Annaly Capital Management (NLY) faced a challenging third quarter as fixed-income markets experienced significant volatility due to a rise in the 10-year Treasury rate, reaching a multi-decade high. However, the mortgage REIT's earnings available for distribution (EAD) rose in the period and comfortably covered its 16% dividend yield, making it an appealing choice for income-focused investors.
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In its earnings report, CEO David Finkelstein acknowledged that the third quarter of 2026 was difficult for fixed-income markets, impacting the company as well. The surge in interest rates particularly affected the value of Agency Mortgage-Backed Securities (MBS), which led to a decrease in the REIT's book value per common share from $20.15 in the second quarter to $17.86 in the third quarter. The company reported a GAAP loss of $1.36 per share and an economic return of -7.6%. Despite these challenges, Annaly generated $0.80 per share of EAD, up from $0.79 in the previous quarter and $0.73 a year earlier, which allowed it to increase its dividend from $0.70 to $0.75 per share in June.
Finkelstein noted that Annaly was prepared for volatility entering the quarter, maintaining a low leverage ratio and minimal duration exposure. This strategic positioning enabled the REIT to manage its portfolio effectively while continuing to invest across its three primary strategies. The company’s mortgage servicing rights (MSR) portfolio grew by 22% in the quarter, reaching $4.3 billion, while its Agency MBS portfolio declined slightly to $91.8 billion, and the residential credit portfolio remained stable at $10.4 billion. Annaly's diversified approach results in more stable earnings compared to other mortgage REITs.
The company also raised $757 million of accretive capital during the quarter, enhancing its financial flexibility and maintaining a lower leverage level. As a result, Annaly remains well-positioned to capitalize on attractive investment opportunities. The returns across its strategies have shown improvement: Agency MBS returns increased to 15%-17% from 14%-16%, residential credit returns rose to 13%-16% from 12%-15%, and MSR returns improved to 12%-15% from 11%-13%.
Given its ability to generate EAD above the current dividend level and maintain a solid earnings outlook, Annaly's high dividend seems secure for now. However, it is essential to note that Annaly is considered a higher-risk investment that has previously reduced its dividend. Investors should assess their risk tolerance and stay vigilant on the company’s performance amid changing market conditions.