Annaly Capital Management (NLY) Q3 2026 earnings review
Annaly still covers its dividend, but book value falls 11%
Annaly earned more than it paid out, but the bond selloff cut deeply into what the company is worth. Earnings available for distribution, the cash-style profit it uses to judge the dividend, reached $0.80 a share against a $0.75 payout. Higher interest rates and wider mortgage-bond spreads pushed book value, its assets minus its debts per share, down 11% in three months.
| Earnings available for distribution per share | $0.80 $0.75 dividend; $0.73 a year ago |
|---|---|
| Book value per share | $17.86 −11% from last quarter |
| Economic return for the quarter | −7.6% +5.5% last quarter |
| Quarterly dividend | Unchanged $0.75 per share |
⚖️ Verdict: 🔴 Bearish
The story got worse because the risk Annaly itself ranked highest, wider mortgage-bond spreads, arrived and cost more than its own stress test allowed for. That test pointed to a loss near 9% of book value; the quarter cost 11%. The good news: the dividend stayed covered, and the loan and servicing businesses set records.
The question now is whether this loss was a one-off mark or the start of earnings failing to offset a falling book value. Wider spreads make new investments earn more, which would repair book value over time; higher borrowing costs could instead squeeze earnings below the dividend. Next quarter's book value and cost of funds will tell.
🐂 Bull Case
Earnings Cover the Dividend for a Tenth Quarter
Annaly judges its dividend against earnings available for distribution, a cash-style profit figure that strips out swings in the market prices of its bonds and hedges. Chief executive David Finkelstein said the quarter's figure came in "once again exceeding the common stock dividend". The standing worry is that the margin over the payout is a few cents and could vanish if rates keep rising.
The figure rose to $0.80 a share from $0.79, the fourth increase in a row. Coupon income on a bigger portfolio did the work, because it outran the rise in borrowing costs. Interest income grew 29% from a year ago, but profit per share gained only 10%, since Annaly sold new shares to pay for the assets.
The margin over the dividend is five cents, so the question returns every quarter. One caution: Annaly excludes securitization costs from the figure as non-recurring, although they occur every quarter, and by our math they are worth about a cent and a half a share.
What to watch: next quarter's earnings available for distribution against the $0.75 dividend. A figure at or below the payout would end the run and put the dividend in question.
Onslow Bay Set Records for Loans and Securitizations
Onslow Bay is the Annaly arm that buys home loans from lenders and packages them into bonds, keeping a slice for its own portfolio. The unit set records on both ends of that pipeline this quarter, the company said, and it stayed the largest non-bank issuer of jumbo and expanded-credit mortgage bonds.
- Loan fundings: $5.8 billion, up 45% from a year ago
- Loan locks (loans agreed but not yet bought): $7.0 billion, up 13%
- Securitizations: 12 deals for $7.4 billion, a "seventh consecutive quarter of record quarterly securitization issuance"
- Residential credit share of capital: 23%, from 22% last quarter
Lock growth slowed to 13% from 27% last quarter, so the fundings record partly reflects loans agreed earlier. That matters because fundings follow locks, and next quarter's purchases depend on a pipeline that is now growing more slowly than the loans coming out of it.
What to watch: lock volume in the fourth quarter. A figure below this quarter's $7.0 billion would mean the fundings record came from the old pipeline rather than new demand.
MSR Buying Hit a Record Pace
Mortgage servicing rights, or MSR, are the fees a servicer earns for collecting payments on home loans. Annaly holds them as a counterweight to its bonds, "providing a hedge to mortgage basis volatility", because their value rises when rates go up and homeowners stop refinancing. The portfolio grew to $4.3 billion, up 6% from last quarter.
- Flow purchases committed: $50 million at market value, a record quarter
- Conventional MSR bought this year: $43.9 billion of loan balances, the most of any buyer
- Valuation multiple: 6.15x, up from 5.97x
- Loans 60 or more days late: 0.6%; prepayment speed 4.8%
The counterweight worked as designed: the servicing book's value rose 3% on higher rates while the bond book lost. But at 22% of capital it is too small to offset the losses on the rest of the balance sheet.
What to watch: flow-channel volume and the valuation multiple next quarter. A multiple holding above 6x with delinquencies steady would mean the servicing book keeps cushioning bond losses.
🐻 Bear Case
Rates Cut Book Value 11% in One Quarter
Book value is Annaly's assets minus its debts, per share, and for a mortgage investor it is the scorecard. "Our cycle-low leverage and minimal duration exposure provided us with the flexibility to actively manage our portfolio while continuing to make attractive investments across our three strategies," chief executive David Finkelstein said. The quarter tested that claim.
Treasury yields moved sharply higher and mortgage-bond spreads widened by 15 to 25 basis points, the company said. Its hedges offset part of the damage but not most of it, and leverage went up rather than down.
- Book value per share: $17.86, down 11% in three months
- Economic return for the quarter: minus 7.6%, after plus 5.5% last quarter
- Losses on investments: $4.7 billion, against hedge gains of $3.1 billion
- Economic leverage: 5.9x, up from 5.6x
This cuts against the defensive framing because Annaly's own stress test, set in June, put the hit from the spread move that followed at under 9% of book value, and the quarter cost 11%. Higher leverage then made the same shock more expensive: the updated table shows a loss of 10.1%, up from 8.7%.
What to watch: book value and the spread-sensitivity table in the fourth-quarter report. A further decline with leverage still near 6x would mean Annaly is adding risk into the selloff rather than waiting it out.
