Executive Summary / Key Takeaways

• Diversified Investment Strategy Delivers Consistent Returns: Annaly Capital Management (NLY) has consistently generated strong economic returns, achieving 8.1% in Q3 2025 and 11.5% year-to-date, driven by its diversified portfolio across Agency MBS, Residential Credit, and Mortgage Servicing Rights (MSR). This multi-faceted approach has enabled NLY to outperform peers and deliver positive economic returns for eight consecutive quarters.
• Robust Earnings and Dividend Coverage: NLY's Earnings Available for Distribution (EAD) of $0.73 per average common share in Q3 2025 consistently out-earned its $0.70 quarterly dividend, demonstrating strong earnings power and a commitment to shareholder distributions. The company expects to maintain this dividend level for the remainder of 2025.
• Strategic Capital Deployment and Operational Efficiency: NLY actively deploys capital into attractive opportunities, evidenced by a 10% quarter-over-quarter growth in its Agency portfolio to $87.3 billion and record securitization issuance in Residential Credit. The company's efficiency ratios improved significantly, with an OpEx-to-equity ratio of 1.34% in Q3 2025, one of the lowest in the mortgage REIT sector.
• Technological Edge in Residential Credit and MSR: Through its Onslow Bay platform and strategic partnerships, NLY leverages technology to enhance operational efficiencies in loan origination, securitization, and MSR servicing. This technological focus contributes to its market leadership in non-bank residential credit issuance and improved MSR portfolio yields.
• Prudent Risk Management and Ample Liquidity: NLY maintains a conservative economic leverage ratio of 5.7x and possesses substantial liquidity, with $8.8 billion in assets available for financing as of September 30, 2025. This strong financial posture, coupled with a 92% hedge ratio, provides resilience against market volatility and interest rate fluctuations.

A Diversified Fortress in Shifting Mortgage Markets

Annaly Capital Management, Inc. (NYSE:NLY) stands as a leading diversified capital manager within the mortgage finance sector, a position it has cultivated since commencing operations in February 1997. The company's core business revolves around generating net income for distribution to its stockholders and optimizing returns through the prudent management of its diversified investment strategies. This overarching strategy is executed through three primary investment groups: the Annaly Agency Group, the Annaly Residential Credit Group, and the Annaly Mortgage Servicing Rights (MSR) Group. NLY's foundational strength lies in its internally-managed structure and its election to be taxed as a Real Estate Investment Trust (REIT), which mandates the distribution of at least 90% of its taxable income to shareholders, making it an attractive proposition for income-focused investors.

The broader economic landscape in Q3 2025 was characterized by U.S. economic resilience, with GDP growth on pace with the prior quarter, supported by healthy consumer spending and AI-driven business investment. However, the labor market showed signs of weakening, with hiring slowing to approximately 30,000 jobs per month between June and August 2025, and the unemployment rate ticking up to 4.3% by August. Inflation remained elevated near 3%, though the impact of higher tariffs on goods inflation was more muted than anticipated. In response to these dynamics, the Federal Reserve cut interest rates by 25 basis points in September 2025, bringing the target range for the Federal Funds rate to 4% - 4.25%, with further cuts projected for the remainder of 2025 and into 2026. This environment of declining macro volatility and anticipated Fed cuts sets a constructive backdrop for NLY's diversified portfolio.

Technological Edge and Operational Excellence

Annaly's strategic framework is significantly bolstered by its commitment to technological innovation and operational efficiency, particularly within its Residential Credit and MSR segments. The company's Onslow Bay platform exemplifies this, serving as a critical technological differentiator in the residential credit market. This platform enables NLY to originate, acquire, and securitize non-Agency residential whole loans with remarkable efficiency. The tangible benefits are evident in its market leadership: Onslow Bay 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. Year-to-date through Q3 2025, Onslow Bay has priced 24 securitizations, representing $12.4 billion of UPB, solidifying Annaly as the largest non-bank issuer in the residential credit market and a top 10 issuer worldwide.

