ANNALY CAPITAL MANAGEMENT INC

The first quarter of 2025 (“Q1 2025”) saw the Trump Administration entering its second term, ready to make meaningful changes across several different policy areas including trade, immigration, fiscal policy, and regulation. While many initiatives, most notably easing of financial regulation, should be supportive of U.S. businesses and financial markets in the medium-term, rapid and concurrent reform announcements introduced uncertainty and financial market volatility in the short-term.

The market volatility was primarily driven by the rollout of several tariff measures in March and April. These announcements have led to decreased business and consumer confidence, risking lower activity data in quarters to come if businesses or consumers alter their behavior. Of note, Q1 2025 activity data remained relatively strong, with consumption and business activity expanding at roughly the same rate as in prior quarters. However, aggregate U.S. gross domestic product (“GDP”) declined modestly in the quarter as higher import volumes reduced economic activity in the GDP growth calculation. Additionally, inflation slowed marginally in the quarter, with personal consumption expenditures excluding food and energy (“core PCE”) running at 3.5% seasonally adjusted annualized rate (“SAAR”), slightly below the 3.7% SAAR recording in Q1 2024.

The Federal Reserve (“the Fed”) kept interest rates unchanged during the quarter, as officials weighed the conflicting signals from tariffs and other policy changes on economic growth and inflation. Fed officials are waiting for further evidence about an economic slowdown or higher inflation before making further adjustments to the Federal Funds Target Rate (“Fed Funds Target Rate”).

Our portfolio performed relatively well in Q1 2025, delivering a 3% economic return during the quarter. This was reflected in an increase to our common stock dividend to $0.70 per share, underscoring healthy earnings momentum, all while modestly increasing economic leverage to 5.7x at quarter end – still a leverage level at the low end of our historical range.

With respect to our portfolio activity, we grew our Agency MBS investments by $4.4 billion market value, with most of the increase coming from additional investments to deploy the approximately $495 million equity we raised during the quarter through the at-the-market stock sale program. Unlike much of 2024, when we concentrated MBS purchases on higher coupon specified pools, a majority of Q1 purchases were in to-be-announced (“TBA”) securities in intermediate coupons. These securities offered the highest relative value following the selloff in interest rates in Q4 2024 and January 2025, with dollar roll financing on TBA contracts improving significantly. As a result, our TBA balances grew to $6.6 billion market value at the end of Q1 2025, the largest holdings in two years.

Similar to prior quarters, we continued to prudently manage our hedge position, maintaining a conservative stance with regard to our interest rate exposure. Of note, increased optimism about changes to the bank regulatory landscape drove a widening in swap spreads – the difference between Treasury and same tenor interest rate swap yields – for much of the quarter. We used this opportunity to better balance our hedge allocation between Treasuries and swaps, in turn lowering our aggregate swap notional and increasing the exposure to Treasury future hedges. In addition, we entered into a $1 billion notional 10-year payer swaption in anticipation of higher interest rate volatility.

Our Residential Credit portfolio ended the quarter at $6.6 billion in market value, declining modestly as we opportunistically sold third-party securities early in the quarter given tight valuations and increased the pace of our securitizations. Annaly’s Onslow Bay (“OBX”) shelf closed six securitization transactions totaling $3.1 billion during the quarter, including our inaugural securitization of home equity line of credit loans (“HELOCs”) and a private placement to a major U.S. insurance company. In addition, we have priced two additional securitizations in April. Correspondent channel lock volumes remained strong, with aggregate quarterly fundings reaching $3.8 billion, just shy of the record pace of fundings seen in the fourth quarter of 2024.

Our mortgage servicing rights (“MSR”) strategy saw its portfolio relatively unchanged during the quarter as we purchased $48 million market value in assets, or $3 billion in unpaid principal balances (“UPB”) through our bulk and flow acquisition channels. We remained selective in our purchases, maintaining our preference for low note rate MSR, though supply stayed elevated as the mortgage originator community remains under pressure to monetize servicing given historically compressed gain on sale margins. After settling $28 billion in UPB of previously announced bulk MSR purchases, the weighted average note rate of our portfolio rose marginally to 3.23%, while our exposure to current coupon MSR remained relatively small.

As the mortgage origination and servicing industry consolidates – best seen in the merger announcement of Rocket Companies and Mr. Cooper Group Inc. at the end of the quarter – we have strategically aligned ourselves with industry leading sub-servicing and recapture partners that we believe provide our platform with clear competitive advantages. We believe that greater efficiency and technological investment in the mortgage industry has provided the potential for enhanced portfolio yield through increased recapture capabilities and an enhanced borrower experience.

Economic return and economic leverage are non-GAAP financial measures. Refer to “Non-GAAP Financial Measures” for additional information, including a reconciliation to its most directly comparable GAAP results.