NLY

Macro and Overall Firm Performance

• The U.S. economy showed resilience in Q2 2026, driven by healthy consumer spending and AI-related tech investment, with a rebounding labor market. Persistent elevated inflation, driven by Middle East energy shocks, residual tariff effects, and AI-related computing equipment demand, has led the market to price in at least one additional Fed rate hike in 2026.
• The firm delivered a 5.5% economic return for the quarter, bringing first half 2026 economic return to 6.9%. Book value per share increased 1.7% quarter-over-quarter to $20.15.
• Earnings available for distribution (EAD) was $0.79 per share, marking the 9th consecutive quarter that EAD has exceeded the quarterly dividend. The firm increased its common quarterly dividend to $0.75 per share. Economic leverage remained conservative at 5.6x, and the firm raised $450 million in equity via its ATM program during the quarter.
• Net interest margin increased 5 basis points to 1.76%, and net interest spread improved 8 basis points to 1.5%, supported by higher asset yields that offset modestly higher economic funding costs. The firm ended the quarter with $9.6 billion in available liquidity for financing, equal to 57% of its total capital base, supporting a flexible, conservative risk profile.

Agency Segment Operations

• Portfolio rotation shifted exposure from 4% coupon MBS to 5.5% and 6% coupons, with new capital deployed primarily to production coupon MBS and agency CMBS. Late in the quarter, specified pool valuations became more attractive after GSE demand slowed, so future investments will be more balanced between TBAs and specified pools.
• Management maintained a conservative hedge profile, proactively adding swap hedges to protect against rising rates, with a preference for swaps over Treasury futures due to more attractive carry.

Residential Credit Segment Operations

• The nonagency private label securitization market is on pace for its largest full-year issuance since 2007, with year-to-date issuance up 50% year-over-year. Annaly is the largest issuer of expanded credit mortgages and the second-largest nonagency issuer overall.
• The firm closed the first ever $1 billion new origination non-QM transaction in Q2, which was well received by investors, allowing a second equally sized deal to price just two weeks later. Years of platform investment have created a scalable, hard-to-replicate business that generates high-yield proprietary investments.

MSR Segment Operations

• Management rotated the portfolio to higher average loan balance MSRs: committing $200 million in purchases and selling $220 million of lower loan balance bulk pools, capitalizing on divergent buyer economics across the market to improve portfolio returns. The firm's flow purchase channel grew to $31 million in market value purchases during the quarter, and will increasingly be used to offset portfolio paydowns.
• Management expects MSR supply to remain healthy for the rest of 2026 due to originator profitability constraints and ongoing industry consolidation.

• Management sees compelling risk-adjusted opportunities across all three core strategies in the current housing finance investment environment, with agency offering attractive spreads and strong technicals, residential credit offering strong growth potential, and MSR outperforming initial expectations.
• The firm's structural advantages (diversification, no dependence on origination volumes for portfolio economics, capital efficiency, scale, and flexibility) allow it to be selective and allocate capital to the highest return opportunities across market cycles, and have supported consistent double-digit economic returns with lower leverage than peer firms.
• Management expects elevated operating expenses from Q2 to moderate in future quarters.
• Management expects nonagency residential credit issuance to exceed $100 billion for full-year 2026, with non-QM and DSCR loans remaining the core high-return focus for the segment.

1. Agency: Ended the quarter at $95 billion in market value, up $3 billion from the prior quarter, representing 57% of total firm capital. Spreads tightened during the quarter amid lower rate volatility and strong broad-based demand for agency MBS. Mid-teen levered returns are currently available in the sector. 2. Residential Credit: Ended the quarter at $10.4 billion in market value, virtually unchanged quarter-over-quarter, representing 22% of total firm capital. The segment hit a new quarterly record with $7.1 billion in loan acquisitions, closed 13 securitization deals totaling $6.8 billion in principal balance, created $780 million in proprietary investments, and achieved 10 basis points of spread tightening for AAA-rated tranches. 3. Mortgage Servicing Rights (MSR): Ended the quarter at $4.1 billion in market value, roughly unchanged quarter-over-quarter, representing 21% of total firm capital. The portfolio has a 50 basis point serious delinquency rate, a 3.3% weighted average note rate, and a valuation multiple of 5.97x. Prepayment speeds came in at 5.2% CPR, below initial model projections, creating upside return potential.

