Business Context and Reporting Period
Company: Annaly Capital Management, Inc. (NLY)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and six months ended June 30, 2026
Business Overview: Annaly is a leading diversified capital manager and Real Estate Investment Trust (REIT) investing in residential mortgage finance. Its portfolio includes Agency mortgage-backed securities (MBS), non-Agency residential credit, residential mortgage loans, and mortgage servicing rights (MSR). The company operates three primary segments: Agency, Residential Credit, and MSR.
Key Financial Metrics
| Metric (in thousands, except per share) | Three Months Ended June 30, 2026 |
Six Months Ended June 30, 2026 |
Three Months Ended June 30, 2025 |
Six Months Ended June 30, 2025 |
|---|---|---|---|---|
| Net Interest Income | $488,193 | $940,884 | $273,200 | $493,171 |
| Net Servicing Income | $157,224 | $299,777 | $127,099 | $253,421 |
| Net Gains (Losses) on Derivatives | $552,426 | $961,538 | ($388,785) | ($1,366,652) |
| Net Gains (Losses) on Investments | ($318,503) | ($990,622) | $83,503 | $894,315 |
| Net Income (Loss) | $827,773 | $1,118,288 | $60,371 | $190,676 |
| Net Income Attributable to Common Stockholders | $781,637 | $1,023,637 | $19,839 | $106,906 |
| Diluted EPS (Common) | $1.06 | $1.40 | $0.03 | $0.18 |
| Total Assets (Period End) | $143,741,176 | $143,741,176 | $112,141,892 | $112,141,892 |
| Total Equity (Period End) | $16,978,376 | $16,978,376 | $13,474,363 | $13,474,363 |
| GAAP Leverage Ratio | 7.4:1 | 7.4:1 | 7.1:1 | 7.1:1 |
| Economic Leverage Ratio | 5.6:1 | 5.6:1 | 5.8:1 | 5.8:1 |
Material Changes vs. Prior Period
- Profitability Surge: Net income attributable to common stockholders increased significantly to $781.6 million for the quarter (from $19.8 million in Q2 2025) and $1.02 billion for the six months (from $106.9 million in 2025). This was driven primarily by favorable changes in net gains on derivatives and higher net interest income.
- Derivative Performance: Net gains on derivatives swung from a loss of $388.8 million in Q2 2025 to a gain of $552.4 million in Q2 2026. This improvement is attributed to favorable unrealized gains on interest rate swaps and futures, offsetting lower net interest components on swaps due to declining SOFR rates.
- Investment Portfolio Growth: Total assets grew to $143.7 billion from $135.6 billion at year-end 2025. The Agency MBS portfolio grew by $2.8 billion during the quarter, while the Residential Credit portfolio remained relatively stable at $10.4 billion.
- Net Interest Income Expansion: Net interest income rose to $488.2 million for the quarter (from $273.2 million in Q2 2025) due to higher average balances in Agency securities and residential mortgage loans, despite higher interest expense from increased debt balances.
- Unrealized Losses on Investments: Net gains (losses) on investments and other turned negative at ($318.5) million for the quarter, compared to a gain of $83.5 million in the prior year, primarily due to unfavorable changes in the fair value of Agency MBS and securitized residential whole loans.
Guidance, Outlook, and Risks
- Market Environment: The second quarter of 2026 was characterized by robust U.S. economic growth but elevated inflation and rising interest rates. The Federal Reserve shifted market expectations from rate cuts to potential hikes, causing Treasury yields to rise across the curve.
- Portfolio Strategy: Management shifted portfolio exposure to higher coupons (reducing 4.5% holdings in favor of 5.5% and 6.0% coupons) and invested new capital in production coupons and Agency CMBS. Specified pool holdings declined as a share of the aggregate portfolio.
- Capital Management: The company raised approximately $447 million in common equity during the quarter via its at-the-market (ATM) sales program. Earnings Available for Distribution (EAD) were $0.79 per share, exceeding the quarterly common stock dividend of $0.75 per share for the ninth consecutive quarter.
- Risk Factors:
- Interest Rate Risk: Rising rates can negatively impact the value of fixed-rate assets and increase borrowing costs, though the company utilizes interest rate swaps to hedge exposure.
- Liquidity Risk: The company maintains a conservative liquidity posture with $8.0 billion in unencumbered assets. However, sudden declines in asset values could trigger margin calls.
- Credit Risk: Exposure exists in non-Agency MBS, residential mortgage loans, and CRT securities. Non-accrual loans represented approximately 1% of the total loan portfolio.
- Prepayment Risk: Changes in prepayment speeds (CPR) impact premium amortization and yield. Experienced CPR was 11.6% for the quarter, higher than the 8.7% in the prior year.
Investor Verification Checklist
- Derivative Valuation: Verify the magnitude of unrealized gains on interest rate swaps ($448.9 million for the quarter) and their sensitivity to interest rate movements.
- Premium Amortization Adjustment (PAA): Review the impact of the PAA on net interest income, which was a cost of $7.1 million for the quarter, reflecting changes in prepayment speed estimates.
- Liquidity Position: Confirm the level of unencumbered assets ($8.0 billion) and the weighted average maturity of repurchase agreements (33 days) to assess short-term funding stability.
- Non-GAAP Measures: Reconcile GAAP Net Income to Earnings Available for Distribution (EAD) to understand the core operating performance excluding volatile fair value changes.
- Securitization Activity: Monitor the volume of new securitizations (13 closed in Q2 totaling $6.8 billion UPB) and the associated cost of funds (5.65% average for the quarter).