10-Q: Annaly Q3 2025: Strong Earnings, Strategic Capital Deployment

Annaly Capital Management reports significantly improved Q3 2025 net income and earnings available for distribution, driven by higher coupon income and strategic portfolio adjustments.

Summary

• Net income attributable to Annaly increased to $832.4 million ($1.21 basic EPS) for Q3 2025, up from $66.4 million ($0.05 basic EPS) in Q3 2024.
• Net income attributable to Annaly for the nine months ended September 30, 2025, was $1.01 billion ($1.45 basic EPS), compared to $519.8 million ($0.80 basic EPS) for the same period in 2024.
• Earnings Available for Distribution (EAD) reached $519.9 million ($0.73 per average common share) for Q3 2025, an increase from $382.5 million ($0.66 per average common share) in Q3 2024.
• EAD for the nine months ended September 30, 2025, was $1.5 billion ($2.18 per average common share), up from $1.1 billion ($1.98 per average common share) in the prior year.
• The company achieved an economic return of 8.1% for Q3 2025 and 11.5% for the 2025 year-to-date period.
• Economic leverage decreased slightly to 5.7x, and cash and unencumbered Agency MBS totaled $5.9 billion, with total assets available for financing increasing to $8.8 billion.
• The Agency MBS portfolio grew by 10% quarter-over-quarter to $87.3 billion in market value.
• The Residential Credit business portfolio increased by $265 million to $6.9 billion in economic market value of assets.
• Onslow Bay's securitization platform closed a record eight securitizations for $3.9 billion in unpaid principal balance (UPB) in Q3 2025, generating $479 million of high-yielding, proprietary securities.
• The Mortgage Servicing Rights (MSR) business purchased approximately $17 billion in UPB across three bulk packages and its flow network during the quarter.
• Issued 39.0 million common shares for net proceeds of $823.3 million in Q3 2025 and 102.0 million shares for $2.1 billion (net) in 9M 2025 through the at-the-market sales program.
• Issued 11,000,000 shares of 8.875% Series J Fixed-Rate Cumulative Redeemable Preferred Stock for gross proceeds of $275 million.

Sentiment

Score: 8

Explanation: The company reported strong financial performance with significant increases in net income and EAD, consistently outperforming its dividend for four consecutive quarters. Strategic growth in key business segments, successful capital raises, and a favorable market environment (declining volatility, expected Fed cuts) contribute to a very positive outlook.

Positives

• Net income attributable to Annaly significantly increased to $832.4 million in Q3 2025 from $66.4 million in Q3 2024.
• Earnings Available for Distribution (EAD) per average common share rose to $0.73 in Q3 2025 from $0.66 in Q3 2024, outearning the current dividend for the fourth consecutive quarter.
• Achieved a strong economic return of 8.1% for Q3 2025 and 11.5% year-to-date 2025.
• The Agency MBS portfolio grew by 10% quarter-over-quarter to $87.3 billion.
• The Residential Credit business portfolio increased by $265 million to $6.9 billion in economic market value.
• Onslow Bay's securitization platform closed a record eight securitizations for $3.9 billion UPB in Q3 2025.
• Onslow Bay's correspondent channel achieved record quarterly volumes across both loan locks ($6.2 billion) and fundings ($4.0 billion).
• The MSR business purchased approximately $17 billion in UPB, including a new partnership with PennyMac Financial Services for $12 billion of low note rate MSR.
• The MSR portfolio is expected to remain insulated against a potential spike in refinancing activity due to an aggregate borrower note rate of 3.27% and predictable cash flows (4.6 CPR).
• Economic leverage decreased slightly to 5.7x, indicating a conservative financial posture.
• Cash and unencumbered Agency MBS totaled $5.9 billion, with total assets available for financing increasing to $8.8 billion.
• Successful capital raises, including $1.1 billion of equity in Q3 2025 and $275 million from the first preferred stock issuance since 2019.

