Annaly Capital Management Q4 2025 Earnings Report

Annaly Capital Management EPS Results

• Actual EPS: $0.74
• Consensus EPS: $0.72
• Beat/Miss: Beat by +$0.02
• One Year Ago EPS: N/A

Annaly Capital Management Revenue Results

• Actual Revenue: $1.06 billion
• Expected Revenue: $567.67 million
• Beat/Miss: Beat by +$493.74 million
• YoY Revenue Growth: N/A

Annaly Capital Management Announcement Details

• Quarter: Q4 2025
• Date: 1/28/2026
• Time: After Market Closes
• Conference Call Date: Thursday, January 29, 2026
• Conference Call Time: 9:00AM ET

Annaly Capital Management (NYSE:NLY), Inc. is a publicly traded real estate investment trust (REIT) that specializes in generating income through investment in mortgage-related assets. The company’s core business activities include the acquisition, financing, and management of a diversified portfolio of agency and non-agency residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS), and other real estate debt instruments. Annaly seeks to profit from the spread between the interest earned on its mortgage investments and its cost of funds, as well as from capital gains realized through active portfolio management.

Founded in 1997 and headquartered in New York City, Annaly has grown to become one of the largest mortgage REITs in the United States. The company went public in 1997 and trades on the New York Stock Exchange under the ticker symbol NLY. Over the years, Annaly has expanded its investment strategies to include credit opportunities and other yield-oriented products, seeking to navigate a variety of interest rate environments and credit market conditions.

Annaly’s investment portfolio is structured around several distinct business segments, including Agency, Credit, and Other Real Estate Investments. The Agency segment focuses on securities issued or guaranteed by U.S. government-sponsored enterprises, offering high liquidity and low credit risk. The Credit segment targets non-agency residential and commercial mortgage assets, while the Other Real Estate Investments segment may include net lease properties and selected opportunistic debt investments. Through this diversified approach, Annaly aims to optimize risk-adjusted returns for its shareholders.

Leadership at Annaly is headed by Michael A. Farrell, who serves as Chairman and Chief Executive Officer, overseeing the firm’s strategic direction and capital management activities. The company’s executive team brings extensive experience in finance, real estate, and risk management. Annaly primarily serves the institutional investment community but also provides access to mortgage market income for retail investors through its listed shares and subsidiary funds.

Annaly Capital Management Q4 2025 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: The firm delivered a 20.2% economic return for 2025 (8.6% in Q4) and a 40% total shareholder return, while EAD rose to $0.74, out-earning the dividend for the quarter.
• Positive Sentiment: Annaly raised $2.9 billion of equity in 2025 (including $560 million via ATM in Q4) and used that capital to grow the portfolio ~30% year-over-year, which management says was accretive.
• Positive Sentiment: Non-agency residential credit and MSR businesses expanded: the Onslow Bay platform set volume records and completed 29 securitizations (~$15.2B) while MSR market value rose to $3.8B with sizable purchase commitments, positioning these businesses for further growth.
• Positive Sentiment: Liquidity and risk posture remain conservative with economic leverage at 5.6x, about $7.8 billion of unencumbered assets and meaningful warehouse capacity, providing flexibility to be opportunistic.
• Negative Sentiment: Management warns valuations are at the tight end of the range and flagged policy uncertainty (GSE MBS purchases, possible G-fee changes), global debt concerns and the potential for higher volatility or faster prepayments as key downside risks.

Presentation

[Operator]

Good morning and welcome to the fourth quarter 2025 earnings call for Annaly Capital Management. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To adjourn your question, please press star then two. Please note today's event is being recorded. I would now like to turn the conference over to Sean Kensil, Director of Investor Relations. Please go ahead.

[Sean Kensil, Director of Investor Relations at Annaly Capital Management]

Good morning and welcome to the fourth quarter 2025 earnings call for Annaly Capital Management. Any forward-looking statements made during today's call are subject to certain risks and uncertainties, which are outlined in the risk factors section in our most recent annual and quarterly SEC filings. Actual events and results may differ materially from these forward-looking statements. We encourage you to read the disclaimer in our earnings release in addition to our quarterly and annual filings. Additionally, the content of this conference call may contain time-sensitive information that is accurate only as of the date hereof. We do not undertake and specifically disclaim any obligation to update or revise this information. During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our earnings release.

[Sean Kensil, Director of Investor Relations at Annaly Capital Management]

Content referenced in today's call can be found in our fourth quarter 2025 investor presentation and fourth quarter 2025 financial supplement, both found under the presentation section of our website. Please also note this event is being recorded. Participants on this morning's call include David Finkelstein, Chief Executive Officer and Co-Chief Investment Officer, Serena Wolfe, Chief Financial Officer, Mike Fania, Co-Chief Investment Officer and Head of Residential Credit, V.S. Srinivasan, Head of Agency, and Ken Adler, Head of Mortgage Servicing Rights. With that, I'll turn the call over to David.

