ANNALY CAPITAL MANAGEMENT INC

The U.S. economy remained resilient in the third quarter of 2025 (“Q3 2025”), with growth roughly on pace with the prior quarter (“Q2 2025”) ahead of a government shutdown that began October 1, 2025, which has delayed official economic data for September. Growth was supported by healthy consumer spending, particularly from high earners, and strong business investment related to artificial intelligence (“AI”), despite lingering uncertainty around tariffs and immigration. Inflation remained well above the Federal Reserve’s (the “Fed”) inflation target, though the anticipated uptick in goods inflation resulting from higher tariffs has been more muted than expected thus far. However, labor market conditions weakened, with hiring slowing to roughly 30,000 jobs per month for the period between June and August 2025. Although the unemployment rate has moved only slightly higher over the same period, the Fed cut interest rates at its Federal Open Market Committee (“FOMC”) meeting in September as the outlook highlights growing risks to the Fed’s employment mandate.

U.S. Treasury yields fell modestly in Q3 2025 and the yield curve steepened, as markets expected modestly lower policy rates going forward. In addition, concerns about the U.S. debt outlook eased following the passage of tax reform in Congress in early July 2025, robust tariff revenues – currently are running at approximately $30 billion per month – and a shift in Treasury issuance towards the front-end of the yield curve. The reduced concerns led to lower Treasury term premia and a widening in swap spreads, which benefited our portfolio given the current allocation of swaps in our hedge book. In addition, interest rate volatility declined to the lowest levels since the onset of the Fed’s hiking cycle in 2022, providing another benefit to our portfolio by lowering convexity costs and helping to tighten Agency MBS spreads.

In this environment, Annaly generated earnings available for distribution of $0.73 per share, thereby outearning our current dividend, which was raised in the first quarter of the year, for the fourth consecutive quarter – and delivered an economic return of 8.1% for Q3 2025 and 11.5% for 2025 year-to-date. Annaly’s economic leverage decreased slightly to 5.7x while cash and unencumbered Agency MBS totaled $5.9 billion, with total assets available for financing increasing to $8.8 billion during the quarter. Moreover, we remained opportunistic in the capital markets by raising approximately $1.1 billion of equity in the third quarter, including $823 million through our at-the-market sales program. We also issued Annaly’s first preferred stock issuance since 2019, and the first non-rated residential mortgage REIT preferred issuance since September 2022, raising $275 million in gross proceeds before deducting the underwriting discount and other estimated offering expenses. While all three of our businesses grew over the quarter, most of the new capital was deployed into MBS given lower realized interest rate and mortgage basis volatility and still historically attractive spreads relative to swap hedges.

Our Agency MBS portfolio ended the quarter at $87.3 billion in market value, up 10% quarter-over-quarter, as MBS performance was supported by the constructive macro backdrop. Early in the quarter, we added MBS in line with our accretive capital raise across the coupon stack and added roughly $1.1 billion in Agency CMBS. However, as higher coupons started to look more attractive, we favored specified pools in 5.5% and 6.0% coupons to further our methodical portfolio construction of recent quarters. As of September 30, 2025, nearly three-quarters of our 6.0% coupon specified pool holdings and 95% of our 6.5% coupon specified pool holdings have medium-to-high quality characteristics that provide call protection as rates rally.

Supply and demand technical factors continued to improve in the Agency MBS sector as fixed income flows were an estimated 50% higher than the same quarter a year ago. In addition, CMO creation has been running at over $30 billion per month, which has helped distribute MBS supply to a wider range of investors. Mortgage spreads tightened by 8 to 12 basis points (“bps”) relative to Treasury hedges over the course of the quarter, with lower and intermediate coupons showing the strongest performance. As mortgage rates declined to the lowest levels in nearly a year, investors increased their prepayment expectations on recently issued higher coupon mortgages, in turn shortening the duration of the securities and negatively impacting their return potential. This quickly shifted investor demand from production coupons to lower and intermediate coupons, with little recent production driving them to outperform.

Within our hedge portfolio, we added hedges alongside new asset purchases, with a bias toward swap hedges in the front end of the yield curve. The additional interest income from hedging with swaps provides adequate compensation for assuming the risk of swap spread tightening. Further out the curve our hedge allocation is more balanced between swap and Treasury-based hedges, though our hedge allocation increased modestly in Q3 2025.

