Annaly Capital Management reported strong fourth quarter and full year 2025 results, achieving an economic return of 8.6% for Q4 and 20.2% for the full year, driving a total shareholder return of 40%. Book value per share increased 5% quarter-over-quarter to $20.21, supported by a 30% portfolio expansion to $93 billion in Agency assets, $8 billion in Residential Credit, and $3.8 billion in MSR. Earnings available for distribution of $0.74 outpaced the $0.70 dividend, bolstered by a 30 basis point improvement in repo rates and strong investment gains from spread tightening. Management maintained a conservative leverage profile of 5.6x and raised $2.9 billion in equity during 2025. Looking ahead to 2026, the company anticipates mid-teens returns and signaled a strategic shift in capital allocation to favor Residential Credit and MSR over Agency assets due to relative value opportunities.
| Metric | Value | Change |
|---|---|---|
| Economic Return (Q4) | 8.6% | N/A |
| Economic Return (FY 2025) | 20.2% | N/A |
| Total Shareholder Return (FY) | 40% | N/A |
| Book Value Per Share | $20.21 | +5% |
| Earnings Available for Distribution | $0.74 | +$0.01 |
| Dividend | $0.70 | N/A |
| Economic Leverage | 5.6x | -0.1x |
| Net Interest Spread (ex-PAA) | 1.49% | Stable |
| Agency Portfolio Market Value | $93.0 B | +$22.0 B YoY |
| Residential Credit Market Value | $8.0 B | +$1.1 B QoQ |
| MSR Portfolio Market Value | $3.8 B | +15% YoY |
Management signaled a distinct strategic pivot in capital allocation, favoring Residential Credit and MSR over Agency MBS due to relative value concerns. While Agency remains the 'anchor' of the portfolio, the firm aims for a long-term mix of 50% Agency, 30% Residential, and 20% MSR, down from the current 62% Agency allocation. This shift is driven by 'uneven' spread tightening where Agency spreads are at 'QE type levels,' whereas credit and MSR offer better incremental returns. Management stated, 'from a capital allocation perspective, favor resi credit, even though it has tightened and MSR for that matter.'
The Residential Credit business (Onslow Bay) achieved record volumes, locking $23 billion and funding $16.5 billion in loans (up 30-40% year-over-year). Annaly solidified its position as the largest nonbank issuer with 29 securitizations totaling $15.2 billion, generating $1.9 billion in high-quality retained assets. Management expects the non-agency market to experience 'the highest growth securitization issuance since 2007' in 2026, providing a robust pipeline for continued growth and 'mid-teens expected ROEs.'
Annaly aggressively purchased 'out of the money' MSR with a weighted average note rate of 3.28% (250 basis points out of the money), providing significant call protection against rate declines. The MSR portfolio grew 15% year-over-year to $3.8 billion, with low delinquencies (55 basis points) and stable cash flows (4.6% CPR). Management views this as a 'stable cash flow vehicle' that supports overall yield and diversifies risk, positioning Annaly as the 'second largest buyer of conventional MSR in 2025.'
Despite tight spreads, the Agency portfolio grew $22 billion to $93 billion. Management focused on adding 5% coupons and Agency CMBS ($1 billion growth) for better convexity and 'durable carry.' The strategy relies on 'low to mid-teen prospective returns' supported by lower hedging costs due to the 'lowest levels [of volatility] since 2021.' Management emphasized that the technicals in the MBS market are 'vastly better' than in previous periods, supporting the safety of these returns even if upside is limited by valuations.
Management explicitly warned that Agency spreads are at the 'very tight end of the range' and 'close to QE type levels.' While justified by technicals, this leaves little room for further spread compression and increases vulnerability to a widening shock. CEO David Finkelstein noted, 'valuation as well is a risk... they're relatively tight,' suggesting that future returns in the Agency sector may be capped unless spreads tighten further from already historically tight levels.
CEO David Finkelstein expressed significant concern regarding 'euphoria in asset markets and asset pricing,' noting a 'remarkable run' and signs that 'investors should be a little concerned.' He cited the doubling of gold prices as a signal of nervousness, suggesting a potential broad correction could impact housing finance assets. He also highlighted the risk of 'complacency' around the global fiscal picture and the amount of debt, which could trigger a return to a high-volatility environment.
Risks regarding housing policy remain a significant uncertainty. Management discussed potential G-fee cuts, noting that while cuts on purchased loans are appropriate, broad cuts on existing loans could 'damage the MBS market and widen spreads.' Additionally, the undefined role of GSE portfolio purchases ($200 billion mandate) introduces uncertainty; management noted that 'higher coupons really have not tightened that much because that has increased policy uncertainty,' creating a potential headwind for that specific sector of the portfolio.
Annaly maintains a 'conservative leverage profile' at 5.6x, which decreased modestly during the quarter. While this provides safety and resilience, it limits the company's ability to magnify returns through leverage compared to more aggressive peers, especially in a low-volatility environment where taking on leverage is often rewarded. Management acknowledged that if spreads were wider, the environment for raising capital and leveraging would be more attractive.
