Annaly Capital Management. Inc. 2026 Q3 Earnings Call

You may begin. Good morning, and welcome to the third quarter 2026 earnings call for Annaly Capital Management.

Please note that this call is being recorded. As a reminder, materials for today's call are available on our website at www.annaly.com. Today's call may include forward-looking statements, which are subject to certain risks and uncertainties that could cause actual results to differ materially and refer to certain non-GAAP measures. Please see the notices in our earnings release for important information regarding forward-looking statements and non-GAAP measures. Participants on this morning's call include David Finkelstein, Chief Executive Officer and Co-Chief Investment Officer, Serena Wolfe, Chief Financial Officer, Mike Fania, Co-Chief Investment Officer and Head of Residential Credit, V.S. Srinivasan, Head of Agency, and Ken Adler, Head of Mortgage Servicing Rights. And with that, I'll turn the call over to David.

Thank you, Sean. Good morning, everyone, and thanks for joining our Q3 earnings call. I'll begin with an overview of the macro environment and our performance during the quarter, then discuss each of our three investment businesses, finishing with our outlook. Serena will then provide a more detailed review of our financials, after which we'll open the call up to Q&A. Now, starting with the macro landscape, the U.S. economy remains resilient, supported by heavy AI investment and healthy consumption. The labor market is stable while inflation remains above the Fed's target, driven in part by higher energy prices. The bond market faced a challenging third quarter, with the 10-year Treasury yield rising 82 basis points to multi-decade highs. The sell-off accelerated following the Fed's first rate hike since 2023, and markets are now pricing nearly three additional 25 basis point hikes through the end of next year.

Higher rates also reflected concerns around government debt, heavy corporate issuance, and a repricing of the Fed's neutral rate. Mortgage rates have accordingly reached 7.5%, a level during this cycle seen only briefly in the fall of 2023, and thus, housing activity is likely to stay subdued as affordability challenges persist and the existing borrower lock-in effect continues to constrain turnover. Weaker demand could soften home prices, though supply and demand remain broadly balanced, notwithstanding regional disparities and underlying borrower credit remains fundamentally sound. As upward pressure on rates intensified during the month of September, rate volatility rose significantly, with implied volatility measures reaching their highest levels since the administration's initial tariff announcement a year and a half ago. This drove MBS spreads wider and led to meaningful underperformance in Agency MBS.

Against this backdrop, our portfolio delivered a negative 7.6% economic return for the quarter. Earnings remained durable, however, with EAD of $0.80 per share, again exceeding our dividend. While economic leverage ended Q3 up modestly at 5.9 turns. In capital markets, we announced the redemption of our $443 million series I floating rate preferred stock during the third quarter, and the redemption helps us maintain a very conservative capital structure, and we view balance sheet leverage as more attractive, particularly as repo financing remains readily available and terms for residential credit and MSR warehouse lines continue to improve. Relatedly, we issued $757 million in common equity on the quarter through our ATM program, with proceeds used both to fund the preferred redemption as well as to invest across our portfolios.

Now turning to our investment strategies and beginning with agency, the sharp sell-off in rates led to meaningful extension across the MBS universe, particularly in the more negatively convex portions of the market. This created duration mismatches and contributed to selling pressure from some more highly levered investors late in the quarter, which exacerbated the volatility-driven MBS spread widening. While we are certainly not immune to mortgage underperformance, we were positioned for rate and spread volatility with conservative duration exposure and historically low leverage heading into the quarter. Our agency portfolio decreased modestly to $92 billion in market value, representing 55% of the firm's capital, though we added approximately $2 billion notional in MBS on the quarter. Activity focused on deploying a portion of our common equity raised into higher coupon specified pools, primarily five and a halfs and sixes.

This past quarter also demonstrated the value of our allocation of high-quality specified pools. On average, our pools are more than 3 and a half years seasoned and carry loan balances less than half those of new production, providing both call and extension protection. As mortgage rates increase, paydowns declined on call-protected pools as expected, but increased on extension-protected pools. Given the distribution and quality of our collateral, the average pay-up on our portfolio increased modestly over the quarter. Now, early in the fourth quarter, we monetized some of this outperformance, rotating over $2 billion in primarily seasoned pools into higher coupon TBAs, which stand to benefit more from a decline in volatility, something we have begun to see since the end of the third quarter.