[David Finkelstein, CEO and Co-Chief Investment Officer at Annaly Capital Management]

Thank you, Sean. Good morning, everyone, and thank you all for joining us for our fourth quarter earnings call. Today, I'll open with a brief overview of the macro and market environment and then touch on our performance for the quarter and the year, following which I'll provide an update on each of our three investment strategies and conclude with our outlook for 2026. Serena will then discuss our financials before opening up the call to Q&A. Now, starting with the macro landscape, the fourth quarter supported the prevailing narrative of a solid U.S. economy. Although official data flow was disrupted by the government shutdown, reports received thus far suggest that the expansion continues at an above-trend pace. The labor market remained soft, however, as hiring slowed further in Q4, but limited layoffs and a reduction in labor force growth have muted the rise in the unemployment rate.

[David Finkelstein, CEO and Co-Chief Investment Officer at Annaly Capital Management]

Fixed income markets exhibited another strong quarter, in turn helping 2025 register the highest total return in the U.S. aggregate bond index since 2020. The market benefited from continued strong inflows into bond funds and the ongoing decrease in both implied and realized rate volatility to the lowest levels since 2021. This decline in volatility was supported by a more predictable outlook for monetary policy, and following 75 basis points of aggregate rate cuts in 2025, markets currently price nearly two additional cuts later this year. The pace and realization of those projected cuts will be dependent on developments in the labor market, stability in inflation, and the composition of the FOMC going forward. The yield curve further steepened during the quarter as short-term yields fell while long-term yields rose modestly.

[David Finkelstein, CEO and Co-Chief Investment Officer at Annaly Capital Management]

Swap spreads continued to widen, partially driven by a shift on the part of the Fed from Quantitative Tightening to balance sheet expansion through reserve management purchases and bills, which served to increase the stability in short-term funding markets. Amid this constructive environment, our portfolio generated an economic return of 8.6% for the fourth quarter, with all three businesses contributing solid returns. For the full year 2025, we've delivered an economic return of just over 20% and a total shareholder return of 40%, underscoring the strength and resilience of our diversified housing finance strategies. Notably, we've been able to produce these results with a conservative leverage profile, and our economic leverage decreased modestly to 5.6 turns on the quarter. Our Earnings Available for Distribution rose marginally to $0.74, again out-earning our dividend.

[David Finkelstein, CEO and Co-Chief Investment Officer at Annaly Capital Management]

Also to note, we remained active in capital markets, raising $560 million of common equity through our ATM in Q4, bringing total equity raised in 2025 to $2.9 billion, inclusive of our Series J preferred stock issuance this past summer. With the capital raised, we were able to accretively grow our portfolio by 30% on the year, with each of our three strategies demonstrating double-digit growth. Now turning to our investment businesses and beginning with agency, our portfolio ended 2025 at $93 billion in market value, an increase of nearly $6 billion on the quarter and $22 billion over the course of the year, with agency ending the year representing 62% of the firm's capital. In addition to MBS benefiting fundamentally from lower volatility and a steeper yield curve, the sector has exhibited a highly supportive supply and demand picture as well.

[David Finkelstein, CEO and Co-Chief Investment Officer at Annaly Capital Management]

In particular, strong and consistent bond fund inflows, REIT equity raises, and GSE portfolio growth of $50 billion through year-end against a backdrop of net MBS supply surprising to the downside helped fuel spread contraction in the second half of 2025. With respect to our portfolio activity, our purchases centered on adding 5% coupons evenly split between pools and TBAs. Given the range-bound rate environment and steeper curve, we were comfortable taking on current coupon exposure to drive higher returns in light of the anticipated reduced hedging costs.

[David Finkelstein, CEO and Co-Chief Investment Officer at Annaly Capital Management]

And we also grew our agency CMBS portfolio by roughly $1 billion, given the sector's relative attractiveness compared to lower coupon MBS. With mortgage rates approaching 6% and recent prepay activity highlighting a more reactive borrower, higher coupons lagged on the coupon stack. However, we have deliberately constructed our specified pool portfolio with enough call protection to withstand a lower rate environment.

[David Finkelstein, CEO and Co-Chief Investment Officer at Annaly Capital Management]

For example, our 6% and 6.5% coupon pools have prepaid 40% slower than that of generic cheapest-to-deliver collateral, and we anticipate our holdings in these coupons should provide durable carry for years to come. Now, our hedge position remained broadly stable this quarter, consistent with our strategy of maintaining a conservative rate posture. With volatility at some of the lowest levels we've experienced over the past five years, our duration management focused predominantly on hedging new asset purchases using a combination of both Treasury futures and swaps.

[David Finkelstein, CEO and Co-Chief Investment Officer at Annaly Capital Management]

Now shifting to residential credit, our portfolio ended the fourth quarter at $8 billion in market value, up $1.1 billion quarter-over-quarter, representing approximately 19% of the firm's capital. Non-agency residential credit was relatively range-bound throughout the quarter, with AAA non-QM spreads ending the year marginally tighter at 125 to the curve.

[David Finkelstein, CEO and Co-Chief Investment Officer at Annaly Capital Management]

Q4 represented another record quarter for our Onslow Bay franchise as we achieved all-time highs across lock volume, fundings, and securitization issuance. During the quarter, our correspondent channel locked and funded $6.4 billion and $5 billion respectively. We settled an additional $800 million of whole loans via bulk acquisitions, and we closed eight securitizations totaling $4.6 billion. And this securitization activity resulted in the creation of $570 million of proprietary OBX assets on the quarter with mid-teens expected ROEs. And throughout the entire year, we locked over $23 billion of loans to the correspondent and funded $16.5 billion exclusively through that channel, representing an increase of 30% and 40% year-over-year respectively.

