Business Context and Reporting Period
Company: Annaly Capital Management, Inc. (NLY)
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended December 31, 2025
Business Overview: Annaly is a leading diversified capital manager and Real Estate Investment Trust (REIT) focused on residential mortgage finance. The company operates through three primary investment groups: the Annaly Agency Group (investing in Agency MBS), the Annaly Residential Credit Group (investing in non-Agency residential whole loans and securitized products), and the Annaly Mortgage Servicing Rights Group (investing in MSR). The company utilizes a shared capital model to allocate capital across these groups based on relative value and risk management parameters.
Key Financial Metrics
| Metric | 2025 | 2024 |
|---|---|---|
| Net Income (GAAP) | $2.05 billion | $1.01 billion |
| Net Income Attributable to Common Stockholders | $1.87 billion | $0.85 billion |
| Earnings Available for Distribution (EAD) | $2.02 billion | $1.56 billion |
| EAD Per Average Common Share | $2.92 | $2.70 |
| Total Assets | $135.6 billion | $103.6 billion |
| Investment Portfolio (Period-End) | $132.1 billion | $98.2 billion |
| Net Interest Income (GAAP) | $1.14 billion | $0.25 billion |
| Economic Net Interest Income (excl. PAA) | $1.94 billion | $1.49 billion |
| GAAP Leverage Ratio | 7.2:1 | 7.1:1 |
| Economic Leverage Ratio | 5.6:1 | 5.5:1 |
| Book Value Per Common Share | $20.21 | $19.15 |
Material Changes vs. Prior Period
- Profitability Surge: GAAP net income more than doubled to $2.05 billion in 2025 from $1.01 billion in 2024. This was driven by a significant improvement in net gains on investments (turning from a $1.8 billion loss in 2024 to a $1.7 billion gain in 2025) and higher net interest income.
- Portfolio Expansion: Total assets increased by approximately $32 billion (31%) to $135.6 billion. The Agency MBS portfolio grew by $22.3 billion year-over-year to $92.9 billion, while the Residential Credit portfolio grew by $1.0 billion.
- Capital Raising: The company raised $2.6 billion in common equity through its at-the-market sales program and issued $275 million of Series J Preferred Stock. No shares were repurchased under the authorized repurchase programs during the year.
- Securitization Activity: The Onslow Bay subsidiary priced 29 securitizations totaling $15.2 billion in 2025, a 38% increase in volume compared to 2024.
- Derivative Performance: Net gains on derivatives shifted from a $2.3 billion gain in 2024 to a $1.2 billion loss in 2025, primarily due to unfavorable changes in unrealized gains on interest rate swaps and futures contracts, partially offset by favorable TBA derivative performance.
Guidance, Outlook, and Risks
Management Commentary & Outlook: Management highlighted a 20.2% aggregate economic return for 2025, including a 5.5% book value gain. The company benefited from a rangebound trading environment in fixed income markets and a steepening yield curve. The Federal Reserve's rate cuts in the second half of 2025 contributed to declining interest rate volatility. Management expects the pace of MSR activity to continue in 2026 due to rising origination volumes and compressed gain-on-sale margins for originators.
Key Risks and Contingencies:
- Interest Rate & Prepayment Risk: The company is exposed to changes in interest rates which affect asset values and prepayment speeds. A decline in rates could accelerate prepayments, forcing reinvestment at lower yields and increasing premium amortization.
- Liquidity & Funding: The strategy relies heavily on leverage (repurchase agreements). Margin calls or disruptions in the repo market could force asset sales at depressed prices. The company maintains a weighted average days to maturity of 35 days on repurchase agreements.
- Regulatory & Tax: As a REIT, the company must distribute at least 90% of taxable income. Changes in tax laws (e.g., the "One Big Beautiful Bill Act" passed in 2025) or REIT qualification rules could impact operations. The company also faces regulatory uncertainty regarding Fannie Mae and Freddie Mac conservatorships.
- Credit Risk: While Agency MBS are guaranteed, the Residential Credit portfolio (non-Agency loans and CRT securities) is exposed to borrower defaults and credit spread widening.
- Cybersecurity: The company relies heavily on third-party service providers and information systems, creating exposure to cyberattacks and operational failures.
Investor Verification Checklist
- Verify EAD vs. GAAP: Confirm the reconciliation between GAAP net income and Earnings Available for Distribution (EAD), specifically the impact of the Premium Amortization Adjustment (PAA) and unrealized gains/losses on derivatives.
- Monitor Leverage Ratios: Track the Economic Leverage Ratio (currently 5.6:1) against the company's target of less than 10:1 and assess the impact of rising interest rates on borrowing costs.
- Review Prepayment Assumptions: Examine the weighted average experienced CPR (8.5% in 2025) versus projected long-term CPR (10.8%) to understand potential future amortization expenses.
- Assess Capital Allocation: Verify the shift in capital allocation percentages (Agency 62%, Residential Credit 19%, MSR 19%) and the performance of each segment.
- Check Dividend Sustainability: Confirm that the declared dividend of $2.80 per share is fully covered by EAD and assess the company's ability to maintain distributions if net interest margins compress.