Annaly Capital Management Inc (NLY) Earnings & Analysis

Latest quarter

Annaly’s adjusted earnings per share of $0.80 exceeded the consensus estimate of $0.77 for the third quarter. Revenue as counted by the consensus was $543.6 million, below the $596.1 million estimate; the filing identifies that reported amount as net interest income.

On the separate revenue measure, Annaly reported $495.7 million, down from $2.1 billion a year earlier. Diluted earnings per share fell to −$1.36 from $1.20. The filing attributes most of the change in net income to losses on investments, partly offset by gains on derivatives and higher net interest and servicing income.

Annaly’s operating margin was −198.6%, compared with 39.0% a year earlier. Free cash flow rose to $3.5 billion from $417.8 million. The filing says earnings available for distribution benefited from higher coupon income and servicing income, partly offset by higher financing costs.

Adjusted EPS is the figure the consensus estimates, not the GAAP EPS above.

What management said on the call

CEO David Finkelstein said higher interest rates and volatility widened agency mortgage-backed securities spreads during the quarter. CFO Serena Wolfe said those moves weighed on book value, while gains on hedges provided offsets. Finkelstein said Annaly added primarily Treasury futures hedges to contain its interest-rate exposure as rates rose.

Wolfe said earnings available for distribution rose as higher coupon income on larger investment and mortgage-loan balances and lower operating expenses outweighed higher financing costs. She said the net interest margin declined as the company’s funding mix included more securitized debt and repo rates edged higher.

In residential credit, Finkelstein said the Onslow Bay correspondent channel recorded $7.0 billion of loan lock volume in the quarter. He said Annaly continued to securitize loans and that the locked pipeline reflected its credit discipline. In mortgage servicing rights, he said purchases included a bulk package and flow-channel volume, with supply increasing during the quarter.

Asked about securitization conditions, Co-Chief Investment Officer Mike Fania said investors had sought a change in payment priority for senior bonds, but he had not seen a change in investor depth. Asked about home-equity lending, he said Annaly remained active in those loans but continued to focus on non-QM and debt-service-coverage-ratio loans.

Head of Mortgage Servicing Rights Ken Adler said the servicing portfolio also helps hedge errors in prepayment models used for the agency portfolio. Finkelstein said Annaly entered the fourth quarter with more interest-rate exposure and had rotated seasoned agency pools into higher-coupon securities. He said the company would continue allocating capital across its businesses as opportunities arise.

Guidance

Finkelstein expects earnings available for distribution to exceed the dividend in Q4 FY2026. Fania expects non-QM mortgage originations of $150.0 billion to $175.0 billion in FY2026 and said they would remain around 8.00% to 9.00% of the overall mortgage origination market.