Annaly Capital Management, Inc. (NLY) Earnings Call Transcript & Summary

Thank you for standing by, and welcome everyone, to the Annaly Capital Management Second Quarter 2026 Earnings Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Sean Kensil, Director of Investor Relations. Please go ahead.

Good morning, and welcome to the Second 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 us. Today, I'll open with a brief macro update for discussing our performance for the quarter, then I'll provide further detail on each of our 3 investment strategies and finish with our outlook. Serena will then discuss our financials in more detail before opening up the call to Q&A. Now starting with the macro landscape. The U.S. economy continued to display resiliency during the second quarter with healthy consumer spending and tech-related investment activity drove economic growth. Also, the labor market appears to have gained some momentum in recent months, which is a welcome shift from the softer trends seen in the second half of 2025. Now that said, beneficials have become increasingly concerned about persistent elevated inflation, notwithstanding last week's softer CPI [indiscernible]. Price pressures have been driven by a confluence of factors, including the energy price shock and the conflict in the Middle East, residual effects from tariffs with strong demand for computing equipment given the AI build-out. And with policymakers more vocal about the potential to tighten policy, interest rates continue to rise, led by the front end of the yield curve. And after pricing roughly 225 basis point cuts earlier this year current market pricing suggest the tend to hike at least once in 2026. Now despite this pressure on the bond market, lower rate volatility provided a tailwind for our portfolio this past quarter, and we delivered a 5.5% economic return once again demonstrating a strong performance of our diversified housing finance model. abc Additionally, we generated $0.79 of earnings available for distribution, marking the ninth consecutive quarter that our EAD has exceeded the dividend, and the reinforced durability of our earnings power helped inform our recent increase in our quarterly common dividend to $0.75 per share. And also to note, we continue to operate with conservative economic leverage of 5.6 turns, and we raised roughly $450 million in equity through our ATM program during the quarter. Now turning to our investment strategies and beginning with the agency sector. Spreads tightened in the second quarter as deescalation in the Middle East led to a decline in both realized and implied rate volatility and demand for agency MBS remains strong, driven by healthy fixed income inflows, increased purchases from overseas investors and a robust CMO market, which is absorbing roughly 30% of gross issuance and broadly distributing the risk to a diversified set of ambassadors. Given this attractive environment, we grew our Agency portfolio by roughly $3 billion, ending the quarter at $95 billion in market value, which increased our capital allocation to Agency to 57%. As far as portfolio activity, we rotated slightly up in coupon by reducing our exposure to [indiscernible] in favor of 5.5s and 6s and we invested capital raised, primarily in the production coupon MBS and Agency CMBS. Over the first half of the year, specified pools outperformed in spite of relatively benign rate volatility and a subdued prepayment outlook, which typically favors more generic collateral and TBAs. Notably, pull out performance was largely driven by strong GSE demand, and we took advantage of these valuations and reduced our pay-up exposure by moving to lower pay-up pools and increasing our TBA holdings. Late in the second quarter, pool valuations became more attractive as GSE demand waned. And as a consequence, we expect new investments to be more balanced across TBAs distress [indiscernible] pools. And with respect to our hedge profile, we were conservative in managing our rate exposure and proactively added additional swap hedges to impact against rising rates. Our portfolio remains diversified across treasury futures and swaps with the preference for the latter given more attractive carry and comfort around balance sheet availability going forward. Now moving to residential credit. Our portfolio ended the second quarter at $10.4 billion in market value, virtually unchanged quarter-over-quarter and representing 22% of the firm's capital. Resi credit spreads moved in tandem with broader fixed income markets with AAAs ending the quarter approximately 10 basis points tighter. Our Onslow Bay correspondent channel produced another strong quarter of volume of $6.7 billion of lots and $5.1 billion of fundings, including whole loan bulk purchases and our partnerships, Annaly purchased $7.1 billion of loans in Q2, which is a new quarterly record for the business. And despite record volumes, the credit quality of our loan pipeline continues to improve, best evidenced by the lock pipeline 765 FICO to 67% CLTV. Non-agency gross securitization issuance totaled over $150 billion year-to-date, up approximately 50% year-over-year, putting the private label market on pace for its largest gross issuance year since 2007. And Annaly remains the largest issuer of expanded credit mortgages and the second largest issuer overall as we closed 13 deals for $6.8 billion in principal balance in the second quarter, creating approximately $780 million of proprietary investments. Year-to-date, the OBX platforms priced 25 transactions totaling $14.2 billion. And notably, we have securitized 8 different forms of residential collateral, underscoring the depth and diversity of our platform. The OBX securitization program also had a [indiscernible] on closing the first $1 billion new origination non-QM transaction, demonstrating Annaly's leadership position in the non-agency market. This inaugural $1 billion deal was well-received by investors, which allowed us to price a second equally sizable transaction approximately 2 weeks later. Our residential credit platform is well positioned for continued growth in the non-agency market, given the substantial investments we've made over the last number of years, which we believe is a key differentiator and should continue to result in Annaly manufacturing, high-yielding, proprietary investments difficult to duplicate and scale. Now shifting to MSR. Our portfolio was roughly unchanged at $4.1 billion in market value with our allocation of the sector representing 21% of the firm's capital. During the quarter, we modestly rotated the portfolio higher in loan balance as we committed to purchase approximately $200 million in market value of MSR across our various sourcing channels while also committing to sell 2 bulk pools with lower loan balances for $220 million in proceeds. These transactions capitalized on differing buyer economics across the MSR market, highlighting our relative value approach and portfolio flexibility. Moving into higher average loan balance in MSR meaningfully enhances our return profile is our cost to service is contractually a fixed amount per loan in contrast to in-house servicers with high fixed costs and a variable cost per incremental loan. Bulk supply in the second quarter decreased modestly from Q1, though we expect supply to remain healthy throughout the balance of the year given ongoing originator profitability constraints and industry consolidation. In a minor note, our flow purchase channel is picking up with $31 million in market value purchase this quarter, and it should become an increasingly important avenue to acquire current coupon MSR and allows us to offset portfolio paydowns. Our MSR portfolio fundamentals remain compelling as prepayment speeds increased in line with seasonals to 5.2 CPR in Q2. They were still below our initial model projections providing potential upside to returns. The credit quality of the portfolio remains exceptional with serious delinquencies range-bound at approximately 50 basis points. At a weighted average note rate of 3.3%, the lowest among the 20 largest MSR holders, our portfolio continues to generate durable, predictable cash flows with meaningful prepayment protection. The MSR valuations remain well supported in the current interest rate environment and our multiple increased marginally to 5.97 largely driven by the increase in rates offset by a flatter curve. And finally, to touch on our outlook, we continue to see compelling opportunities across our 3 strategies underpinned by a healthy fixed income and housing finance investment environment. Agency spreads remain at attractive levels with mid-teens levered returns and very favorable technicals and we'll look to further deploy new capital in the sector, balanced against relative value opportunities in our other businesses. Our residential credit platform continues to exhibit substantial growth, supported by our loan sourcing and capital markets capabilities, long-standing originator relationships and scaled platform. Our MSR business is performing well ahead of our expectations, anchored by a deliberately constructed portfolio, low note rate, high credit quality that would be difficult to replicate at scale in today's market. Importantly, Annaly offers investors a differentiated way to access value across the housing finance sector without assuming the operational intensity and volume dependency of a traditional origination model. We're not relying on loan volumes to sustain the economics of our portfolios, which allows us to remain selective, invest with scale and allocate capital to the opportunities offering the most attractive risk-adjusted returns. And that is a structural advantage that transcends market cycles, and it has contributed to our ability to generate double-digit economic returns while operating with less leverage than our peers and in an environment that continues to challenge origination dependent business models, the capital efficiency, scale and flexibility of our platform meaningfully sets us apart. And now with that, I'll hand it over to Serena to discuss the financials.

