NLY Q3 Deep Dive: Agency and Credit Portfolio Expansion Drives Diversified Returns

Mortgage finance REIT Annaly Capital Management (NYSE:NLY) reported Q3 CY2025 results beating Wall Street’s revenue expectations, with sales up 637% year on year to $885.6 million. Its non-GAAP profit of $0.73 per share was in line with analysts’ consensus estimates.

Is now the time to buy NLY? Find out in our full research report (it’s free for active Edge members).

StockStory’s Take

Annaly Capital Management delivered third quarter results that met Wall Street’s non-GAAP profit expectations and exceeded revenue estimates, yet the market reaction was muted. Management attributed the solid quarter to lower interest rate volatility and effective capital deployment, particularly within its Agency mortgage-backed securities (MBS) portfolio. CEO David Finkelstein highlighted that the company’s diversified approach, including increased activity in Agency MBS, residential credit, and mortgage servicing rights (MSR), supported stable returns. Finkelstein emphasized, “We generated an economic return of 8.1% for the third quarter and 11.5% year-to-date, notably recording a positive economic return for 8 consecutive quarters.”

Looking ahead, Annaly’s guidance is driven by expectations of continued fixed income demand, further Federal Reserve rate cuts, and a stable housing finance environment. Management believes that tightened Agency spreads and healthy MSR supply will support portfolio growth, while the company’s capital flexibility should help navigate uncertain macroeconomic conditions. CFO Serena Wolfe stated, “We expect to earn earnings available for distribution consistent with where we were this past quarter…we feel good about out earning the dividend and overall, the portfolio is in a stable place.” The company is focusing on opportunistic asset purchases and maintaining high credit quality, especially as housing fundamentals remain mixed.

Key Insights from Management’s Remarks

Management views the third quarter’s performance as a result of strategic capital allocation toward Agency MBS, increased securitization in residential credit, and disciplined risk management, all while benefiting from declining interest rate volatility.

• Agency MBS portfolio expansion: Annaly significantly increased its Agency MBS holdings, deploying capital raised during the quarter to take advantage of tighter spreads and lower interest rate volatility. Management cited improved demand from fixed income funds and technical factors supporting the sector.
• Residential credit securitization growth: The company’s Onslow Bay platform executed record-setting securitization volumes, further solidifying Annaly’s leadership in nonbank residential credit issuance. Management emphasized increased market penetration for non-qualified mortgage (non-QM) loans and disciplined credit standards.
• MSR portfolio growth and strategy: Annaly expanded its MSR portfolio with bulk purchases and formed a new partnership with PennyMac Financial Services, focusing on low note rate MSRs to secure predictable cash flows and minimize negative convexity risk (the risk that prepayments increase as rates fall, hurting returns).
• Capital raising and balance sheet flexibility: The firm raised $1.1 billion in accretive equity, including reopening the mortgage REIT preferred market, and maintained low leverage and significant liquidity—enabling further opportunistic asset growth across its business lines.
• Operational efficiency gains: Annaly improved its operating efficiency ratios, with CFO Serena Wolfe noting sector-leading cost efficiency despite managing three distinct business lines, which supports stable earnings available for distribution (EAD) and ongoing dividend coverage.

Drivers of Future Performance

Management expects continued portfolio growth and earnings stability, driven by supportive fixed income demand, further Federal Reserve rate cuts, and a disciplined approach to asset allocation and risk.

• Agency MBS technicals and Fed policy: Management highlighted that tighter spreads are supported by declining volatility and a steeper yield curve. Expectations for additional Federal Reserve rate cuts and potential regulatory reforms could further improve demand for Agency MBS, although management remains cautious about taking on significant rate risk in the current environment.
• Residential credit platform leadership: The Onslow Bay correspondent channel and OBX securitization platform are positioned to benefit from a growing private label market and increased non-QM issuance. Management believes maintaining high credit quality and proprietary asset creation will be essential as the broader housing market remains mixed.
• MSR supply and cash flow stability: Annaly’s focus on acquiring low note rate MSRs is expected to provide durable, predictable cash flows. The company anticipates a healthy supply of MSRs and has capacity to grow this segment opportunistically, while recent technology investments by servicing partners are expected to lower costs.

Catalysts in Upcoming Quarters

In the coming quarters, our analyst team will monitor (1) Annaly’s pace of capital deployment in Agency MBS and whether spread tightening persists, (2) continued expansion and performance of the Onslow Bay residential credit platform, and (3) MSR acquisition activity and its impact on cash flow predictability. Additionally, we will track management’s ability to maintain operational efficiency as the company scales its diversified housing finance platform.

Annaly Capital Management currently trades at $20.92, down from $21.28 just before the earnings. At this price, is it a buy or sell? See for yourself in our full research report (it’s free for active Edge members).

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