Annaly Capital Management, Inc. Q4 FY2025 earnings call

Management Statement and Operational Highlights

• Macro Landscape: Fourth quarter had a solid U.S. economy despite government shutdown; fixed income markets strong with highest total return in U.S. aggregate bond index since 2020; yield curve steepened, swap spreads widened, and rate cuts expected.
• Portfolio Performance: Fourth quarter economic return 8.6%, full year 2025 economic return over 20%, total shareholder return 40%; raised $560 million common equity in Q4, total equity raised in 2025 $2.9 billion.
• Agency Strategy: Portfolio $93B, benefited from lower volatility, supply/demand; added 5% coupons, grew Agency CMBS portfolio.
• Residential Credit Strategy: Portfolio $8B, non-Agency residential credit range-bound; Onslow Bay franchise had record quarter, locked over $23B loans, closed 29 securitizations.
• MSR Strategy: Portfolio $3.8B, committed to purchase $22B principal balance MSR; second largest buyer of conventional MSR in 2025; MSR valuation multiple increased, fundamental performance strong.

Segment Performance

• Agency: Portfolio ended 2025 at $93 billion in market value, an increase of nearly $6 billion in the quarter and $22 billion over the year, representing 62% of the firm's capital.
• Residential Credit: 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.
• MSR: Portfolio ended the fourth quarter at $3.8 billion in market value including unsettled commitments, a nearly $280 million increase quarter-over-quarter and a 15% increase year-over-year, representing 19% of the firm's capital.

Guidance

• Expected mid-teen prospective returns in Agency due to lower hedging costs.
• Non-Agency market to continue growing, Onslow Bay positioned well.
• MSR portfolio to grow with best-in-class profile.
• Diversified housing model expected to perform, non-Agency strategies likely to get additional capital.

Risks

• Macro risks: Global fiscal picture, debt levels, asset market euphoria.
• Agency market risks: Valuation at tight end, housing policy uncertainty.

Question and Answer

Q: Could you give us an update on mark-to-market book values?

A: Sure, Bose. 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 1% higher than that.

Q: Could you 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 a comfort level with your dividend in 2026.

A: 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. And 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. And we haven't really tightened that much or rather -- sorry, widen that much since that announcement. So we feel like the swaps market is 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 will take that. And then 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 outearned in Q4. We expect outearned certainly in Q1, and we feel like the dividend is safe here.

Q: Obviously, on the MSR portfolio, the current portfolio is pretty well insulated from modestly lower interest rates. But could you expand on your comment about being opportunistic for coupon MSR and how you're expecting that market to trade as prepays increase?

A: Sure. I'll hand it off to Ken for that. Yes. 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 about the value change after you buy it, I think. 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. Yes. 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.

Q: 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?

A: 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 purchased 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 can find 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 purchased loans, we think that would make sense to help first-time homeowners and new buyers get into the housing market.

Q: You were just talking about the lower risk environment that we're in today. I guess as you look out, like 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?

A: Sure. From a macro standpoint, then I'll drill down a little bit on the mortgage market. But the 2 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 vol environment because of the amount of debt in the world. And I think it's probably under-recognized the 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 safety store of value. It's doubled since the beginning of last year and up 27%, 28% this year. 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 market, 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 market. So those are 2 things we're watching quite closely in terms of risks in the Agency market specifically.

Q: 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?

A: Yes, you're just saying as a hedge to our MSR and the runoff. Yes. 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 percent note rate loan really ascribes the value to that loan, and there's some 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.

Q: 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 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?

A: Yes. So as it relates to the caps, it's hard to say. Obviously, everybody probably saw that 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 2 of them. 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. Hedging, yes. The 1 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 have 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 swaps spreads right away. It will take time.