Negatives

• Net gains (losses) on derivatives showed an unfavorable change, resulting in a ($1.5) billion loss for the nine months ended September 30, 2025, compared to a $53.6 million gain for the same period in 2024.
• Net gains (losses) on investments and other decreased to $561.9 million for Q3 2025 from $1.7 billion in Q3 2024.
• Higher interest expense was incurred due to increased securitized debt balances from new securitizations and higher average rates, partially offset by lower interest expense on repurchase agreements.
• Labor market conditions weakened, with hiring slowing to approximately 30,000 jobs per month for the period between June and August 2025.
• Inflation remained above the Federal Reserve's 2% target, and disinflationary progress has stalled.
• The housing market continues to experience little to slightly negative home price appreciation on a year-over-year basis.
• Unrealized losses on available-for-sale securities amounted to ($629.3 million) at September 30, 2025.
• Net unrealized gains (losses) on instruments measured at fair value through earnings for 9M 2025 were negatively impacted by U.S. Treasury securities sold, not yet purchased ($229.5 million), non-Agency MBS ($102.2 million), MSR ($63.0 million), CRT securities ($34.6 million), and participations issued ($16.2 million).

Risks

• Changes in interest rates, the yield curve, and prepayment rates can affect net interest income and asset values.
• Availability and terms of mortgage-backed securities (MBS) and other securities for purchase.
• Availability and terms of financing, including repurchase agreements and other secured financing.
• Changes in the market value of the company's assets.
• Changes in business conditions and the general economy.
• Credit risks related to investments in credit risk transfer securities, residential mortgage-backed securities, and related residential mortgage credit assets.
• Risks related to investments in mortgage servicing rights (MSR), including adverse impacts from rising borrower delinquencies.
• The company's ability to consummate any contemplated investment opportunities.
• Changes in government regulations or policy affecting the company's business.
• The company's ability to maintain its qualification as a REIT for U.S. federal income tax purposes.
• The company's ability to maintain its exemption from registration under the Investment Company Act of 1940.
• Operational risks or risk management failures by the company or critical third parties, including cybersecurity incidents.
• Liquidity and funding risk, including the inability to meet obligations without incurring unacceptable losses.
• Counterparty risk, relating to potential losses if counterparties to repurchase or derivative agreements fail to perform their obligations.
• Dependence on third-party service providers (e.g., mortgage loan servicers and sub-servicers) for various business processes.

Future Outlook

Expect investment strategies to be well-positioned for the balance of 2025 due to declining macro-volatility, additional expected Fed interest rate cuts, and healthy fixed income demand. The portfolio is built to guard against uncertainty, maintaining flexibility with historically low leverage and significant liquidity. Anticipate continued pressure on housing into the winter seasonals, but cumulative depreciation should be modest given positive longer-term housing market fundamentals. The continuation of the Fed cutting cycle should make MBS more attractive for overseas investors, and potential regulatory reform is expected to spur bank demand. Interest rate volatility should remain subdued as the Fed moves towards a neutral policy, and a steeper curve is likely to reduce option costs for the MBS portfolio.

Management Comments

• Annaly generated earnings available for distribution of $0.73 per share, thereby outearning our current dividend, which was raised in the first quarter of the year, for the fourth consecutive quarter and delivered an economic return of 8.1% for Q3 2025 and 11.5% for 2025 year-to-date.
• Annaly's economic leverage decreased slightly to 5.7x while cash and unencumbered Agency MBS totaled $5.9 billion, with total assets available for financing increasing to $8.8 billion during the quarter.
• We also issued Annaly's first preferred stock issuance since 2019, and the first non-rated residential mortgage REIT preferred issuance since September 2022, raising $275 million in gross proceeds before deducting the underwriting discount and other estimated offering expenses.
• While all three of our businesses grew over the quarter, most of the new capital was deployed into MBS given lower realized interest rate and mortgage basis volatility and still historically attractive spreads relative to swap hedges.
• Overall, we remain optimistic with respect to the Agency MBS sector.
• We expect our investment strategies to be well-positioned for the balance of 2025 given declining macro-volatility, additional expected Fed interest rate cuts and healthy fixed income demand.
• While our outlook remains positive, we have carefully built our portfolio to guard against uncertainty and are flexible in the current investing climate with historically low leverage and significant liquidity.
• We believe Annaly's diversified housing finance model has yielded proven results, having generated a 13% average annual economic return over the trailing three year period since scaling each business.