On the liability side, as rates moved higher, we responded by adding to our hedge position, primarily in treasury futures, to keep our overall interest rate exposure contained. We entered the fourth quarter with slightly more rate exposure, however, as current higher yields offer attractive value. We're also comfortable carrying somewhat more duration as the rise in rates materially reduce negative convexity in both our portfolio and the broader MBS universe. As a result, asset durations should be less sensitive to further rate moves in the current environment, reducing the need for hedge rebalancing. Moving to residential credit, our portfolio ended the third quarter roughly flat quarter-over-quarter at $10.4 billion in market value, representing 23% of the firm's capital.

Residential spreads traded in a tight range for the majority of Q3, with triple A non-QM spreads ending the quarter approximately 10 basis points wider, largely in sympathy with other securitized products. Our Onslow Bay correspondent channel delivered another strong quarter, with 7 billion of lock volume and 5.8 billion of fundings, our highest quarterly funding volume since the channel's inception more than 5 years ago. Importantly, growth has not come at the expense of credit discipline with our current locked pipeline carrying an average FICO of 766 and an average LTV of 67%. Now, with respect to securitization, we settled 7.4 billion of transactions in Q3 while pricing an additional 2.2 billion in October. Annaly remains the market's largest expanded credit sponsor, and we have now priced more than 21 billion securitizations in 2026 across 37 deals.

While the new issue market has experienced marginal widening post quarter end, we are encouraged by the resiliency of the private label market and expect 2026 to be a post GFC record in transaction volume. Now to discuss MSR. Our portfolio increased to $4.3 billion market value, with our allocation of the sector representing 22% of the firm's capital. We took a measured approach to purchases during the quarter, settling one bulk package for roughly $140 million in market value, while our flow channel experienced just over $50 million in volume, a new quarterly high as we continue to gain market share in the co-issue sector. Bulk supply in the market increased quarter-over-quarter, and we expect it to stay robust throughout the balance of the year given current mortgage industry dynamics as we have spoken about extensively over the past year.

This environment should provide ample opportunity to responsibly grow our portfolio. Year to date, we remain the largest purchaser of bulk MSR, reflecting the value we bring to the origination community as a strategic partner with a deep permanent capital base. MSR valuations modestly increased, with our multiple ending the quarter at 6.15 times, largely driven by higher interest rates and wider current coupon MBS spreads. Our prepayment speeds remained very low this past quarter, decreasing to 4.8 CPR, reflecting our portfolio's low average note rate, seasonal factors, and higher mortgage rates. Credit performance remains strong, with serious delinquencies below 60 basis points. Along with healthy income from our escrow deposits, these factors support a predictable cash flow profile that continues to be a complement to our other investment strategies and an important contributor to our EAD. Now turning to our outlook.

We are mindful of uncertainty in the market. We entered the fourth quarter prudently positioned with substantial liquidity, and we remain focused on preserving capital while dynamically allocating across our three businesses as opportunities emerge. Within agency, we continue to manage call and extension risk proactively as the rate outlook evolves, while current spread levels offer compelling new money returns in the mid to high teens. While elevated volatility persists, the outlook for Agency MBS is constructive as spreads have retraced the widest levels since before the GSEs began more actively increasing their portfolios in mid 2025. At the same time, the technical picture remains favorable, with record bond fund inflows and continued support from the GSEs, overseas investors, and banks, while supply is limited given seasonal and high primary mortgage rates.

In residential credit, our scaled Onslow Bay correspondent platform gives us direct access to high-quality whole loans, greater control over asset selection, and supports one of the leading securitization programs across asset-backed finance. As the largest issuer of expanded credit MBS, we are uniquely positioned to participate in the continued growth in the non-agency market, with non-QM issuance up nearly 60% year to date. The investments we have made across our platform over the past several years have supported expansion, operating efficiency, and disciplined credit execution. Lastly, in MSR, our differentiated portfolio of low note rates, high-quality assets continues to generate durable cash flows supported by our diversified network of servicing and recapture partnerships, and has demonstrated this year we have the flexibility and capacity to grow the portfolio creatively, further enhancing our earnings and cash flow profile.