Thank you, David. Today, I will briefly review the financial highlights for the quarter ended June 30, 2026. As in prior quarters, our earnings release discloses GAAP and non-GAAP earnings metrics. And my comments will focus on our non-GAAP EAD and related key performance metrics, which exclude PAA. As David noted, the second quarter was characterized by a constructive fixed income investment environment despite geopolitical uncertainty and rising yields. Against this backdrop, our diversified platform delivered strong performance, elevated portfolio yields, tighter mortgage spreads, favorable hedge performance and disciplined risk management supported both earnings and book value during the quarter. As of June 30, 2026, our book value per share increased by 1.7% from the prior quarter to $20.15. Including our $0.75 quarterly dividend, we generated a positive economic return of 5.5% for the quarter, bringing our economic return for the first half of the year to 6.9%. earnings available for distribution per share increased by $0.03 to $0.79 per share and exceeded our newly increased quarterly dividend of $0.75 per share. The increase was primarily driven by higher average yields on our agency portfolio as our weighted average coupon increased 11 basis points to 5.11% as well as higher securitization volumes within our residential credit business and favorable funding costs with average repo rate declining 6 basis points to 3.84% during the quarter. These benefits were partially offset by lower levels of swap income, reflecting lower average receive rate as [indiscernible] declined during the quarter. Net interest margin increased 5 basis points to 1.76%, while net interest spread improved 8 basis points to 1.5%, with both measures benefiting from higher asset yields, which more than offset modest increases in economic funding costs. Our balance sheet remains conservatively positioned with economic leverage declined slightly to 5.6x from 5.7x in the prior quarter, a reflection of the increase in our hope value for Q2. Our reported ending repo rate decreased 2 basis points to 3.85% while weighted average Grupo days to maturity ended the quarter at 33 days, down 3 days from the prior quarter. Our residential credit platform continued to demonstrate strong momentum, generating significant securitization activity during the quarter, as David discussed earlier. Additionally, to support continued growth across our residential credit and MSR businesses, total warehouse capacity increased to $8.3 billion, including $2.8 billion of committed capacity. We maintain ample available capacity in both businesses, with utilization rate of 61% for residential credit and 50% for MSR. We ended the second quarter with $8 billion in unencumbered assets, including $5.5 billion in cash and unencumbered agency MBS. In addition, we had approximately $1.6 billion in fair value of MSR pledged to committed warehouse facilities, which remains undrawn and provides an additional source of liquidity subject to market advance rates. In total, we had $9.6 billion of total assets available for financing at quarter end, up approximately $580 million from the prior quarter. This represented approximately 57% of our total capital base and provides us with significant liquidity and financial flexibility to support portfolio growth while maintaining a conservative risk profile. Finally, our OpEx to equity ratio increased 11 basis points to 1.4% this quarter, bringing our year-to-date ratio to 1.34%. The increase was driven in part by elevated expenses incurred during the quarter, which we expect to moderate in future periods. Overall, the quarter highlighted the benefits of our diversified housing finance platform and disciplined risk management approach. We generated book value growth, a positive economic return, strong earnings and maintained our conservative yet collectible balance sheet positioning. That concludes our remarks. We will now take questions. Thank you, operator.

