and resilient should volatility return.

Agency Business Drives Scale and Returns

Annaly’s Agency MBS portfolio closed 2025 with a market value of $93 billion, up nearly $6 billion sequentially and $22 billion year over year, and representing 62% of the firm’s capital. Favorable technical factors—such as robust demand for Agency paper and spread contraction—contributed meaningfully to 2025 performance. While spreads have now tightened toward the low end of recent ranges, limiting incremental upside, the company’s Agency scale remains a core earnings engine and liquidity anchor.

Onslow Bay: Residential Credit Sets Records

The Onslow Bay residential credit platform delivered a record quarter and a standout year. The residential credit portfolio reached $8 billion at year-end, up $1.1 billion on the quarter and accounting for roughly 19% of capital. In Q4, correspondent locks totaled $6.4 billion and fundings $5 billion, and the platform completed eight securitizations totaling $4.6 billion, generating $570 million of proprietary OBX assets with expected mid-teens returns on equity. Over 2025, Onslow Bay locked more than $23 billion and funded $16.5 billion in loans—up about 30% and 40% year over year, respectively—while completing 29 securitizations worth $15.2 billion and creating roughly $1.9 billion of retained assets. Management highlighted this business as a key growth and return driver.

MSR Growth with Healthy Credit and Prepayment Metrics

Annaly’s MSR portfolio ended the quarter at $3.8 billion, up around $280 million from Q3 and 15% year over year, representing about 19% of capital. The company committed to purchases tied to roughly $22 billion of unpaid principal balance (UPB), equating to about $330 million of market value, and onboarded $59 billion of UPB over the year, making Annaly one of the largest buyers of conventional MSR. Portfolio fundamentals remain solid: conditional prepayment rates (CPR) held at 4.6%, serious delinquencies were just 55 basis points, and the weighted average note rate was approximately 3.28%, some 250 basis points out of the money versus current mortgage rates. While management noted MSR returns are “a little bit lighter” relative to other segments, they still view MSR as strategically attractive and operationally sound.

Funding, Liquidity and Efficiency Strengthen the Balance Sheet

The company continued to strengthen its funding and liquidity profile, adding $6.7 billion of repo principal in the quarter. The ending repo rate fell to 4.02%, down 34 basis points from the prior quarter, and the average repo rate improved by around 30 basis points to roughly 4.2%, reducing financing costs. Annaly reported $7.8 billion of unencumbered assets, including $6.1 billion in cash and unencumbered Agency MBS, and total assets available for financing of about $9.4 billion, equal to roughly 58% of capital. Operational efficiency also improved, with the efficiency ratio dipping to 1.31%, 10 basis points better than the prior quarter, underscoring disciplined expense management as the platform scales.

Impact of Compressed Agency Spreads

One of the main headwinds management flagged is the marked tightening of Agency MBS spreads, now near the tight end of their recent range. While the earlier widening and subsequent tightening supported 2025 returns, today’s narrower spreads reduce the abundance of high-yield opportunities and cap the upside from further spread compression. This translates into a more selective approach to deploying incremental capital in the Agency space and underscores the importance of diversification into residential credit and MSR.

Lower Swap Income Weighs on Hedging Contribution

Annaly also pointed to a decline in swap income, driven by lower average receive rates on its interest rate hedges. This development partially offsets the benefits of higher asset yields and tighter spreads, slightly dampening net interest and hedging income. While lower hedging costs are positive from a risk standpoint, the reduced swap income underscores the nuanced trade-offs in the current rate and volatility environment.

MSR Return Profile Moderates

Despite strong MSR portfolio fundamentals, management acknowledged that returns from the MSR segment have recently been “a little bit lighter” than those available in other parts of the platform. This does not reflect credit weakness or operational issues—prepayments and delinquencies remain low—but rather the relative pricing and risk-adjusted return profile compared with Agency and residential credit opportunities. As a result, MSR remains strategically important, but investors should not expect it to be the primary driver of near-term performance.

Policy and GSE Uncertainty Looms Over the Market

Executives highlighted meaningful uncertainty tied to housing policy and the role of the government-sponsored enterprises (GSEs) in the mortgage market. Potential changes to guarantee fees, evolving GSE purchase programs and decisions around portfolio caps could all introduce volatility, affect prepayment dynamics or cause spreads to widen, especially if existing mortgage economics are impacted. While such policy risk is a long-standing feature of the MBS landscape, management stressed it as an important variable for valuations and risk management in 2026.

Prepayment and Valuation Risks in the Mortgage Stack

Prepayment behavior—particularly among higher-coupon mortgages—remains a key risk, with mortgage rates around 6% keeping borrowers sensitive to rate movements. Management noted that more reactive borrower behavior can complicate modeling and hedging of prepayment speeds. At the same time, valuations in lower-coupon MBS are already tight, limiting the number of attractive new deployment opportunities in parts of the capital stack. This mix of prepayment uncertainty and rich valuations reinforces the need for disciplined security selection and cautious leverage.

Less Attractive Capital Raising Conditions

With spreads tighter and volatility subdued, Annaly sees the current environment as less conducive to aggressively raising new equity compared with periods of wider spreads, when new capital could be deployed into clearly accretive opportunities. While the company successfully raised nearly $3 billion of equity in 2025, management signaled that the pace of capital issuance may slow as they focus on optimizing the existing balance sheet and redeploying internal capital rather than diluting shareholders in a less favorable issuance window.

Macro Risks and the Threat of Higher Volatility

The company also cautioned that broader macro risks—ranging from global fiscal and debt concerns to what management described as “euphoria” in some asset markets—could ultimately disrupt the current low-volatility regime. A reversal in sentiment or a shock to risk assets could quickly translate into wider spreads and higher volatility across rates and mortgages. While Annaly’s conservative leverage and ample liquidity position it to withstand such episodes, management made clear that investors should not assume today’s calm market conditions will persist indefinitely.

Forward-Looking Outlook and Capital Allocation Priorities

Looking ahead to 2026, Annaly laid out an outlook that leans constructive but measured. Management projects low- to mid-teens prospective returns on Agency MBS, supported by lower volatility and a steeper yield curve, and continues to expect mid-teens returns on equity from Onslow Bay securitizations, underscoring the residential credit segment as a core growth engine. The company anticipates a supportive backdrop for MSR, aided by low prepayment speeds, modest delinquencies and a portfolio of mortgages well out of the money for refinancing. Annaly expects to continue earning more than its $0.70 quarterly dividend, as evidenced by the fourth-quarter EAD of $0.74 and guidance that earnings should again exceed the dividend in the first quarter. Capital allocation is set to tilt incrementally toward residential credit and MSR over time, with a longer-term mix targeted around 50% Agency, 30% residential credit and 20% MSR. This strategy will be supported by substantial unencumbered assets, significant warehouse capacity and modest economic leverage, while meaningfully lower hedging costs in a low-volatility environment should further bolster net returns.

In sum, Annaly’s earnings call painted a picture of a company that has used a favorable 2025 backdrop to strengthen its balance sheet, scale its diversified platform and reinforce its dividend coverage, while remaining clear-eyed about the risks from tighter spreads, policy uncertainty and potential macro volatility. For investors, the message was one of disciplined optimism: performance has been strong, the funding and liquidity profile is robust, and management sees attractive, though more selective, opportunities across Agency MBS, residential credit and MSR as the firm navigates 2026.