8-K: Annaly Capital Delivers Strong Q3 2025 Economic Return

Annaly Capital Management reported a robust third quarter 2025, with earnings exceeding its dividend and a significant 8.1% economic return for the quarter.

Summary

• Annaly Capital Management achieved earnings available for distribution (EAD) of $0.73 per average common share for Q3 2025, exceeding the declared quarterly common stock cash dividend of $0.70 per share.
• Book value per common share increased to $19.25, up from $18.45 in Q2 2025.
• The company delivered a strong economic return of 8.1% for the quarter and 11.5% year-to-date through Q3 2025.
• Economic leverage decreased to 5.7x from 5.8x in the prior quarter, with $8.8 billion of total assets available for financing.
• Annaly raised $1.1 billion of accretive capital during the quarter, including $823 million from common equity sales and $275 million from Series J preferred stock issuance.
• The total investment portfolio grew to $97.8 billion, with the highly liquid Agency MBS strategy representing 89% of total assets ($87.3 billion).
• The Residential Credit portfolio increased 4% to $6.9 billion, driven by record correspondent channel activity and securitization issuance.
• The MSR portfolio grew 6% to $3.5 billion in market value, supported by opportunistic purchases and a new strategic subservicing relationship with PennyMac Financial Services, Inc.

Sentiment

Score: 8

Explanation: The filing indicates strong financial performance with earnings exceeding dividends, increased book value, and robust economic returns. Strategic initiatives in Agency MBS, Residential Credit, and MSR are progressing well, supported by successful capital raises and prudent leverage management. The overall market environment is also described as improving for fixed income.

Positives

• Earnings available for distribution (EAD) of $0.73 per average common share for Q3 2025 surpassed the quarterly common stock cash dividend of $0.70 per share.
• Book value per common share increased to $19.25, indicating growth in shareholder equity.
• Achieved a strong economic return of 8.1% for the quarter and 11.5% year-to-date through Q3 2025.
• Economic leverage decreased to a prudent 5.7x, down from 5.8x in Q2 2025.
• Maintained enhanced liquidity with $8.8 billion of total assets available for financing, including $5.9 billion in cash and unencumbered Agency MBS.
• Successfully raised $1.1 billion of accretive capital, comprising $823 million in common equity and $275 million in 8.875% Series J preferred stock.
• The Agency portfolio grew by 10%, with new purchases predominantly in specified pools with call protection across 5.5% and 6.0% coupons.
• Residential Credit portfolio increased 4% to $6.9 billion, driven by record correspondent channel activity and record quarterly securitization issuance of nearly $4 billion.
• Onslow Bay introduced innovative deal structures, including the first Non-QM Floating Rate Tranche and its largest Non-QM transaction ever ($743 million).
• The MSR portfolio increased 6% to $3.5 billion in market value, benefiting from opportunistic purchases and a strategic subservicing relationship with PennyMac.
• Average GAAP cost of interest-bearing liabilities decreased by 3 basis points quarter-over-quarter to 4.73%.

Negatives

• Average economic cost of interest-bearing liabilities slightly increased by 2 basis points quarter-over-quarter to 3.96%.
• Prepayment risk rose, particularly for recently originated generic collateral, although Annaly's portfolio is largely in specified pools with call protection.

Risks

• Changes in interest rates and the yield curve could materially impact financial results.
• Fluctuations in prepayment rates on mortgage-backed securities pose a risk.
• Availability of mortgage-backed securities (MBS) and other securities for purchase may be limited.
• Availability and terms of financing could affect operations and profitability.
• Changes in the market value of the company's assets could lead to losses.
• General business conditions and the broader economy may impact performance.
• Ability to grow the residential credit business and mortgage servicing rights business is subject to market conditions and competition.
• Credit risks are associated with investments in credit risk transfer securities, residential mortgage-backed securities, and related residential mortgage credit assets.
• Risks are related to investments in mortgage servicing rights, including valuation and servicing costs.
• Ability to consummate contemplated investment opportunities may be hindered.
• Changes in government regulations or policy affecting the company's business could have adverse effects.
• Maintaining qualification as a REIT for U.S. federal income tax purposes is crucial.
• Maintaining exemption from registration under the Investment Company Act of 1940 is essential.
• Operational risks or risk management failures by Annaly or critical third parties, including cybersecurity incidents, could occur.