The Onslow Bay correspondent channel, a key component of this technological ecosystem, achieved record-setting quarterly volumes in Q3 2025, locking $6.2 billion and funding $4 billion in whole loans. This channel maintains a disciplined credit strategy, with a quarter-end locked pipeline boasting a 765 weighted-average FICO score, a 68% weighted-average combined loan-to-value ratio, and over 96% first lien exposure, indicating a high-quality asset base. The ability to manufacture proprietary assets through this market-leading channel, even amidst tightening credit standards, allows NLY to generate mid-teens expected returns on equity (ROEs).

In the MSR business, technological enhancements across servicing partners are directly contributing to declining subservicing costs and improved portfolio yields. David Finkelstein, CEO, highlighted that "One of the driving factors of MSR valuations as of late has been the cost of servicing has come down because of technological enhancements, which are only, I would say, right now escalating and accelerating and consolidation in the servicing sector will only fuel that." This technological advantage, coupled with strategic partnerships like the new agreement with PennyMac Financial Services (PFSI) to purchase $12 billion of low note rate MSR, enhances NLY's ability to manage and monetize its MSR portfolio efficiently. For investors, these technological differentiators translate into a stronger competitive moat, improved financial performance through lower costs and higher yields, and a more robust market positioning in key segments of the mortgage finance industry.

Performance with Perspective

Annaly's financial performance in Q3 2025 underscores the effectiveness of its diversified strategy. The company reported GAAP net income attributable to Annaly of $832.4 million for the three months ended September 30, 2025, a substantial increase from $66.4 million in the same period of 2024. This surge was primarily driven by favorable changes in net gains/losses on derivatives, net interest income, and net servicing income.

Non-GAAP Earnings Available for Distribution (EAD) for Q3 2025 stood at $519.9 million, or $0.73 per average common share, consistently exceeding the quarterly dividend of $0.70 per share. This strong EAD was fueled by higher coupon income, a result of increased residential mortgage loan and securities balances, and strategic purchases of higher-coupon securities. The Residential Credit business, in particular, contributed to increased yields, with average yields rising to 6.29% in Q3 2025. Overall, the average yield on interest-earning assets (excluding PAA) increased to 5.46% in Q3 2025 from 5.41% in Q2 2025. The net interest spread ex-PAA also improved, reaching 1.5% in Q3 2025, while the net interest margin ex-PAA remained comparable at 1.7%.

Annaly's operational efficiency is further highlighted by its improved efficiency ratios, which decreased by 10 basis points to 1.41% for Q3 2025, and stood at 1.46% year-to-date. The OpEx-to-equity ratio for the quarter was 1.34%, positioning NLY among the lowest in the mortgage REIT sector despite its three complementary businesses. The company's book value per share increased by 4.3% to $19.25 as of September 30, 2025, reflecting strong performance.

Liquidity remains a cornerstone of Annaly's financial health. As of September 30, 2025, the company held $8.8 billion in total assets available for financing, including $5.9 billion in cash and unencumbered Agency MBS. An additional $1.5 billion in fair value of MSR, pledged to committed warehouse facilities, can be quickly converted to cash. This substantial liquidity, combined with a conservative economic leverage ratio of 5.7x (down from 5.8x in the prior quarter), provides a robust buffer against market fluctuations.

Competitive Positioning and Strategic Responses

Annaly operates in a highly competitive mortgage finance market, contending with other mortgage REITs, asset managers, and financial institutions. Key direct competitors include AGNC Investment Corp. (AGNC), Starwood Property Trust (STWD), Blackstone Mortgage Trust (BXMT), and New Residential Investment Corp. (NRZ). While AGNC primarily focuses on agency residential mortgage-backed securities, NLY's diversified portfolio, encompassing agency, non-agency, and MSR assets, provides a broader strategic scope and potentially greater resilience across varied market conditions. This diversification allows NLY to capture opportunities in commercial real estate that more specialized peers might overlook.

