Business Context and Reporting Period
Company: Annaly Capital Management, Inc. (NLY)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter ended March 31, 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, and mortgage servicing rights (MSR). The company operates three primary segments: Agency, Residential Credit, and MSR.
Key Financial Metrics
| Metric | Q1 2026 | Q1 2025 |
|---|---|---|
| Net Interest Income | $452.7 million | $220.0 million |
| Net Servicing Income | $142.6 million | $126.3 million |
| Net Gains (Losses) on Derivatives | $409.1 million | ($977.9 million) |
| Net Gains (Losses) on Investments | ($672.1 million) | $810.8 million |
| Net Income (GAAP) | $290.5 million | $130.3 million |
| Net Income Available to Common Stockholders | $242.0 million | $87.1 million |
| Diluted EPS | $0.33 | $0.15 |
| Total Assets | $138.5 billion | $105.1 billion |
| Total Equity | $16.3 billion | $13.1 billion |
| GAAP Leverage Ratio | 7.3:1 | 6.8:1 |
| Economic Leverage Ratio (Non-GAAP) | 5.7:1 | 5.7:1 |
Material Changes vs. Prior Period
- Profitability Surge: Net income attributable to Annaly increased 128% year-over-year to $282.7 million, driven primarily by a $1.38 billion swing in net gains on derivatives (from a loss of $977.9 million in Q1 2025 to a gain of $409.1 million in Q1 2026) and a doubling of net interest income.
- Portfolio Expansion: Total assets grew by $29.9 billion (28%) to $138.5 billion. This was fueled by a $2.2 billion increase in residential mortgage loans and a $2.1 billion increase in securitized residential whole loans.
- Capital Raising: The company issued 22.3 million shares of common stock under its at-the-market sales program, raising $508.5 million in net proceeds.
- Derivative Performance: The significant improvement in derivative gains was attributed to favorable changes in unrealized gains on interest rate swaps and futures, partially offset by unfavorable changes in TBA derivatives.
- Investment Losses: Net gains on investments turned negative ($672.1 million loss) compared to a positive $810.8 million in the prior year, primarily due to unfavorable unrealized changes in Agency MBS and residential whole loans.
Outlook, Risks, and Management Commentary
- Market Environment: Q1 2026 was characterized by geopolitical uncertainty (conflict in the Middle East) causing energy price shocks and a sell-off in Treasury yields. Agency MBS spreads tightened early in the quarter following a GSE purchase announcement but widened later due to volatility.
- Capital Allocation: Management shifted capital away from Agency MBS toward Residential Credit and MSR businesses, which offered more attractive risk-adjusted returns. Residential Credit allocation rose to 23% of firm capital, and MSR allocation grew to 21%.
- Dividends: The company declared a common stock dividend of $0.70 per share. Earnings Available for Distribution (EAD) per share was $0.76, covering the dividend.
- 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.
- Liquidity Risk: The company maintains a conservative liquidity posture with $7.4 billion in unencumbered assets and diverse funding sources.
- Credit Risk: Exposure exists in non-Agency MBS, CRT securities, and residential mortgage loans, though credit standards remain rigorous (weighted average FICO of 762 for locked pipeline).
- Subsequent Events: In April 2026, the company closed four additional residential mortgage loan securitizations totaling $1.8 billion.
Investor Verification Checklist
- Derivative Volatility: Verify the sustainability of the $409 million derivative gain, noting the significant year-over-year swing and reliance on interest rate swap valuations.
- Unrealized Losses: Review the $672 million unrealized loss on investments and the specific impact of Agency MBS valuation changes on book value.
- Leverage Metrics: Confirm the distinction between GAAP leverage (7.3:1) and Economic leverage (5.7:1) to understand true recourse debt exposure.
- Dividend Coverage: Monitor the EAD per share ($0.76) relative to the declared dividend ($0.70) to assess payout sustainability.
- Securitization Activity: Track the growth of the Onslow Bay securitization platform and the associated non-recourse debt levels.