Future Outlook

Markets anticipate the Federal Reserve will lower interest rates towards 3% by the end of next year. The U.S. economy is expected to maintain solid growth, even as the labor market shows continued softening, contributing to lower interest rate volatility and strong fixed income demand. Inflation remains above the Federal Reserve's 2% target, but the impact of tariffs has been less than expected, improving the fiscal outlook.

Management Comments

• Annaly delivered a strong economic return and earnings continued to exceed the dividend as the operating environment improved.
• Enhanced liquidity and maintained prudent leverage during the quarter while opportunistically accessing the capital markets.
• Overweighted Agency MBS given attractive relative returns while continuing to achieve milestones across Residential Credit and MSR.
• Annaly's Agency portfolio is made up of high-quality and liquid securities, predominantly specified pools, TBAs and derivatives, benefiting from in-house proprietary analytics.
• The Residential Credit platform is agile, deploying capital across both residential whole loan and Non-Agency securities markets, with programmatic securitization providing proprietary investments.
• The MSR portfolio complements the Agency MBS strategy by offering an attractive yield and hedging mortgage basis volatility, with Annaly positioned for opportunistic growth in both bulk and flow MSR markets.

Industry Context

The U.S. economy demonstrated resilience with healthy consumer spending and A.I.-related investment, despite a softening labor market. Interest rate volatility reached cycle lows, supporting fixed income demand. Mortgage delinquencies remained stable, consistent with 2015-2019 levels, while other consumer credit sectors saw plateaued delinquency rates. Residential credit spreads tightened modestly, fostering a supportive environment for securitization issuance, with Non-Agency issuance volumes up nearly 30% year-over-year, particularly in Non-QM. Bulk MSR supply increased significantly, providing substantial market opportunities.

Comparison to Industry Standards

• Annaly Residential Credit Group remains the largest non-bank issuer and the second largest issuer overall of Prime Jumbo and Expanded Credit MBS, pricing 24 residential whole loan securitizations totaling $12.4 billion in proceeds in 2025 year-to-date.
• Onslow Bay is one of the largest and most liquid sponsors of residential credit securitizations, representing approximately 20% of Non-QM issuance year-to-date.
• Annaly is a top 10 Agency MBS servicer with the lowest note rate among top 20 servicers, based on Fannie Mae and Freddie Mac data as of September 30, 2025.

Stakeholder Impact

• Shareholders are positively impacted by strong economic returns, increased book value per share, and earnings exceeding the dividend, suggesting potential for continued shareholder distributions.
• The successful capital raise indicates continued investor confidence and provides capital for strategic growth initiatives.
• The strategic subservicing relationship with PennyMac enhances operational efficiency and market reach, potentially benefiting customers through improved servicing capabilities.

Next Steps

• Continue to focus on active management of the Agency portfolio with a bias towards up-in-coupon specified pools with call protection.
• Maintain prudent leverage with substantial liquidity and a conservative hedge portfolio.
• Expand partnerships and remain well-positioned for opportunistic MSR purchases, leveraging the new strategic partnership with PennyMac.
• Continue disciplined credit framework and focus on whole loans and retained OBX securities for growth in Residential Credit.

Key Dates

Recommendation

Annaly Capital Management's Q3 2025 results demonstrate robust financial health, with earnings comfortably covering dividends and a significant increase in book value per share. The company's strategic focus on high-quality Agency MBS, coupled with strong growth and innovation in its Residential Credit and MSR portfolios, positions it well for continued performance. Prudent leverage management, enhanced liquidity, and successful capital raises further underscore its stability and growth potential in an improving market environment for fixed income. The positive economic return and strategic execution make it an attractive investment.

Keywords

Annaly Capital Management, REIT, Mortgage-Backed Securities, MBS, Mortgage Servicing Rights, MSR, Residential Credit, Financial Results, Q3 2025, Earnings, Dividend, Book Value, Leverage, Capital Raise, Securitization, Agency MBS, Non-Agency RMBS, Economic Return