Annaly's book value declined, and it posted a significant GAAP loss in the third quarter.
It still generated enough earnings available for distribution to cover its dividend.
Investment returns have risen over the past quarter, putting it in a strong position to continue generating solid earnings.
The third quarter was very challenging for fixed-income investors such as Annaly Capital Management (NYSE:NLY). A surge in the 10-year Treasury rate to a multi-decade high caused significant volatility. Despite that, the mortgage REIT's earnings available for distribution (EAD) rose in the period, more than covering its 16%-yielding dividend.
That makes it a potentially attractive option for investors seeking a super-sized dividend yield.
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Annaly Capital's CEO David Finkelstein stated in the mortgage REIT's third-quarter earnings press release that "the third quarter of 2026 was a challenging period for fixed income markets, which we were not immune to." Surging interest rates caused volatility in the fixed-income markets, particularly for Agency MBS. That weighed on the value of MBS investments, resulting in the REIT's book value per common share declining from $20.15 in the second quarter to $17.86 in the third quarter. Meanwhile, its economic return was -7.6%, and it reported a GAAP loss of $1.36 per share.
However, the company's underlying results were much stronger. The REIT generated $0.80 per share of EAD, more than covering its $0.75-per-share dividend. EAD increased from $0.79 per share in the second quarter and from $0.73 per share in the year-ago period. The company's improving earnings enabled it to raise its dividend from $0.70 per share to $0.75 per share this past June.
While the quarter was challenging, Annaly's CEO noted that the REIT "entered the quarter prepared for the volatility." It had a low leverage ratio and minimal duration exposure. That gave it the flexibility to actively manage its portfolio while continuing to deploy capital across its three investment strategies. Its diversification allowed it to focus on opportunities to grow its mortgage servicing rights (MSR) portfolio, which increased 22% in the quarter to $4.3 billion. Meanwhile, its Agency MBS portfolio modestly declined to $91.8 billion, while its residential credit portfolio was relatively flat at $10.4 billion. The company's multifaceted investment strategy provides it with more durable earnings than those of other mortgage REITs.
The company remains in a strong position to continue capitalizing on attractive investment opportunities. It has maintained a lower leverage level and strong liquidity, giving it ample investment capacity. Annaly raised $757 million of accretive capital during the quarter, further bolstering its financial flexibility.
Meanwhile, returns remain healthy across its investment strategies, increasing over the past quarter:
| Strategy | Third Quarter Illustrative Returns | Second Quarter Illustrative Returns |
|---|---|---|
| Agency MBS | 15%-17% | 14%-16% |
| Residential Credit | 13%-16% | 12%-15% |
| MSR | 12%-15% | 11%-13% |
Data source: Annaly Capital Management.
That puts it in a solid position to continue generating EAD above its current dividend level over the coming quarter.
Annaly weathered a rough third quarter rather well. It generated more than enough EAD to cover its 16%-yielding dividend, even after raising it earlier this year. Meanwhile, it's in a solid position to continue producing strong earnings.
However, Annaly is a higher-risk income investment. It has cut its dividend in the past and could cut it again if market conditions and investment returns deteriorate significantly. Investors need to have a high risk tolerance to buy Annaly for income and should view it not as a buy-and-hold investment but as one they must monitor each quarter.
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Matt DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.