[David Finkelstein, CEO and Co-Chief Investment Officer at Annaly Capital Management]

During 2025, we closed 29 securitizations for an aggregate $15.2 billion, generating approximately $1.9 billion of high-quality retained assets for Annaly and our joint venture, while remaining firmly entrenched as the largest non-bank issuer in the residential credit sector. Even with the continued growth in the Onslow Bay channel and securitization program, we remained disciplined on credit, with our current locked pipeline representing a 762 weighted average FICO and a 68 original LTV, with limited layered risk. Now, the first few weeks of 2026 have been marked by credit spread tightening as both the corporate credit and structured finance asset classes have strengthened given the movement in the agency MBS market. Now, this is a supportive backdrop for our business as declining cost of funds and stability in capital markets should keep our volumes elevated.

[David Finkelstein, CEO and Co-Chief Investment Officer at Annaly Capital Management]

Given our market leadership, Annaly remains well-positioned to continue to benefit from the growth and liquidity of not only the non-QM market, but also the broader non-agency market, which is expected to experience the highest growth securitization issuance since 2007 this year. Now, turning to MSR, our portfolio ended the fourth quarter at $3.8 billion in market value, including unsettled commitments, representing a nearly $280 million increase quarter-over-quarter and a 15% increase year-over-year. MSR ended the year representing 19% of the firm's capital. During the quarter, we committed to purchase $22 billion in principal balance, or roughly $330 million in market value of MSR, with a weighted average note rate of 3.46%. Now, these purchases were across five bulk packages in our flow channels, of which $150 million in market value is expected to settle in Q1.

[David Finkelstein, CEO and Co-Chief Investment Officer at Annaly Capital Management]

Notably, we are the second largest buyer of conventional MSR in 2025, onboarding $59 billion in UPB throughout the year, and we ranked as the sixth largest non-bank agency servicer. Bulk supply was ample this past year, and we expect this pace of activity to continue in 2026 due to increasing origination volumes coupled with compressed gain-on-sale margins necessitating MSR sales, as demonstrated throughout 2025. Now, regarding our flow business, we're focused on expanding our footprint and are now active across all GSE platforms, providing access to current coupon MSR, which we plan to purchase opportunistically. Our MSR valuation multiple increased marginally on the quarter, driven by a steeper yield curve, modest spread tightening, and lower volatility. Fundamental performance within the MSR portfolio continues to be strong, and cash flows remain durable.

[David Finkelstein, CEO and Co-Chief Investment Officer at Annaly Capital Management]

The portfolio paid 4.6 CPR in Q4, unchanged quarter over quarter, while serious delinquencies remain muted at 55 basis points. With a weighted average note rate of 3.28%, our portfolio is still 250 basis points out of the money. As we continue to enhance our sub-servicing and recapture relationships, we look forward to growing our MSR portfolio in the coming year, taking advantage of the role we've created as a preferred partner to the originator and servicer community. Now, to conclude with our outlook, as we look further into 2026, each of our investment strategies is well-positioned to continue delivering strong results for our shareholders.

[David Finkelstein, CEO and Co-Chief Investment Officer at Annaly Capital Management]

The agency spread tightening following the GSE's recent MBS purchase announcement has been pronounced, but it is important to note that not only are technicals in the market vastly better than at any time since the Fed was actively buying MBS, also MBS hedging costs should be meaningfully lower given the decline in volatility, supporting low to mid-teen prospective returns. And we anticipate the non-agency market to continue to grow as a share of total origination, and Onslow Bay is uniquely positioned to maintain its healthy pace of loan acquisitions and securitization issuance. The non-QM market in particular has matured into a more liquid institutional asset class, and our early positioning gives us significant competitive advantages in loan selection and execution.

[David Finkelstein, CEO and Co-Chief Investment Officer at Annaly Capital Management]

Our best-in-class MSR portfolio remains distinguished with an average note rate that is significantly out of the money and an exceptional credit profile, which provides our portfolio with a stable cash flow vehicle supporting our overall yield and returns. Most importantly, we believe our diversified housing model will continue to perform for our shareholders in the year ahead. In an environment where spreads across various asset classes have tightened unevenly, the optionality to invest in the most accretive assets is an important lever to drive returns that monoline peer strategies are not afforded.

[David Finkelstein, CEO and Co-Chief Investment Officer at Annaly Capital Management]

Accordingly, while agency will certainly continue to remain the anchor of our portfolio, our non-agency strategies will likely see additional capital allocation all else equal. We do, however, have the earnings power and the liquidity to be both patient and opportunistic. The scale to maintain our market leadership across housing finance and our diversification enables us to be resilient across different rate cycles and market environments. And now with that, I'll hand it over to Serena to discuss the financials.