[Operator Instructions] We'll take our first question from Bose George at KBW.

Actually, first, a question just on the mark-to-market book value. Could we get an update?

Sure, Bose. So as of Friday, book value was off a little over 1%. So economic return of roughly 0.5%.

Okay. Great. And then I just wanted to ask about dividend coverage. Obviously, you raised the dividend. So clearly, you're comfortable with it. But just can you just discuss the economic return of the portfolio relative to of the required ROE that's needed to cover the dividend, which looks like it's a little under 15%.

Sure. So in terms of the economic return and the returns available in the market, we obviously show that depiction in the investor supplement with Agency 14% to 16% and upwards of 15% in resi and upwards up 13% per MSR funded through warehouse financing. So the way we look at it is we have line of sight, I think, into the near term using the forwards. And when the Board sets the dividend, they're very methodical, and we want to make sure that it is earnable and we don't take these decisions lightly. So we were certainly encouraged by the fact that we feel like it's earnable over the foreseeable future, and we're on track to modestly outran the dividend this quarter, all else equal. Now in terms of the portfolio, where we own our assets is in a very good position, and it covers very well. And prepayments are relatively low, and we have assets locked in for a very long time. So generally, we feel very good about dividend coverage on a go-forward basis.

We'll move next to Crispin Love at Piper Sandler.

David, can you -- kind of build in on that prior question, but just give us a little bit of a view of where you're looking to add incremental capital across our 3 strategies, looking at at Slide 7 and the returns you referenced. The returns are pretty stable with last quarter or are stable with last quarter. And last quarter, you seem to be leaning a little bit more into resi credit. So just curious on any shifts that you have, kind of where you're most interested in putting the incremental dollar across the 3 strategies, especially as agency technicals remain strong.