Overall, we remain optimistic with respect to the Agency MBS sector. While spreads have tightened meaningfully in Q3 2025, it was achieved with minimal support from banks or overseas investors. The continuation of the Fed cutting cycle should make MBS more attractive for the overseas community and potential regulatory reform is anticipated to help spur bank demand. Interest rate volatility should remain subdued as the Fed continues their path towards a neutral policy setting, while a steeper curve is likely to reduce option costs for our MBS portfolio.

Our Residential Credit business saw its portfolio increase by $265 million to $6.9 billion in economic market value of assets during the quarter. Investment grade assets in the residential credit market tightened during the quarter with Non-QM “AAA”-rated securities roughly 15 bps tighter, providing a supportive backdrop for securitization issuance, which is running at the second largest gross issuance since 2008 at $160 billion year-to-date. Within this environment, we believe Onslow Bay’s securitization platform continues to be well positioned to benefit from the growth of the private label market, demonstrated by closing a record eight securitizations for $3.9 billion in unpaid principal balance (“UPB”) in Q3 2025, generating $479 million of high yielding, proprietary securities for Annaly and our joint venture. Onslow Bay has now priced 24 securitizations, including 3 after the end of the third quarter, representing $12.4 billion of UPB since the beginning of 2025, solidifying Annaly as the largest non-bank issuer in the residential credit market.

The strong securitization volumes came as the Onslow Bay correspondent channel also achieved record setting quarterly volumes across both loan locks and fundings, while remaining disciplined regarding our credit strategy. The correspondent channel locked $6.2 billion and funded $4.0 billion in whole loans in Q3 2025 with the quarter end locked pipeline representing a 765 weighted-average FICO score, a 68% weighted-average combined loan-to-value ratio and over 96% first lien exposure. In addition, Annaly redeemed OBX 2022-NQM8 during the quarter, exercising the transaction’s three-year call as we expect there to be significant embedded value in our late 2022 vintage and 2023 vintage Non-QM issuances given current securitization cost of funds and pricing in the Non-QM whole loan market.

The housing market continues to experience little to slightly negative home price appreciation on a year-over-year basis, as consistently elevated mortgage rates weigh on affordability. We expect continued pressure on housing into the winter seasonals as “available for sale” inventory has increased, although cumulative depreciation should be modest given the longer-term, positive housing market fundamentals. For now, we intend to remain disciplined by maintaining a high credit quality portfolio with a continued focus on manufacturing proprietary assets through our market leading correspondent channel. Approximately 75% of our residential credit exposure is comprised of OBX securities and residential whole loans, providing full control over both the acquisition and management of the assets.

In our mortgage servicing rights (“MSR”) business, we purchased roughly $17 billion in UPB across three bulk packages and our flow network during the quarter. In addition, we announced a new partnership with PennyMac Financial Services (“Pennymac”), adding another industry leading mortgage originator and servicer to our existing set of “best-in-class” subservicing and recapture partners. As part of this new relationship, we agreed to purchase $12 billion of low note rate MSR from Pennymac, whereby Pennymac will perform all subservicing and recapture responsibilities for the portfolio sold.

Meanwhile, we believe our MSR portfolio should remain insulated against a potential spike in refinancing activity, as the aggregate borrower is approximately 300 bps out of the money with a 3.27% note rate and the portfolio continues to exhibit highly predictable, durable cash flows, paying 4.6 CPR over the last three months ended September 30, 2025. The associated fundamentals remained positive as well, evidenced by the portfolio’s serious delinquencies being unchanged at 50 bps, escrow balances increasing 7% year-over-year, better-than-expected float income, and declining subservicing costs given increased technological investments across our servicing partners.

Looking ahead, we remain optimistic about our portfolio’s ability to deliver attractive risk-adjusted returns. We expect our investment strategies to be well-positioned for the balance of 2025 given declining macro-volatility, additional expected Fed interest rate cuts and healthy fixed income demand. While our outlook remains positive, we have carefully built our portfolio to guard against uncertainty and are flexible in the current investing climate with historically low leverage and significant liquidity. We believe Annaly’s diversified housing finance model has yielded proven results, having generated a 13% average annual economic return over the trailing three year period since scaling each business.

Economic return, earnings available for distribution and economic leverage are non-GAAP financial measures. Refer to "Non-GAAP Financial Measures" for additional information, including a reconciliation to their most directly comparable GAAP results.