Borrowing Costs Rose and the Lending Spread Narrowed
Annaly earns the gap between what its mortgage bonds and loans yield and what it pays to borrow against them, mostly through short-term repo loans. The standing concern is that a Federal Reserve raising rates lifts that borrowing cost faster than asset yields rise, and this quarter the gap narrowed.
- Economic cost of borrowing, including swaps: 4.03%, up 7 basis points
- Net interest spread excluding the accounting adjustment: 1.42%, down from 1.50%
- Net benefit from swaps: $92 million, down from $192 million a year ago
- Average interest-earning assets: up 24% from a year ago
Earnings still rose because the portfolio grew by a quarter, so more assets at a thinner spread produced more income. But that growth came from selling new shares, so if the spread keeps narrowing, the mortgage investor needs ever more issuance just to hold earnings per share flat.
What to watch: the economic cost of borrowing next quarter. Another rise without a matching lift in asset yields would mean the spread, not the stress test, decides whether the dividend stays covered.
Risks this quarter didn't answer
Four standing concerns got no new numbers in the press release or the presentation, so this quarter neither eases nor deepens them, and each waits on a disclosure that has not yet arrived.
- Loan credit: the share of home loans 90 days late or in foreclosure is not in the release; the quarterly filing's loan note will show it. The securities table shows 3.49% of non-QM bonds 60 days late, with no prior figure to compare.
- Short-term funding: repo borrowings now mature in 30 days on average, down from 33, so the book rolls over faster; the filing's maturity table will show whether term funding grew.
- Policy: management points to "potential bank capital rule reform offering an additional catalyst" for mortgage-bond demand, without numbers; a rule change would move spreads either way.
- Equity raising: Annaly sold $757 million of new shares, up from $447 million last quarter; the fourth-quarter volume shows whether the programme keeps that pace after the book-value drop.
👓 Other Themes
Annaly Redeems $442.5 Million of Preferred Stock
Annaly redeemed all of its Series I preferred shares on October 1, the day after the quarter ended. Those shares carried a 6.75% fixed-to-floating coupon, and preferred dividends cost the group $41 million last quarter. At the original coupon the redemption saves about $7.5 million a quarter by our math, roughly a cent a share, and the common stock sold during the quarter more than covered the payout.
Slower Prepayments Added $45 Million to GAAP Income
Homeowners paid off loans more slowly, at 9.6% a year against 11.6% last quarter, so Annaly lowered its long-term prepayment forecast. Under its accounting that change reversed past premium write-downs and added $44.5 million to GAAP interest income. The cash-style earnings figure excludes it, so the dividend comparison is unaffected. The mortgage investor says "prepays are expected to slow further given elevated mortgage rates".
💲 Other KPIs
Spare liquidity fell to $4.2 billion from $5.5 billion at the end of June, the lowest in the five quarters shown. Total assets available for financing also dropped, to $8.5 billion. Against $85.5 billion of repo borrowings that mature in 30 days on average, the cushion is now under 5% by our math, down from nearly 8% a year ago.
Up 16% from a year ago and 3% from last quarter, after Annaly sold $757 million of new stock through its at-the-market programme. The count has risen every quarter for two years. That is why interest income up 29% became profit per share up only 10%, and shares outstanding ended the quarter at 785 million.
Overhead fell to 8.2% of earnings available for distribution from 9.3% last quarter. Compensation expense dropped to $41 million from $45 million while earnings grew, and total expenses equal 0.15% of average assets on an annualized basis. The ratio has improved in each of the last two quarters.
🔮 Guidance
Unchanged. The payout stays at $0.75 a share, 7% above a year ago after the increase made in the second quarter. Earnings available for distribution exceeded it by five cents, and the margin has stayed between three and six cents for five quarters. If that pattern holds, the next figure lands near $0.80 again, though the company gave no number.
Raised. The middle of the range moved up one point to 16%, because wider mortgage-bond spreads make new purchases earn more. Third raise in three vintages: +2.5 points, then +1. Annaly stresses these are returns on new money in today's market, not returns on its existing portfolio, which just lost value from the same spread move.
Raised. The midpoint rose one point to 14.5%, back to where it stood a year ago, as non-QM bond spreads ended the quarter about 10 basis points wider. The number describes what new loans and retained bonds would earn, so it supports the case for keeping the securitization machine running rather than the value of loans already held.
Raised. The midpoint rose 1.5 points to 13.5%, the largest move of the three, because higher rates lift servicing values and bulk supply from stretched lenders keeps coming. The range still sits below the 15%–17% the servicing business showed a year ago, so the raise is a recovery rather than new ground.
❓ Key Questions
What share of the loan book is seriously delinquent?
Loans 90 days late and foreclosures in process rose faster than the loan book in the first half. The release gives no update; the quarterly filing's loan note will, and it decides whether non-QM credit is seasoning badly.
Why exclude recurring securitization costs from distributable earnings?
Annaly ran 12 securitizations this quarter and treats their $10.7 million cost as non-recurring. Including it would trim about a cent and a half from the $0.80 figure and narrow the dividend cushion.
How much of the book-value loss has reversed since September?
Spreads widened most at the end of the quarter. Whether book value has recovered in October tells readers if the 11% drop was a timing mark or a lasting repricing of the portfolio.
What hedge mix does Annaly target as swaps roll off?
New hedges were mainly Treasury futures, and the net swap benefit has halved from a year ago. The mix sets how borrowing costs behave if rates rise further, and so whether the spread keeps narrowing.
At what borrowing cost does the dividend stop being covered?
The economic cost of funds rose to 4.03% and the cushion is five cents a share. A stated breakeven would let investors judge the payout without waiting for each quarter's number.