Annaly (NLY) Q4 2025: Portfolio Grows 30% as Non-Agency and MSR Capital Allocation Rises

2026-01-29 | By EarningsIQ Research

Annaly’s Q4 2025 showcased a 30% year-over-year portfolio expansion, driven by disciplined capital raises and a deliberate shift toward non-agency and mortgage servicing rights (MSR) strategies. Management’s focus on diversified housing finance, conservative leverage, and opportunistic capital allocation positions the firm for resilience, but tight agency spreads and evolving policy risks warrant close monitoring as 2026 unfolds.

Summary

• Capital Deployment Shift: Annaly is reallocating toward non-agency and MSR, seeking higher returns as agency MBS valuations tighten.
• Funding and Liquidity Strength: Balance sheet flexibility and low leverage support continued portfolio growth and dividend coverage.
• Policy and Spread Risk: Tight agency spreads and regulatory shifts remain top watchpoints for risk and capital allocation.

Performance Analysis

Annaly delivered an 8.6% economic return in Q4 2025, with all three business lines—agency, residential credit, and MSR—contributing solidly to results. Economic leverage remained conservative at 5.6x, underscoring the firm’s risk discipline during a period of robust portfolio growth. Dividend coverage remains intact, as earnings available for distribution (EAD) again exceeded the quarterly payout, driven by higher investment balances and improved repo funding costs.

Agency MBS, representing 62% of capital, benefited from declining volatility and supportive supply-demand technicals, while non-agency residential credit and MSR each comprised 19% of capital. Residential credit saw record origination and securitization activity, with Onslow Bay channel funding and locking volumes up 30-40% year-over-year. MSR growth was buoyed by Annaly’s position as the second-largest buyer of conventional MSR, onboarding $59 billion in UPB and maintaining strong credit metrics.

• Portfolio Expansion: Annaly’s portfolio increased by nearly $6 billion in Q4, with annual growth of $22 billion in agency and double-digit expansion in all segments.
• Cost and Margin Discipline: Repo rates declined 34 basis points to 4.02%, and net interest margin improved 13 basis points for the year, reflecting funding optimization.
• Liquidity Buffer: $7.8 billion in unencumbered assets and a 58% asset-to-capital ratio provide ample flexibility for future allocation shifts.

Efficiency gains and capital raises ($2.9 billion in 2025) enabled Annaly to scale its diversified housing finance platform while maintaining a measured risk profile and out-earning its dividend. However, the pace of future capital deployment may moderate as agency spreads tighten and relative value shifts toward credit and MSR.

Executive Commentary

Strategic Positioning

1. Diversification Across Housing Finance

Annaly’s business model blends agency MBS, non-agency residential credit, and MSR, enabling capital rotation as market conditions evolve. In Q4, agency remained the anchor at 62% of capital, but management signaled a growing preference for allocating incremental capital to non-agency and MSR, citing relative value and risk-return considerations. This optionality is a core advantage over monoline peers, providing resilience across rate environments.

2. Opportunistic Capital Raising and Deployment

Annaly raised $2.9 billion in equity during 2025, including $560 million in Q4 through the ATM program and preferred stock issuance. These proceeds funded outsized portfolio growth, particularly in residential credit and MSR. Management emphasizes a patient and opportunistic approach, with future capital deployment expected to favor credit and MSR as agency MBS valuations tighten and spread volatility declines.

3. Funding and Risk Management Discipline

Repo funding costs declined and duration management was conservative, with hedging focused on new asset purchases via treasury futures and swaps. Economic leverage remains at the low end of historical ranges, and liquidity is robust, with $9.4 billion in assets available for financing. Annaly’s scale enables efficient funding and operational leverage, supporting both growth and risk mitigation.

4. Policy and Market Dynamics as Catalysts

Management flagged housing policy uncertainty and GSE activity as key market drivers, particularly regarding the potential for guarantee fee reductions and the evolving role of GSEs as market stabilizers. While agency spreads are tight, management believes technicals remain supportive, but is prepared to adjust capital allocation as policy and spread conditions change.

Key Considerations

Annaly’s Q4 2025 performance underscores its ability to scale and shift capital across a diversified housing finance platform, but the external environment—marked by tight agency spreads and policy uncertainty—requires active management and vigilance.

Key Considerations:

• Capital Allocation Flexibility: Management is actively tilting toward non-agency and MSR, targeting a longer-term mix of 50% agency, 30% resi credit, and 20% MSR.
• Dividend Durability: Out-earning the dividend in Q4, with management expressing high confidence in continued coverage as portfolio returns remain in the mid-teens.
• Policy Watchpoints: GSE activity, guarantee fee changes, and broader regulatory interventions could quickly alter spread dynamics and capital allocation priorities.
• Operational Scale: Efficiency ratios improved to 1.31% for the quarter, reflecting benefits of scale and disciplined cost management.

Risks

Tight agency MBS spreads and elevated asset valuations heighten the risk of lower forward returns, especially if volatility or policy shifts disrupt current technicals. Macro risks include global debt overhang and asset market euphoria, while housing policy uncertainty and GSE actions could impact prepayment speeds and market stability. Annaly’s diversified model provides some mitigation, but investors should remain alert to sudden changes in spread and funding environments.

Forward Outlook

For Q1 2026, Annaly guided to:

• Continued out-earning of the dividend, supported by mid-teens portfolio returns.
• Incremental capital allocation favoring non-agency credit and MSR over agency MBS.

For full-year 2026, management maintained a constructive outlook:

• Expectations for robust origination and securitization volumes, particularly in non-agency and MSR.

Management highlighted several factors that could shape the year:

• Ongoing monitoring of GSE policy and spread technicals.
• Willingness to be both patient and opportunistic in capital deployment as market conditions evolve.

Takeaways

Annaly’s Q4 2025 results reflect a strategic pivot toward higher-return opportunities in non-agency and MSR, while maintaining a conservative risk posture and ample liquidity.

• Performance Outpaced Peers: Annaly’s economic return and portfolio growth were supported by disciplined capital raises and sector rotation, reinforcing its leadership in diversified housing finance.
• Strategic Capital Allocation: Management is now prioritizing credit and MSR, signaling a shift in response to tight agency MBS spreads and evolving relative value.
• Watch for Policy Shifts: Investors should monitor GSE actions, housing policy, and spread volatility, as these will influence future capital allocation and risk-return dynamics.

Conclusion

Annaly enters 2026 with a larger, more diversified portfolio, robust liquidity, and a clear intent to deploy capital where risk-adjusted returns are most attractive. The firm’s ability to dynamically allocate capital across agency, credit, and MSR—while maintaining dividend coverage—positions it well for shifting market and policy backdrops, though vigilance on spread risk and policy change remains essential.

Industry Read-Through

Annaly’s results reinforce the growing importance of diversified housing finance models in navigating tight agency spreads and policy-driven volatility. The firm’s pivot toward non-agency credit and MSR highlights a broader industry trend, with liquidity and scale becoming key differentiators. REITs and housing finance peers should note Annaly’s emphasis on capital flexibility, disciplined leverage, and readiness to rotate exposure as market and regulatory conditions evolve. Policy risk and spread compression will remain sector-wide themes as the GSEs and regulators continue to shape the mortgage landscape in 2026.

NLY Financials Mortgage REIT Housing Finance Capital Allocation MSR Non-Agency Dividend