Compared to STWD, which emphasizes commercial real estate originations and property-level investments, NLY's mix of assets offers a more balanced risk exposure. NLY's REIT status also provides tax-efficient distributions, potentially enhancing customer loyalty and attracting income-focused investors. Against BXMT, which benefits from Blackstone's vast resources, NLY's independent REIT model fosters direct investor relations and greater strategic agility to pivot across asset classes. In the residential mortgage and servicing rights space, NLY directly competes with NRZ, but NLY's expanded scope into commercial and corporate areas offers a qualitative edge in diversification, potentially reducing overall risk exposure.

NLY's competitive advantages are rooted in its diversified investment strategies and operational efficiencies. The company's shared capital model facilitates capital rotation based on relative value, optimizing returns while managing risk. This institutionalized platform, benefiting from scale and efficiency, allows NLY to operate at lower cost levels than many peer averages. The company's strategic relationships with industry leaders, including its joint venture with GIC Private Limited for residential credit assets and its partnership with Fifth Wall Ventures for real estate technology, provide access to quality originations and innovative platforms, further enhancing its competitive edge.

Outlook and Forward Trajectory

Annaly's management maintains a positive outlook, anticipating continued Federal Reserve rate cuts and sustained healthy fixed income demand. David Finkelstein expressed optimism for the Agency MBS sector, expecting the Fed's cutting cycle to make MBS more attractive for overseas investors and potential regulatory reform to spur bank demand. He also projects subdued interest rate volatility, which should reduce option costs for the MBS portfolio.

The Residential Credit business is poised to benefit from the growing private label market, with the Onslow Bay correspondent channel and OBX securitization platform positioned as clear market leaders. Management expects healthy MSR supply to continue, providing ample opportunities for opportunistic portfolio growth, supported by NLY's deep capital base, low leverage, and strategic partnerships.

NLY's financial guidance reflects this positive trajectory. The company expects to earn EAD consistent with Q3 2025 levels ($0.73 per share) for the current quarter, confidently covering its $0.70 quarterly dividend. The Zacks Consensus Estimate projects fiscal 2025 EPS at $2.89 per share, with revenue anticipated to grow by 492.83% compared to the previous year, reaching $1.47 billion. This strong outlook is underpinned by improved financing costs and economic leverage, setting the stage for increased earnings available for distribution and robust margins.

Risks and Challenges

Despite a compelling outlook, Annaly faces inherent risks common to the mortgage REIT sector. Interest rate sensitivity remains a primary concern, as significant fluctuations can impact asset values, borrowing costs, and net interest margins. While NLY employs sophisticated hedging strategies, including interest rate swaps and futures contracts, these do not eliminate all risk. The company's dependence on borrowed funds, while amplifying returns, also increases the risk of substantial losses, margin calls, or forced asset sales under adverse conditions.

Credit risk, particularly in the non-Agency portfolio (residential mortgage loans, CRT securities, and other non-Agency MBS), is another key consideration. Although NLY maintains a high-quality credit portfolio and disciplined underwriting standards, a significant downturn in the housing market or rising borrower delinquencies could adversely affect MSR values and overall portfolio performance. Operational risks, including human error, systems issues, and cybersecurity threats, also pose challenges, especially given the reliance on third-party service providers. Furthermore, intense competition in the mortgage finance market can lead to increased asset prices, potentially limiting NLY's ability to generate desired returns. Regulatory and compliance risks, particularly maintaining REIT status and Investment Company Act exemption, are ongoing considerations.

Conclusion

Annaly Capital Management's strategic diversification across Agency MBS, Residential Credit, and Mortgage Servicing Rights has proven to be a resilient and effective model, consistently delivering strong economic returns and robust dividend coverage. The company's proactive approach to capital management, coupled with its technological advancements in loan origination and servicing, provides a distinct competitive edge in a dynamic market. As the U.S. economy continues to evolve with anticipated Fed rate cuts and shifting market dynamics, NLY's disciplined risk management, ample liquidity, and commitment to operational efficiency position it favorably for sustained performance. The company's ability to leverage its diversified platform and technological capabilities to generate proprietary assets and manage risk effectively underpins a compelling investment thesis for discerning investors seeking stable income and long-term value in the mortgage finance sector.