Annaly Capital's Q3 2025 Earnings Call: Contradictions Emerge on Dividend Strategy, MBS Outlook, and Leverage Shifts

Business Commentary:

Portfolio Performance and Asset Allocation: - Annaly Capital Management achieved a 10.1% economic return for Q4 2023, outearning its dividend, and delivered a 6% economic return for the full year 2023 despite market volatility. - The firm rotated its portfolio in Q4, reducing exposure to Agency MBS (from 64% to 62% of dedicated equity) and increasing allocations to Residential Credit and MSR. - This reallocation was driven by disciplined portfolio management, favoring higher-yielding assets like specified pools in Agency MBS and growing the residential whole loan and Onslow Bay securitization strategy.

Residential Credit and MSR Business Growth: - The Residential Credit portfolio grew to $5.7 billion in market value, up 14% year-over-year, with strong whole loan acquisitions ($1.8 billion settled in Q4, $1.6 billion sourced directly). - The MSR portfolio increased by 18% ($400 million) in Q4, reaching $2.7 billion at year-end, a nearly 50% increase for 2023. - Growth in both businesses was supported by robust market activity and a constructive outlook, with the MSR market expecting to remain active in 2024, though sales may moderate from 2023's elevated levels.

Macro and Market Outlook: - The firm anticipates a soft landing scenario, expecting rate cuts to materialize around mid-2024, which historically has been a catalyst for fixed income inflows. - Agency MBS spreads are expected to remain tightly ranged in 2024, with the Fed likely continuing to reinvest paydowns and potentially adding to MBS holdings in the second half. - The outlook is constructive for housing if the labor market and consumer remain resilient, though housing activity remains subdued.

Contradiction Point 1

Dividend Sustainability and Economic Return

This is a substantial contradiction regarding a core financial policy. In 2023Q4, management expresses a cautious, contextual outlook on dividend sustainability without recommending an adjustment. In 2025Q2, the tone shifts to confident affirmation that the dividend is "earnable" and has been consistently outearned, which directly impacts investor expectations about capital returns and financial health.

Can you discuss the current dividend level and its sustainability in the present environment? - Crispin Love (Piper Sandler)

2023Q4: They expect EAD to be contextual with the dividend and do not recommend an adjustment to the dividend to the Board at this time. - David Finkelstein(CEO)

Can you discuss your comfort with the dividend and how it relates to the portfolio's economic returns? - Bose Thomas George (Keefe, Bruyette, & Woods, Inc.)

2025Q2: The dividend was raised deliberately earlier in the year and is confident it is earnable. The portfolio has outearned the dividend every quarter, and they expect to continue covering and potentially outearning it for the remainder of the year, all else equal. - David L. Finkelstein(CEO)

Contradiction Point 2

Outlook for Agency MBS Spreads

This is a substantial contradiction involving a key market forecast. In 2023Q2, the firm's guidance is that spreads will tighten "materially" from wide levels. By 2023Q4, the outlook has shifted to expect spreads to trade in a "tighter range" without a major rebound, directly contradicting the prior quarter's expectation for significant improvement. This changes the investment thesis for the core Agency MBS strategy.

Can you update your outlook for agency spreads given the significant tightening over the past several months? - Crispin Love (Piper Sandler)

2023Q4: They do not expect MBS spreads to get back to the highs seen in 2023. Overall, MBS spreads should trade in a tighter range in 2024. - V.S. Srinivasan(Head of Agency)

Are spreads more likely to widen or tighten during an interest rate rally? How sensitive are MBS spreads to bank deposit rates currently? - Eric Hagen (BTIG)

2023Q2: Spreads are expected to tighten, but not materially, from current wide levels. Fair value suggests ~15 bps tightening. - David Finkelstein(CEO)

Contradiction Point 3

Portfolio Leverage and Capital Allocation Strategy

This is a substantial contradiction concerning a major investment strategy. In 2023Q4, management states a conservative stance on leverage, being "not immediately minded" to change it. In 2025Q2, the strategy pivots to explicitly favoring raising "accretive capital" over increasing leverage, representing a material shift in risk tolerance and capital deployment priorities in an uncertain market.

What is the target leverage level going forward given your current asset mix? - Douglas Harter (UBS)

2023Q4: They are playing conservatively given potential market volatility. They are comfortable with the current level, are not immediately minded to increase or decrease it, and are able to earn a good return with it. - David Finkelstein(CEO)

How do you balance continued investment in an attractive market via leverage or new capital? - Douglas Michael Harter (UBS Investment Bank)

2025Q2: In an uncertain environment, they found it more advantageous to raise accretive capital and deploy it rather than increase leverage. The current returns are handsome even at low leverage... They may raise capital in the current quarter if an accretive opportunity materializes, but they don't need to increase leverage. - David L. Finkelstein(CEO)

Contradiction Point 4

Agency Portfolio Positioning and Investment Preference

This is a substantial contradiction regarding core investment strategy. In 2025Q3, the firm clearly states it remains "overweight" in the Agency MBS sector and that increasing Residential Credit/MSR weightings is a goal. In 2023Q4, the guidance shifts to a more balanced approach, suggesting a rotation "further into both resi and MSR," indicating a fundamental change in the preferred capital allocation.

Where is the best place to allocate new capital? Will the company continue to favor credit in 2024? Are incremental ROEs still better in the agency channel compared to credit? - Bose George (KBW)

2023Q4: Agency has a better headline ROE, but considering volatility and overall capital allocation, it still makes sense on a risk-adjusted basis to continue to rotate further into both resi and MSR. - David Finkelstein(CEO)

How do current Agency returns compare to your preferred investment areas given tighter spreads? - Bose George (Keefe, Bruyette, & Woods, Inc.)

2025Q3: The firm remains overweight in Agency MBS, as the sector has healed fundamentally and technically... The goal is to increase Residential Credit and MSR weightings back to a combined 40% of the portfolio, but the current positioning benefits from the Agency overweight. - David Finkelstein(CEO)

Contradiction Point 5

Outlook and Exposure to Commercial Real Estate (CRE)

This is a substantial contradiction involving a significant market risk factor. In 2023Q4, management confidently asserts they have no CRE exposure and views related banking issues as "isolated and not systemic." By 2025Q3, while not directly mentioning CRE, the firm's emphasis on a high hedge ratio and active monitoring of systemic risks represents a broader, more defensive posture that contrasts sharply with the prior dismissal of systemic risk, suggesting an evolved or reconsidered risk framework.

How do you assess the CRE market and whether you see incremental risks this year from banks or others with unrecognized CRE losses, and how might that impact markets overall? - Trevor Cranston (JMP Securities)

2023Q4: They sold their commercial platform over two years ago and are glad not to be in that sector... They see the CRE banking issues as isolated and not systemic. They don't have exposure and think the event will be contained... - David Finkelstein(CEO)

Is EAD expected to remain consistent with Q3 levels, and have you updated your dividend coverage outlook considering the current macroeconomic rate outlook? - Kenneth Lee (RBC Capital Markets)

2025Q3: The firm has a 92% hedge ratio, which provides strong protection to the income stream... The firm will monitor the situation into 2026. - David Finkelstein(CEO)