Industry Context

The U.S. economy remained resilient in Q3 2025, with growth on pace with Q2 2025, supported by healthy consumer spending and strong business investment, particularly in artificial intelligence (AI). Inflation remained above the Federal Reserve's target, though tariff-related goods inflation was more muted than expected. The labor market showed signs of weakening, with hiring slowing. The Fed cut interest rates by 25 bps in September 2025, signaling a shift towards a lower rate path due to employment mandate risks, with further cuts expected. U.S. Treasury yields fell modestly, and the yield curve steepened, while interest rate volatility declined to multi-year lows, benefiting portfolios by lowering convexity costs and tightening Agency MBS spreads. The Agency MBS sector saw improved supply and demand technical factors, with fixed income flows up 50% year-over-year and CMO creation exceeding $30 billion per month. The residential credit market experienced tightening in investment-grade assets, with Non-QM AAA-rated securities roughly 15 bps tighter, supporting strong securitization issuance. The housing market continues to face pressure from elevated mortgage rates, leading to modest home price appreciation.

Comparison to Industry Standards

• Onslow Bay's securitization issuance of $160 billion year-to-date is the second largest gross issuance since 2008 in the residential credit market.
• Onslow Bay has priced 24 securitizations, representing $12.4 billion of UPB since the beginning of 2025, solidifying Annaly as the largest non-bank issuer in the residential credit market.
• The MSR portfolio's serious delinquencies remained unchanged at 50 bps, indicating stability in borrower performance.
• The MSR portfolio's 4.6 CPR over the last three months ended September 30, 2025, suggests highly predictable and durable cash flows, which is a positive attribute for MSR investments.
• Annaly's diversified housing finance model generated a 13% average annual economic return over the trailing three-year period, which is presented as a strong performance metric compared to its own historical results.

Management Changes

Corporate Governance

Legal Proceedings

• No material legal proceedings pending as of September 30, 2025.

Related Party Transactions

• No specific related party transactions detailed beyond the general business operations with subsidiaries (e.g., Onslow Bay Financial LLC, Arcola Securities, Inc.). The filing does not explicitly mention 'related party transactions' in a separate section for new dealings.

Stakeholder Impact

• Shareholders: Benefited from increased net income and EAD, consistent dividend outperformance, and successful common and preferred stock offerings.
• Employees: Compensation expenses increased, potentially indicating growth or adjustments in employee-related costs.
• Customers/Borrowers: The MSR portfolio's low note rates (3.27%) suggest stability for existing borrowers, while record volumes in the correspondent channel indicate continued access to loan origination.
• Creditors/Lenders: The company's diversified financing sources, conservative leverage, and significant liquidity enhance its creditworthiness and ability to meet financial obligations.
• Regulatory Bodies: The company continues to monitor and comply with REIT status requirements and Investment Company Act exemptions, ensuring regulatory adherence.

Next Steps

• Continue to deploy new capital into MBS, favoring specified pools in 5.5% and 6.0% coupons.
• Maintain a disciplined approach in the housing market, focusing on high credit quality and manufacturing proprietary assets through the correspondent channel.
• Monitor the Fed cutting cycle for MBS attractiveness to overseas investors and potential regulatory reform for bank demand.
• Continue to manage the MSR portfolio to remain insulated against refinancing activity.
• Continue to diversify financing profile, adding new non-mark-to-market facilities and financing options.
• Comply with applicable federal and state securities laws and stock exchange rules in connection with any conversion of preferred stock into common stock.
• The Board will consider appropriate actions if internal capital thresholds are not met, including asset sales, changes in asset mix, reductions in asset purchases or originations, or issuance of capital.

Key Dates

Recommendation

The company demonstrated strong financial performance in Q3 2025, with significant increases in net income and EAD, consistently outearning its dividend. Strategic growth in its Agency MBS, Residential Credit, and MSR segments, coupled with successful capital raises, positions it well for future returns. The favorable macro outlook, including declining interest rate volatility and anticipated Fed rate cuts, further supports a positive investment thesis. The conservative leverage and strong liquidity also mitigate risks.

Keywords

REIT, Mortgage REIT, MBS, Agency MBS, Residential Credit, Mortgage Servicing Rights, MSR, Securitization, Fixed Income, Interest Rates, Financial Services, Capital Management, Annaly, NLY