[Serena Wolfe, CFO at Annaly Capital Management]

Thank you, David. Today, I will provide a brief overview of the financial highlights for the quarter ended December 31st, 2025, as well as select full-year measures. Consistent with prior quarters, while our earnings release discloses GAAP and non-GAAP earnings metrics, my comments will focus on our non-GAAP EAD and related key performance metrics, which exclude PAA. Starting with book value, as of December 31st, 2025, our book value per share increased 5% from $19.25 in the prior quarter to $20.21. After accounting for our $0.70 dividend, we achieved an economic return of 8.6% in Q4. This brings our full-year 2025 economic return to 20.2%.

[Serena Wolfe, CFO at Annaly Capital Management]

Strong investment gains drove this quarter's performance. We benefited from spread tightening driven by lower volatility and favorable technical factors. Gains on our interest rate swaps also supported results as swap spreads widened. Earnings available for distribution per share increased by $0.01 to $0.74 and again, as David mentioned earlier, exceeded our dividend for the quarter. This increase in EAD was driven by a 30 basis points improvement in our average repo rate to 4.2% and higher average investment balances resulting from growth in our agency and residential loan portfolios. For the full-year, average yields rose 26 basis points year-over-year from 5.13% in 2024 to 5.39% in 2025. However, these benefits were partially offset by lower levels of swap income due to lower average receive rates.

[Serena Wolfe, CFO at Annaly Capital Management]

Net interest spread and net interest margin, both excluding PAA, remained strong and comparable to prior quarters at 1.49% and 1.69% respectively. For the full-year 2025, net interest spread and net interest margin, both excluding PAA, reached 1.4% and 1.7%, an improvement of 18 basis points and 13 basis points respectively, further demonstrating the returns from our disciplined investing and funding teams. Turning to financing, we added $6.7 billion of repo principal at attractive spreads while deploying the proceeds from accretive ATM issuances during the quarter. This led to a Q4 reported ending repo rate of 4.02%, down 34 basis points. Additionally, our weighted average repo days ended the quarter at 35 days, 14 days lower than the prior quarter. Our economic leverage ratio remained historically low at 5.6x, down one sixth from the third quarter's end.

[Serena Wolfe, CFO at Annaly Capital Management]

Meanwhile, total warehouse capacity across our residential credit and MSR businesses reached $6.9 billion, with $2.7 billion of that committed. We continue to maintain ample capacity in both businesses, with utilization rates at 47% for residential credit and 50% for MSR. As for liquidity, we ended the fourth quarter with $7.8 billion in unencumbered assets, including $6.1 billion in cash and unencumbered agency MBS. We also have about $1.5 billion in fair value of MSR pledged committed warehouse facilities, but still undrawn, which can be quickly converted to cash, subject to market advance rates. As a result, our total assets available for financing are approximately $9.4 billion, up $500 million from the third quarter. This represents about 58% of our total capital base and provides significant liquidity and flexibility.

[Serena Wolfe, CFO at Annaly Capital Management]

Finally, regarding OpEx, our efficiency ratios again improved significantly during the quarter, down 10 basis points to 1.31%, and brought the full-year ratio to 1.42%, illustrating the efficiencies of our size and scale. Now, that concludes our prepared remarks, and we'll now open the line for questions. Thank you, Operator.

[Operator]

Thank you. We'll now begin to answer sessions. If you'd like to ask a question, please press star then one on your telephone keypad. If you're using a speakerphone, we ask that you please pick up your handset before pressing the keys. If at any time your question has been addressed and you'd like to withdraw your question, please press star then two. At this time, we'll pause for just a moment to assemble our roster. Today's first question comes from Alyssa DeStefano with KBW. Please go ahead.

[Bose George, Managing Director at KBW]

Hey, everyone. This is Bose at KBW. The first question, can you give us an update on mark-to-market book values?

[David Finkelstein, CEO and Co-Chief Investment Officer at Annaly Capital Management]

Sure, Bose. Good morning. So as of Tuesday, our book was up 4%, inclusive of the dividend accrual, so 3% netting that out. After yesterday, maybe a fraction of a percent higher than that.

[Bose George, Managing Director at KBW]

Okay. Great. Thanks. And then can you just talk about the portfolio returns or the blended ROEs on the portfolio given the spread tightening since quarter end? And then can you just translate that into comfort level with your dividend in 2026?

[David Finkelstein, CEO and Co-Chief Investment Officer at Annaly Capital Management]

Sure. So overall, we could still achieve an upwards of mid-teens returns. When we look at the agency market, obviously, we've gotten a considerable amount of tightening, but versus swaps, you still get there. We're confident in the durability of the swaps market as a hedge, given the fact that the Fed's obviously, as I mentioned in my prepared remarks, much more considerate of balance sheet availability. We haven't really tightened that much, or rather, sorry, widened that much since that announcement.

[David Finkelstein, CEO and Co-Chief Investment Officer at Annaly Capital Management]

So we feel like the swaps market's a perfectly good place to hedge, and you can get that return. In the RESI market, the whole loan channel to securitization is still giving us those returns. MSR is a little bit lighter, but when you consider the hedging benefits and diversification benefits, we'll take that. When you look at our overall balance sheet, where we own assets, is very supportive of the dividend yield. So we feel good about it. We out-earned in Q4. We expect to out-earn certainly in Q1, and we feel like the dividend's safe here.