Overall: Management exhibited a confident and pragmatic demeanor, emphasizing the 'strength and resilience' of their diversified model. While prepared remarks were highly positive regarding the 'constructive environment' and 'solid' performance, the tone shifted to cautious defensiveness during Q&A when discussing valuation risks and macro headwinds. Executives were direct about dividend safety but candid about the challenges posed by tight Agency spreads and 'euphoria in asset markets.'
Confidence: HIGH - Management demonstrated high confidence in their business model, dividend sustainability, and ability to generate 'mid-teens' returns. They provided specific data points to support their outperformance and articulated clear strategic pivots. However, confidence was slightly tempered by acknowledged macro risks and the current tightness of Agency spreads.
Management stated the dividend is 'safe here' and they expect to 'outearn certainly in Q1'.
Company expects to achieve 'upwards of mid-teens returns' supported by lower hedging costs.
Strategic target to shift allocation toward 50% Agency, 30% Residential Credit, and 20% MSR (from current 62/19/19).
Expect to be 'opportunistic' in buying MSR, noting bulk supply was 'ample' and pace should continue in 2026.
Hedging & Uncertainty: Management employed a mix of definitive statements regarding past performance and hedged language regarding future outlooks. Phrases like 'we anticipate,' 'we expect,' and 'likely' were used to project confidence in the business model (e.g., 'we anticipate the non-Agency market to continue to grow'). However, hedging increased significantly when discussing macro risks and policy, using terms like 'could end up,' 'perhaps,' and 'if past is prologue.' This pattern reveals high confidence in operational execution but substantial uncertainty regarding external macro factors and policy interventions. The use of 'constructive environment' was balanced against warnings of 'complacency,' indicating a strategy of banking profits while remaining vigilant for a regime change.
"The fourth quarter supported the prevailing narrative of a solid U.S. economy." - David Finkelstein, CEO
"We feel like the dividend is safe here." - David Finkelstein, CEO
"There's real signs out there that people should be -- investors should be a little concerned." - David Finkelstein, CEO
"Spreads have tightened across various asset classes... unevenly." - David Finkelstein, CEO
"We do, however, have the earnings power and the liquidity to be both patient and opportunistic." - David Finkelstein, CEO
"The safety of those returns is there, but the abundance of yield is not quite there." - David Finkelstein, CEO
Analyst Sentiment: Analysts were inquisitive, focusing heavily on the sustainability of returns given tight spreads, the mechanics of the GSE's portfolio buying, and the specific strategy for MSR acquisitions in a falling rate environment. Questions were direct, probing for 'comfort levels' on the dividend and 'bands' around future allocation targets.
Management Responses: Management responses were detailed and transparent, readily admitting when valuations were 'tight' but justifying positions with technicals. They displayed a strong command of market mechanics, particularly regarding swap spreads and GSE policy impacts. They deflected slightly on specific GSE cap predictions but were firm on dividend safety and the strategic rationale for their portfolio mix.
Discussion on mark-to-market book value updates post-quarter end, with management confirming a 4% increase including dividend.
Deep dive into MSR strategy, specifically the relative value of 'current coupon' versus 'out of the money' MSR and the infrastructure built to trade them.
Analysis of GSE policy impacts, specifically the risk of G-fee cuts damaging the MBS market and the technical impact of GSE portfolio buying on swap spreads.
Capital allocation strategy, specifically the speed and triggers for shifting capital from Agency to Residential Credit and MSR.
Risk management regarding the 'low risk' environment, specifically what factors (fiscal debt, asset euphoria) could end the low volatility regime.
Annaly Capital Management remains a compelling income play supported by a diversified, resilient business model that delivered a 20% economic return in 2025. The shift in capital allocation toward higher-yielding Residential Credit and MSR assets—where Annaly holds a leading market position—positions the company to sustain 'mid-teens' returns even as Agency spreads face headwinds from tight valuations. The dividend appears secure with solid coverage of $0.74 in EAD versus a $0.70 payout, and the company's massive liquidity pool ($9.4 billion available for financing) provides ample dry powder for growth. While macro risks regarding 'euphoria' and policy uncertainty warrant monitoring, management's disciplined underwriting and defensive positioning (low leverage, out-of-the-money MSR) offer significant downside protection. The stock offers an attractive blend of yield and growth potential in a stabilizing rate environment.
The shift from quantitative tightening (QT) to balance sheet expansion by the Fed has increased stability in short-term funding markets. Management noted this is a 'very good sign for balance sheet intensive products' like Agency MBS.
Implied and realized rate volatility have decreased to the 'lowest levels since 2021.' This decline significantly reduces hedging costs, supporting wider net interest margins and economic returns for mortgage REITs.
Uncertainty surrounding GSE portfolio purchases and potential G-fee cuts creates a risk of spread widening. Management warned that broad G-fee cuts on existing loans could 'damage the MBS market,' while the GSE's role as a 'spread stabilizing force' remains undefined.
The labor market remains 'soft' with hiring slowing, though limited layoffs have muted the rise in unemployment. This 'above-trend' expansion supports the housing market but creates uncertainty for the pace of future rate cuts.