• Persistent elevated inflation and potential additional Federal Reserve rate hikes create upward pressure on interest rates, which creates portfolio valuation and interest rate risk that the firm mitigates through proactive hedging.
• Ongoing geopolitical uncertainty from the Middle East conflict creates energy price and market volatility risk.
• Sourcing sufficient loan volume in residential credit is an industry-wide challenge, and competitive pressure means the firm must remain disciplined on returns, passing on low-margin opportunities even if it reduces near-term volume.
• Higher note rate agency MBS carry increased prepayment risk if rates decline, which the firm mitigates by prioritizing specified pools with built-in call protection.

Q: After the recent market volatility post-quarter-end, what is the updated mark-to-market for book value, and how confident is management in the coverage of the newly raised dividend? / A: As of the Friday before the call, book value was down just over 1%, with an economic return down roughly 0.5% from quarter-end. Management reports current levered returns are ~14% for agency, ~15%+ for residential credit, and ~13%+ for MSR. The board makes dividend decisions methodically, and the firm expects to earn the increased dividend over the foreseeable future, with currently locked-in long-dated assets and low prepayments supporting comfortable coverage. (287 characters)

Q: Where does management plan to deploy incremental new capital across the three segments, and how has prior capital raising benefitted the firm? / A: While agency and MSR have very strong technicals currently, residential credit offers the best risk-adjusted returns, so the marginal dollar will likely split between agency (a stable, investable option given low volatility) and incremental residential credit growth, with MSR also seeing continued selective purchases. Since Q3 2024, the firm has raised $5.4 billion in total capital, $2.6 billion of which was allocated to growing residential credit and MSR, generating ~$280 million in accretion, a 33% economic return, and 53% total shareholder return over 8 quarters. (368 characters)

Q: How is Annaly able to source the large residential credit loan volumes it has achieved, when sourcing is a broad industry challenge? / A: Key competitive advantages include longstanding, trusted originator relationships built over 10+ years in the market, with consistent competitive pricing even during market stress (unlike many private equity-owned peers that pull back during fundraising cycles). The firm sources from over 350 correspondents (far more than most peers, including smaller originators) and recently added non-delegated correspondent capacity to access additional price-insensitive volume. Strong back-end securitization execution allows lower fixed costs per loan and higher offered prices to originators for the same target ROE. The firm remains disciplined, passing on low-return opportunities even if it reduces volume. (437 characters)

Q: How is the firm balancing prepayment risk as average coupons rise across mortgage portfolios, amid falling expected prepayment rates from higher current rates? / A: The firm's core strategy for the agency portfolio is to prioritize higher coupon specified pools with built-in call protection to mitigate prepayment risk if rates fall. When specified pool valuations were expensive earlier in 2025 from strong GSE demand, the firm tactically shifted to lower coupons, and rotated back up as valuations normalized. The firm also concentrates prepayment risk in liquid agency securities (which allow easy trading around surprises) and holds virtually no prepayment risk in the stable MSR portfolio. (342 characters)

Q: What unique opportunities does Annaly have in the MSR market, driven by its operating model? / A: Annaly uses an operationally light model with third-party subservicers, relying on fixed variable cost per loan rather than the high fixed in-house servicing costs of bank and traditional MSR buyers. This makes the firm a favored buyer for originators looking to sell MSR for liquidity, as selling to Annaly does not leave the seller with stranded in-house servicing costs. The firm also uses granular, specified pool-style analytics to price flow MSR purchases, allowing it to acquire assets with better OAS and convexity than peers, creating differentiated value. (341 characters)