[Bose George, Managing Director at KBW]

Okay. Great. Thank you.

[David Finkelstein, CEO and Co-Chief Investment Officer at Annaly Capital Management]

Thank you, Bose.

[Operator]

Thank you. And our next question today comes from Jason Stewart at Compass Point. Please go ahead.

[Jason Stewart, Analyst at Compass Point]

Hey, good morning. Thanks for taking the question. Obviously, on the MSR portfolio, the current portfolio is pretty well insulated from modestly lower interest rates. Could you expand on your comment about being opportunistic for current coupon MSR and how you're expecting that market to trade as prepays increase?

[David Finkelstein, CEO and Co-Chief Investment Officer at Annaly Capital Management]

Sure. I'll hand it off to Ken for that.

[Ken Adler, Head of Mortgage Servicing Rights at Annaly Capital Management]

Yeah. I mean, we've now set up the infrastructure to be fully active in that space. And the primary way we've done that is through the Fannie and Freddie MSR exchange platforms. And we're now active with close to 100 counterparties today, and we provide pricing every day. What's really interesting about new production pricing is it really doesn't move that much with interest rates because it's always set at the current mortgage rate. So really, what it is, is it's about the value change after you buy it, I think.

[Ken Adler, Head of Mortgage Servicing Rights at Annaly Capital Management]

And given the improved ability to do recapture for the industry, that's been much more insulated than it's been in past regimes. So we're there. And we don't see it as valuable to us at this time based on where we can buy the lower note rate stuff. So to the extent relative value changes and that becomes more attractive, you will see us more active in that area.

[David Finkelstein, CEO and Co-Chief Investment Officer at Annaly Capital Management]

Yeah. And I'll just add, Jason, to the extent we're a financial participant, the low note rate MSR has worked well and let the operating platforms, the originators, focus on production coupon and their management of the borrower. But we do expect origination, obviously, to pick up a lot this year with a 6% mortgage rate. And so as a consequence, you'll see a lot of production coupon MSR hitting the market. And we've gotten comfortable, very comfortable with our recapture partners at our servicers to where we can manage that quite well. So we'll see how the market develops, but we'd like to get more into the production MSR space.

[Jason Stewart, Analyst at Compass Point]

Okay. That's helpful. And just one more point on that. How much would you need to see valuations change for it to hit return hurdles in terms of current coupon production?

[Ken Adler, Head of Mortgage Servicing Rights at Annaly Capital Management]

Yeah. Well, what's going on is when originators sell MSR, they want to sell the MSR that's least valuable to them. And that is the lower note rate MSR because there's a lower chance that that customer is going to become active. So in today's world, when they originate, and Dave alluded to this in the prepared comments, when they originate a loan, the profitability on that origination does not allow MSR retention to retain all the MSR. In fact, they have to sell a majority of the MSR to be liquidity neutral.

[Ken Adler, Head of Mortgage Servicing Rights at Annaly Capital Management]

So what we're seeing is originators prefer to sell the lower note rate MSR, so that's more valuable to us because that's what they're selling. We expect that flow to dry up, and then the relative value shifts to the current coupon. But also, as Dave alluded to, we're well set up based on the network of people to buy from and then the network of people to both subservice and perform recapture for us.

[Jason Stewart, Analyst at Compass Point]

Okay. All right. Thank you.

[David Finkelstein, CEO and Co-Chief Investment Officer at Annaly Capital Management]

Thanks, Jason.

[Operator]

Thank you. And our next question today comes from Eric Hagen at BTIG. Please go ahead.

[Eric Hagen, Managing Director at BTIG]

Hey, thanks. Good morning, guys. Lots of speculation out there right now for things the administration can do to lower mortgage rates further, including a potential cut to guarantee fees. I mean, can you weigh in on this and how you think a big G-fee cut could impact the prepayment environment?

[David Finkelstein, CEO and Co-Chief Investment Officer at Annaly Capital Management]

Sure. So obviously, a G-fee cut is something that's been talked about. Our view, and we've been communicated about this to policymakers, is that a G-fee cut on purchase loans is perfectly appropriate. We're concerned that if you do broad G-fee cut and impact existing loans, you're going to damage the MBS market and widen spreads. And I think that there's been an awareness of that. And furthermore, if you confine it to purchase loans, you don't negatively impact the ROEs of the GSEs, and that's certainly a consideration. So perhaps they do something like give it a year holiday on purchase loans. We think that that would make sense to help first-time homeowners and new buyers get into the housing market.

[Eric Hagen, Managing Director at BTIG]

Yep. Okay. That's great. Thanks for weighing in on that. You mentioned the cost of hedging should be lower as a result of the GSEs being back in the market, spread volatility being lower. I mean, what metric would you use to maybe compare the cost of hedging over time? And how would you maybe compare the attractiveness of raising capital when spreads are widened, kind of more attractive versus an environment of tighter spreads and lower spread volatility?