Sure, Crispin. So both Agency technicals and MSR technicals are very strong, the strongest we've seen in quite some time. However, residential credit, we believe, exhibits the best risk-adjusted returns. So yes, we would like to incrementally add to residential credit, but we have to be responsible as it relates to the underlying credit, but we're making a lot of progress. We priced 4 transactions already in July, and we're in the market with another deal as we speak. So we do expect to add in resi credit. But agency is certainly very investable, particularly when you consider the technicals and how broad the demand is. And so we feel it's a safe place to invest. [indiscernible] has come down, notwithstanding the recent turbulence geopolitically. And so we feel good about it. So I'd say the marginal dollar will probably go into agency with resi credit as we can add in MSR is still right there. As a matter of fact, we added a package just yesterday, we purchased an MSR package with a sub-3% note rate that we feel very good about with a strong OAS. And so that's it. When it comes to raising capital, Crispin, and investing it. I think we would like to just take a second here and talk about what we've accomplished over the past couple of years when we started raising capital again beginning in the third quarter of 2024. We raised $5.4 billion in capital in the last 2 years, including our preferred last summer and it's been very intentional. Obviously, price to book has to be accretive, assets have to be attractive. And to your question, we have to be able to nurture these other businesses, namely resi and MSR. And when you look at the capital allocation associated with those raises, we added $2.6 billion in capital to both residential credit and MSR over the past 2 years. And that's helped grow those businesses. And so the capital raising has fostered the development of these businesses and has been very accretive. We generated nearly $280 million in accretion. It's added considerable scale enabled us to develop more partnerships and really been a game changer for us. And as a consequence, over the past 2 years, we've generated just over 33% economic returns and starting to raise capital again. and the shareholder has noticed, and we've delivered a 53% TSR in those 8 quarters. So we feel really good about what we've accomplished, but from a capital allocation standpoint as well as a capital raising standpoint.

Great, David. I appreciate that. Just 1 last question for me, just on the administration, FHFAGSEs. From your seat, how do you think they've been acting, just the impacts of the mortgage markets and spreads. They were definitely very vocal earlier in the year. Would you expect additional actions in the balance of the year? Do you think it's enough for the GSEs to continue buying Agency MBS, which they have been doing in what seems to be a pretty prudent way with definitely some more room to go in the coming months.

Yes. So we can't say whether there will be more action, whether it be raising the caps or anything otherwise. But they do have plenty of dry powder left. I think through May, they've settled roughly $45 billion in pools. And obviously, the mandate was $200 billion. What I'd say about the GSEs and their approach broadly is it's been very constructive for the agency market. In January, when spreads tightened as much as they did on the announcement, we were obviously quite concerned about being crowded out, -- but what it feels like today is they are acting much like a relative value market participant when spreads are wider they provide support and add and they slow down the pace or stop buying when spreads tighten. And so that's served to help stabilize mortgage spreads, and it's made it an easier investment environment, and we welcome their participation. When it's all said and done, let's say, they get to the $200 billion, and that's it. We expect them to be generally responsible participant. They're very good. We know the people there. A lot of them are from prior lives that we worked with in the past, and we respect them a great deal. And so we're we're welcoming their participation, and we expect them to be a positive force in the agency market.

We'll move next to Marissa Lobo at UBS.

Just looking at current coupon spreads compared to prior periods of Fed leadership transitions, do you feel that today's mortgage market is pricing in a larger uncertainty premium than normal or how much of the current coupon spread do you think reflects the uncertainty?

Thanks, Lisa. I think when you look at mortgages today, what's really driving it is realized and implied [indiscernible] is very low and the supply-demand technicals are very strong. We have said -- as David mentioned, after the Iran crisis, we saw -- after the deescalation, we saw both realized and implied walls come down, and the base is tightened. And supply has been more muted than what we expected at the beginning of the year with most people expecting that supply around $160 billion for 2026 compared to what we have sensed in at about $200 billion at the beginning of the year. And fixed income flows have been really strong, 30% of gross issuance is going into CMOs, which is distributed to a wide range of accounts. So I think market pricing is really not looking at the uncertainty from the fed, they're basically looking at where market pricing on bloody. And markets basically pricing mortality there is not a lot of uncertainty from the Fed.

That's helpful. And just shifting to growth in the other segments. So you've spoken about scale being a competitive advantage. And as you grow resi credit and MSRs, where do you still see the greatest opportunities for operating leverage here?

