Annaly Capital (NLY) Q4 2025 earnings review
A Stellar Finish: 20% Annual Return Validates Strategy
Annaly delivered a decisive Q4 beat, capping 2025 with a 20.2% total economic return. The company successfully navigated the rate environment, generating GAAP Net Income of $1.40 per share and Earnings Available for Distribution (EAD) of $0.74, comfortably covering the $0.70 dividend. Book value surged 5% sequentially to $20.21, driven by meaningful spread tightening in the Agency portfolio. Management's aggressive capital deployment into Agency MBS (portfolio up 32% in 2025) has proved timely, capturing upside while keeping economic leverage conservative at 5.6x.
🐂 Bull Case
Annaly grew its Agency MBS portfolio by 32% (+$22 billion) in 2025. This massive allocation shift captured significant book value gains as spreads tightened in Q4.
Despite falling rates usually hurting Mortgage Servicing Rights (MSR) values, Annaly's MSR portfolio grew 8% in value. Their strategy of holding 'lowest note rate' MSRs protects them from prepayment churn.
🐻 Bear Case
The weighted average experienced CPR (prepayment rate) rose to 9.7% in Q4 from 8.6% in Q3. If rates fall further, faster prepayments could erode yields on premium assets.
While economic leverage fell to 5.6x, GAAP leverage ticked up to 7.2x. This divergence often indicates increased off-balance sheet exposure or derivative usage that requires monitoring.
⚖️ Verdict: 🟢🟢
Strong Bullish. Annaly is firing on all cylinders. They covered the dividend, grew book value significantly, and maintained low leverage. The strategic pivot to load up on Agency MBS throughout 2025 was perfectly timed.
Key Themes
Agency Portfolio Powerhouse
Annaly aggressively scaled its Agency MBS portfolio, which now represents 62% of dedicated capital (up from 59% a year ago). The portfolio grew 6% QoQ to $92.9 billion. This was the primary engine for the book value jump to $20.21, as the company benefited from spread tightening and favorable carry.
Residential Credit Breakout
The Residential Credit group is no longer just a diversifier; it is a growth engine. The portfolio jumped 16% in Q4 to $8.0 billion. Key catalyst: record correspondent channel activity fueling $4.6 billion in securitizations in Q4 alone (and $15.2 billion for the full year). Annaly is effectively manufacturing its own high-yield assets.
Rising Prepayment Speeds (CPR)
Accelerating. The weighted average experienced CPR (Constant Prepayment Rate) increased to 9.7% in Q4 from 8.6% in Q3 and 8.7% a year ago. As interest rates stabilize or fall, prepayment risk increases, which forces the company to amortize premiums faster, creating a headwind for Net Interest Margin.
Cost of Funds Stabilization
Stable. After rising for years, funding costs have plateaued and begun to dip. Average economic cost of interest-bearing liabilities dropped slightly to 3.95% (from 3.96% in Q3). GAAP cost of funds dropped significantly (4.49% vs 4.73%). This stabilization is critical for maintaining the Net Interest Spread, which held steady at 1.49%.
Capital Raising Efficiency
Annaly raised $2.9 billion in accretive capital during 2025, primarily through its ATM program. Unlike many REITs that dilute shareholders to survive, Annaly deployed this cash immediately into higher-yielding Agency MBS ($22B portfolio growth), directly contributing to the earnings beat and book value accretion.
Hedging Complexity
While effective, the hedge portfolio is complex. The hedge ratio is 90%, down slightly from 92% in Q3. The company is using a mix of Treasury futures and swaps. In a volatile yield curve environment, mismatches between the hedge instruments and the MBS assets (basis risk) remains a key risk factor to watch.
Other KPIs
Accelerating. Up from $0.73 in Q3 and $0.72 a year ago. This metric is the primary proxy for dividend safety. The $0.74 result provides 106% coverage of the $0.70 quarterly dividend.
Accelerating. A strong 5% increase from $19.25 in Q3. This reversal from the mid-year dip ($18.45 in Q2) confirms the thesis that Annaly's portfolio is benefitting from the current macro environment.
Stable/Decelerating. Down from 5.7x in Q3 and 5.8x in Q2. Management is achieving record returns without stretching the balance sheet, leaving 'dry powder' for future volatility.
Stable. Effectively flat vs Q3 (1.70%) and Q2 (1.71%). Maintaining this margin while significantly growing the asset base is a strong indicator of disciplined growth.
Guidance
Management notes they enter 2026 'well-positioned' due to a 'constructive environment.' They expect continued momentum in Agency MBS due to spread tightening and strong fund flows.
Stable. The dividend was maintained at $0.70 for Q4. With EAD at $0.74, the payout ratio is healthy at ~95%, suggesting the dividend is safe for the near term.
Key Questions
MSR Valuation in Falling Rate Environment
The MSR portfolio value rose 8% this quarter despite the general inverse relationship between MSR values and interest rates. Can you unpack the specific drivers here—was this purely bulk purchases, or are you seeing lower-than-expected attrition in the low-note-rate cohort?
Leverage Divergence
GAAP leverage ticked up to 7.2x while Economic leverage fell to 5.6x. What specific off-balance sheet items or derivatives caused this widening gap, and should investors expect GAAP leverage to creep higher in 2026?
Residential Credit Securitization Pace
You achieved record securitization volume of $4.6B in Q4. Given the current rate volatility, do you see this pace as sustainable in 2026, or was Q4 an outlier due to year-end window dressing?
Agency Spread Tightening runway
You benefited significantly from Agency spread tightening in Q4. With spreads now tighter, does the risk/reward profile still favor the 'Agency Overweight' strategy, or will we see capital rotation back toward Credit/MSR in H1 2026?