[David Finkelstein, CEO and Co-Chief Investment Officer at Annaly Capital Management]

Yeah. So the first question in terms of measuring spread volatility, here's our view as it relates to the GSEs and their involvement. We don't have a lot of clarity. We know there's a $200 billion mandate, but we don't know what role the GSEs are going to play. I think it'd be highly productive if they evolved into a spread stabilizing force for the MBS market. And that was somewhat of the role they played pre-financial crisis. And it gave investors confidence that mortgage spreads would remain relatively stable. And as a consequence, it incentivized participation in the market.

[David Finkelstein, CEO and Co-Chief Investment Officer at Annaly Capital Management]

And then overall, given higher participation, you got a tighter spread as a consequence of others doing the work for the GSEs because you knew that they would be there when they got too wide and provide support for the market. And they also were economically focused and sold when mortgages were tight. That would be a good outcome. They clearly don't have the capacity that they did pre-financial crisis, but they got a lot of dry powder.

[David Finkelstein, CEO and Co-Chief Investment Officer at Annaly Capital Management]

So we'd like to see that evolution, but we'll have to wait to see. In terms of measuring spreads and volatility, spread vol has been very stable for the last six months, and it's been quite comforting. We haven't had to spend a lot of money at all hedging, and you see that in our economic return. So we feel quite good about that. And then, Srini, you want to dive into your second question again or second part of your question again, Eric?

[Eric Hagen, Managing Director at BTIG]

Sure. Yeah. We're just looking at how you might compare the attractiveness of raising capital in the different spread environments.

[David Finkelstein, CEO and Co-Chief Investment Officer at Annaly Capital Management]

So look, I'll jump in there, and then Srini can add. When spreads were extraordinarily wide, it was obviously a catalyst to raise capital because there was a tremendous amount of upside. Compare that to today, where spreads are meaningfully tighter. Obviously, from a relative value standpoint, it doesn't look as attractive. But when you consider the fact that the stability of spreads is higher, it gives you some confidence. But candidly, if I had to choose between one environment over the other, I'd rather have wider spreads with a little bit more uncertainty in terms of raising capital.

[David Finkelstein, CEO and Co-Chief Investment Officer at Annaly Capital Management]

So from that standpoint, I would expect that the pace of capital raising may not be as high as in that environment. But nonetheless, the amount of support for the agency market, given the fact that you have very strong technicals from obviously the GSEs, but also money managers, REITs raising capital, etc., that's quite comforting. And to the earlier part of the question about volatility, we're at the cycle lows, and that's supported by what we're seeing day-to-day in markets.

[David Finkelstein, CEO and Co-Chief Investment Officer at Annaly Capital Management]

Another point to note is that the Fed's shoring up balance sheet, as I talked about in my prepared remarks and in Bose's question. The fact that the Fed went from QT to adding reserves in the system is a very good sign for balance sheet-intensive products, whether it's Treasuries or Agency MBS. The ability to finance is key. And I think it's been a little bit underappreciated. So the agency market is a safe place right now. It's just that spreads are obviously at the tight end of the range. They're close to QE-type levels. The safety of those returns is there, but the abundance of yield is not quite there.

[Eric Hagen, Managing Director at BTIG]

Really appreciate your comment. Keep going. Thanks.

[Vankeepuram Srinivasan, Head of Agency at Annaly Capital Management]

Going forward, there could be pockets of opportunity if we get more clarity on what policy changes come about. Post the GSE announcement to purchase MBS, higher coupons really have not tightened that much because there is increased policy uncertainty. So as we get some clarity there, there could be pockets of opportunity.

[Eric Hagen, Managing Director at BTIG]

Yep. Thank you guys so much. Really helpful.

[David Finkelstein, CEO and Co-Chief Investment Officer at Annaly Capital Management]

Thank you, Eric.

[Operator]

And our next question today comes from Doug Harter at UBS. Please go ahead.

[Doug Harter, Equity Research Analyst at UBS]

Thanks. David, you were just talking about the lower risk environment that we're in today. I guess as you look out, how do you handicap the risks that that could change? What might be the factors that could cause kind of an end to this low-risk environment with more volatility?

[David Finkelstein, CEO and Co-Chief Investment Officer at Annaly Capital Management]

Sure. From a macro standpoint, then I'll drill down a little bit on the mortgage market. But the two biggest risks that we see are the global fiscal picture and the amount of debt out there, including that in the United States, and a little bit of complacency around it. And you could end up with the bear environment because of the amount of debt in the world. And I think it's probably under-recognized risk of that. And another macro risk is just the euphoria in asset markets and asset pricing. It's been a pretty remarkable run across markets, and there's real signs out there that people should be, investors should be a little bit concerned. Just look at the price of gold as a safe store of value. It's doubled since the beginning of last year and up 27%-28% this year.

[David Finkelstein, CEO and Co-Chief Investment Officer at Annaly Capital Management]

So I think there's some nervousness out there, and it's a little bit hard to invest, and we could get a correction broadly in assets. Now, as it relates to the agency markets, specifically in our markets, valuation as well is a risk. We are at the very tight end of the range on Agency MBS. It's justified given the facts I mentioned earlier, but nonetheless, they're relatively tight. Another risk, as Eric discussed, is housing policy uncertainty and what role the GSEs will play and what the administration will do to potentially increase affordability and how that could impact the convexity profile of the agency markets. So those are two things we're watching quite closely in terms of risks in the agency markets specifically.