When it comes to operating leverage, we are an operating light company, and it served us very well. I talked in the prepared remarks about the lack of origination and servicing. And we feel like we can scale these businesses with the current operating leverage, and it's been beneficial for us. We're not obligated to invest in any 1 sector because we don't have a lot of operating leverage. Relying on partnerships has been a distinct advantage, particularly in times like these. And we're here ready with capital to deploy it. To the extent there's an opportunity to add operating leverage, we'll look at it. But for the time being, being a capital participant has served us very well. And given where we're at in the cycle, we think it will continue to for the foreseeable future, Marissa.

We'll take our next question from Doug Harter at BTIG.

Can you talk a little bit about on the resi credit side, the ability to source the magnitude of loans and the diversity of loans and talking to others across the industry. It definitely seems like sourcing is enough volume is a challenge. Can you sort of talk about where you're seeing the volume coming from the advantages you have there and kind of how that translates into the returns of the portfolio.

Sure. Thanks, Doug. This is Mike. I think that there's a number of key advantages that we have. One is that we've been in this market. We've been buying non-QM and DSCR loans for over 10 years. We've been doing it through the correspondent channel for over 5 years. Annaly has -- given the capital that we've raised, we've always delivered consistent pricing I think that's something that not all of our peers and competitors can say. A lot of our peers are private equity. There are certain times where they're not able to deliver a rate sheet that is competitive because they are raising capital in a different component of the fund's life. So I think having that stability, having that capital, the reputation that we've earned, I think, has been well earned. I think it's been hard earned. We've been buying loans during coded, where we've honored commitments that others have not done. Originators don't always have short memory. So I think that there's a lot of goodwill that's been built up through time. On the operational side, we are much deeper than a lot of our competitors and a lot of our peers. We face at this point now over 350 correspondents. When you look at a lot of the other correspondent channels that we're competing against, they may be trying to face the top 50 originators we have gone much further down the chain. We also recently expanded into non-delegated correspondent. We did that in the beginning of the year. So that's added significant volume, and it's added volume that's a little bit more price insensitive than the delegated channel. The service level is very strong. We have a fully staffed scenario desk. We have a fully staffed exception desk. We've invested a lot, as David mentioned, in terms of technology infrastructure, the ability to face 350 originators is very challenging. And then lastly, I'll say that our execution on the back end is better than our peers and better than our competitors. We are pricing larger deals, which is able to spread fixed costs and have lower fixed costs because it's a larger balance. Our variable costs, including the underwriting fees are lower than our peers because of the size of the deals that we're able to bring. And then we're also pricing tighter than the majority of other issuers. So that means at the same level of margin as some of our peers and competitors we're able to offer a higher price, right? So we're getting the same ROE at a higher price given some of that secondary execution. So there's a lot of new entrants and the market is competitive. We actually -- our lot volume actually decreased quarter-over-quarter. It was $6.7 billion. It's actually down 9% to 10%. Part of that is because, as David mentioned, we're looking to earn mid-teens ROEs, we're not just going to be out in the market and leading with pricing and leading with the rate sheet. So we'll be diligent. But I think the infrastructure that we've built, the number of originators, the relationships that we had, the pricing advantages. That has allowed us to source these assets at a greater clip than a lot of our competitors.

I appreciate that, Mike. And then just one clarification. In the -- you talked about in thepresentation how kind of like the economic assets in residential credit were relatively flat. How do I square that with the level of activity that you talked about, kind of what are the puts and takes there?

Yes. So if you look at the actual portfolio, loans are effectively flat quarter-over-quarter, $4.7 billion of residential loans. So this is on an economic basis. Those are loans that are held on balance sheet that have yet to be securitized. Then when you look at our OBX portfolio on an economic basis, obviously, we report GAAP. But when you look at an economic basis, the OBX portfolio was up $400 million. That's through retained securities. But the third-party securities portfolio was down a little over $350 million. We sold $260 million of AAA CRE CLOs as they tightened in. We took advantage of redeploying that into Agency. And then our CRT portfolio was also down close to $65 million. So credit spreads did tighten and especially across third-party securities, we have the ability to monetize that. So that's really why you see that the flattish portfolio quarter-over-quarter.

Yes. And Doug, just to add, OBX and whole loans represent over 80% of the resi credit balance sheet. And that's been the objective. We've used third-party securities to generate yield over time, but manufactured securities in-house our higher returning assets. And so the objective is to have the portfolio predominantly characterized by OBX related assets.