[Doug Harter, Equity Research Analyst at UBS]

Great. I appreciate that, David. Thank you.

[David Finkelstein, CEO and Co-Chief Investment Officer at Annaly Capital Management]

Thank you, Doug.

[Operator]

And our next question today comes from Rick Shane at JP Morgan. Please go ahead.

[Rick Shane, Analyst at JPMorgan]

Hey, good morning, everybody, and thanks for taking my question. Look, you guys are seeing attractive opportunities buying MSRs, low-coupon MSRs. I assume you're basically seeing that as an attractive IO. Given discounts in MBS for lower coupons, does it make sense? Is it attractive to be buying lower-coupon MBS at this point as well? I'm just curious, particularly as sort of on the margin, you're starting to get more questions about prepayment.

[David Finkelstein, CEO and Co-Chief Investment Officer at Annaly Capital Management]

Yeah. You're just saying as a hedge to our MSR and the run-off.

[Rick Shane, Analyst at JPMorgan]

Exactly. Give yourself an opportunity to pick up some discount accretion if speeds pick up and also potentially is an attractive yield.

[David Finkelstein, CEO and Co-Chief Investment Officer at Annaly Capital Management]

Yeah. And look, the first point I'd note is that the valuation on low-coupon MBS is quite tight. So there's better ways, I think, to manage that type of risk, whether it be through duration or other factors. There's a little bit of policy risk in low-note rate MSR, but we feel it's very safe. And I think when it comes to housing policy changes, you could see legislation that reduces capital gains tax, so you could get some turnover in low-coupon MSR. But those are at the margin. Otherwise, I think the borrower in a 3%-odd note rate loan really ascribes the value to that loan, and there's a real reluctance to give it up. So we do feel like it's a safe, durable asset. And we do hedge some of that uncertainty through duration, but to couple it with low-coupon MBS, and we do have some, and that is obviously a consideration, Rick, but the valuations just don't warrant it.

[Rick Shane, Analyst at JPMorgan]

Got it. And is there enough liquidity in the lower coupons that if you felt like the bid-ask was attractive that you could deploy capital there? And that's a nuance just as equity guys I don't think, at least I fully appreciate.

[David Finkelstein, CEO and Co-Chief Investment Officer at Annaly Capital Management]

Yeah. Yeah. And there is liquidity in low coupons. It's not as good as production and slightly higher. But if you wanted to compile a bigger position in low coupons, it wouldn't be hard. I mentioned we added DUS to the portfolio, agency CMBS. In our view, relative to lower-coupon MBS, that was meaningfully cheaper. And so to get a good convexity profile and longer duration assets, that was sufficient for us last quarter.

[Rick Shane, Analyst at JPMorgan]

Got it. Okay. That makes sense because that's got a super low prepayment characteristic because those are.

[David Finkelstein, CEO and Co-Chief Investment Officer at Annaly Capital Management]

Exactly.

[Rick Shane, Analyst at JPMorgan]

Got it.

[David Finkelstein, CEO and Co-Chief Investment Officer at Annaly Capital Management]

Exactly.

[Rick Shane, Analyst at JPMorgan]

Thank you so much, guys.

[David Finkelstein, CEO and Co-Chief Investment Officer at Annaly Capital Management]

Thank you, Rick.

[Operator]

And our next question today comes from Harsh Hemnani with Green Street. Please go ahead.

[Harsh Hemnani, Analyst at Green Street]

Thank you. All right. So I think on the prepared remarks, you characterized the current environment as spreads have tightened across all housing finance assets, but unevenly. And it seems like credit is starting to look a little bit more attractive on a relative value basis. And we saw that section of the portfolio grow a little faster than the rest of the businesses this quarter. I guess as you look out over the next year or so, your long-term target for equity allocation is like 60% Agency MBS and 20% across the other two each. Can you help us put some bands around that? How much could we see credit exposure or MSR even increase from over that 20% number?

[David Finkelstein, CEO and Co-Chief Investment Officer at Annaly Capital Management]

Sure. And I did allude to this, Harsh, so thank you for the question. So in 2025, we grew the agency portfolio 30% and each RESI and MSR by 15% through the capital raises that we undertook. And that was the right weighting to go with given how well agency's done. So we're perfectly happy with it. But now we're at a little bit of a different balance when it comes to valuations. And we do, from a capital allocation perspective, favor RESI credit, even though it has tightened, and MSR for that matter. And we'd like those percentages if we did add capital to switch. We'd like to grow RESI and MSR 30% and agency less than that. So the objective today from a capital allocation standpoint is to increase MSR and RESI. It's episodic in terms of the opportunities, notwithstanding the consistency of the pipeline for our whole loan correspondent channel. But we would like to grow those businesses.

[David Finkelstein, CEO and Co-Chief Investment Officer at Annaly Capital Management]

And we've said in the past that the longer-term weighting we would like to achieve is 50% agency, not below that, and 30% RESI, 20% MSR. We don't have to get there right away, but that is an objective. We have to be very considerate with respect to the credit environment. But nonetheless, when you look at the health of the loans we're acquiring and our portfolio, we're very comfortable with the credit we're doing. And so we're hopeful we can grow it. And I don't expect us to get to those objectives over the near term in terms of down to 50% agency, but we'd like to, at the margin, increase MSR and RESI here.

[Harsh Hemnani, Analyst at Green Street]

That's super helpful. Thank you.

[David Finkelstein, CEO and Co-Chief Investment Officer at Annaly Capital Management]

Thank you, Harsh.

[Operator]

Thank you. And our next question comes from Trevor Cranston, Citizens JMP. Please go ahead.

[Trevor Cranston, Managing Director at Citizens JMP]

Hey. Thanks. You talked some about the impact of the GSE portfolio buying on the market. I was curious if you could share your views on the likelihood or feasibility of the portfolio caps potentially being increased at some point as they get closer to the current cap size. And then also, I was just curious if you guys have seen or if you expect to see any impact from their portfolio buying on the swap or funding markets. Thanks.

[David Finkelstein, CEO and Co-Chief Investment Officer at Annaly Capital Management]

Yeah. So as it relates to the caps, it's hard to say. Obviously, everybody probably saw the post from the FHFA director last Friday, I believe it was, talking about they don't intend to increase the caps, but we just don't know. But when you look today, they came into the year with, I think it's $178 billion in capacity between the two of them.

[David Finkelstein, CEO and Co-Chief Investment Officer at Annaly Capital Management]

So we're a long ways away from hitting those caps. And we'll see how it evolves. But we don't have a good answer as to whether or not those caps will actually be increased. Obviously, they can do it in conjunction with Treasury, and it doesn't require Congress. So we'll have to wait and see how the year evolves on that front. And sorry, the second part of your question, Trevor? Oh, hedging.

[Trevor Cranston, Managing Director at Citizens JMP]

Yeah. Whether you're seeing any impact from the GSE buying on swap markets.

[David Finkelstein, CEO and Co-Chief Investment Officer at Annaly Capital Management]

Look, we're not as much. You could argue that swap spreads should be wider given the adjustments the Fed has made with respect to their asset purchases. And we didn't get, as I mentioned earlier, a meaningful amount of widening based on the greater availability of balance sheet. And it could indicate some involvement from the GSEs. We don't have information on that.

[David Finkelstein, CEO and Co-Chief Investment Officer at Annaly Capital Management]

I do know from our experience pre-financial crisis, and I was on the sell side interacting quite extensively with the GSEs, if past is prologue in terms of how they behave, they would hedge those purchases and use swaps because that'll enhance the yield relative to shorting Treasuries, for example, and they can get a decent ROE out of it. So we would expect that to be the case. Whether they're actively engaged in the swaps market today, I don't have a good answer for their involvement. And as it relates to funding markets, the GSEs are active participants in the funding markets with their liquidity and their capital during parts of the month. And their absence might be a factor. However, what I would say is that they're buying MBS, which is a balance sheet-intensive product and is funded in many circumstances.

[David Finkelstein, CEO and Co-Chief Investment Officer at Annaly Capital Management]

So they're taking assets out of the market that might otherwise be funded. And so even though they're not providing as much liquidity in the repo market, that should offset the asset purchases should offset the lack of funding. And really what matters, I think, in terms of funding markets is reserves in the system. And that's the key factor we look at. And they're now back to slightly over $1 trillion, I guess, or $3 trillion. And we feel like funding markets are still going to be fine without their participation. Oh, and Srini, you got another point.

[Vankeepuram Srinivasan, Head of Agency at Annaly Capital Management]

The one thing I would add is just the size of the GSE book. I mean, if they bought the entire $200 billion, it's about $100 million DV01. So if you assume they've done 5% or 10%, you're talking about $5 million-$10 million DV01. It's just not large enough for you to see any impact on swap spreads right away. It'll take time.

[Trevor Cranston, Managing Director at Citizens JMP]

Yeah. Okay. That makes sense. Thank you.

[David Finkelstein, CEO and Co-Chief Investment Officer at Annaly Capital Management]

Thank you, Trevor.

[Operator]

Thank you. And that concludes our question-and-answer session. I'd like to turn the conference back over to David Finkelstein for any closing remarks.

[David Finkelstein, CEO and Co-Chief Investment Officer at Annaly Capital Management]

Thank you, [Rocco]. And thank you, everybody, for joining us today. Have a good rest of the winter, and we'll talk to you real soon.

[Operator]

Thank you, sir. That concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.

Participants

Executives

• David Finkelstein, CEO and Co-Chief Investment Officer
• Ken Adler, Head of Mortgage Servicing Rights
• Sean Kensil, Director of Investor Relations
• Serena Wolfe, CFO
• Vankeepuram Srinivasan, Head of Agency

Analysts

• Bose George, Managing Director at KBW
• Doug Harter, Equity Research Analyst at UBS
• Eric Hagen, Managing Director at BTIG
• Harsh Hemnani, Analyst at Green Street
• Jason Stewart, Analyst at Compass Point
• Rick Shane, Analyst at JPMorgan
• Trevor Cranston, Managing Director at Citizens JMP