ANNALY CAPITAL MANAGEMENT INC (NLY)

Item 2. Management’s Discussion and Analysis

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Special Note Regarding Forward-Looking Statements

Certain statements contained in this quarterly report, and certain statements contained in our future filings with the Securities and Exchange Commission (the “SEC” or the “Commission”), in our press releases or in our other public or stockholder communications contain or incorporate by reference certain forward-looking statements which are based on various assumptions (some of which are beyond our control) and may be identified by reference to a future period or periods or by the use of forward-looking terminology, such as “may,” “will,” “believe,” “expect,” “anticipate,” “continue,” or similar terms or variations on those terms or the negative of those terms. Such statements include those relating to the Company’s future performance, macro outlook, the interest rate and credit environments, tax reform and future opportunities. Actual results could differ materially from those set forth in forward-looking statements due to a variety of factors, including, but not limited to, changes in interest rates; changes in the yield curve; changes in prepayment rates; the availability of mortgage-backed securities (“MBS”) and other securities for purchase; the availability of financing and, if available, the terms of any financing; changes in the market value of the Company’s assets; changes in business conditions and the general economy; the Company’s ability to grow its residential credit business; the Company's ability to grow its mortgage servicing rights business; credit risks related to the Company’s investments in credit risk transfer securities and residential mortgage-backed securities and related residential mortgage credit assets; risks related to investments in mortgage servicing rights; the Company’s ability to consummate any contemplated investment opportunities; changes in government regulations or policy affecting the Company’s business; the Company’s ability to maintain its qualification as a REIT for U.S. federal income tax purposes; the Company’s ability to maintain its exemption from registration under the Investment Company Act of 1940; and operational risks or risk management failures by us or critical third parties, including cybersecurity incidents. For a discussion of the risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements, see “Risk Factors” in our most recent Annual Report on Form 10-K and any subsequent Quarterly Reports on Form 10-Q. The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements, except as required by law.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our most recent annual report on Form 10-K. All references to “Annaly,” “we,” “us,” or “our” mean Annaly Capital Management, Inc. and all entities owned by us, except where it is made clear that the term means only the parent company. Refer to the section titled “Glossary of Terms” located at the end of this Item 2 for definitions of commonly used terms in this quarterly report on Form 10-Q.

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Item 2. Management’s Discussion and Analysis

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Item 2. Management’s Discussion and Analysis

Overview

We are a leading diversified capital manager with investment strategies across mortgage finance. Our principal business objective is to generate net income for distribution to our stockholders and optimize our returns through prudent management of our diversified investment strategies. We are an internally-managed Maryland corporation founded in 1997 that has elected to be taxed as a REIT. Our common stock is listed on the New York Stock Exchange under the symbol “NLY.”

We use our capital coupled with borrowed funds to invest primarily in real estate related investments, earning the spread between the yield on our assets and the cost of our borrowings and hedging activities.

For a full discussion of our business, refer to the section titled “Business Overview” in our most recent Annual Report on Form 10-K.

Business Environment

The second quarter of 2026 (“Q2 2026”) was characterized by continued robust U.S. economic growth, supported by consumer spending and technology-related investment, with labor market momentum improving relative to the softer trends experienced in the second half of 2025. Inflation remained elevated, driven by energy shocks stemming from developments in the Middle East, residual effects from tariffs, and demand for computing equipment related to artificial intelligence (“AI”). Against this backdrop, Federal Reserve (the “Fed”) officials discussed the potential for interest rate hikes, and interest rates rose over the quarter, led by the front end of the yield curve, as market pricing shifted from an expectation of roughly two 25 basis point (“bps”) cuts this year to the possibility of at least one hike.

In this environment, Annaly generated a portfolio economic return of 5.5% in Q2 2026, with earnings available for distribution (“EAD”) of $0.79 per share, once again exceeding the quarterly common stock dividend, which was increased to $0.75 per share. This marked the ninth consecutive quarter in which EAD surpassed the dividend. Economic leverage stood at 5.6x, and the Company raised approximately $447 million of common equity through our at-the-market (“ATM”) sales program during the quarter.

Agency mortgage-backed security (“MBS”) spreads tightened during the quarter, aided by a de-escalation of tensions in the Middle East that reduced implied volatility across financial markets. Agency MBS technicals remained favorable, with fixed income fund inflows through the first half of 2026 (“1H 2026”) running at more than double the pace of the prior three years. Overseas investors purchased approximately $65 billion of Agency MBS year-to-date, a marked shift from the net reductions recorded in the first halves of 2024 and 2025, while collateralized mortgage obligation (“CMO”) floater creation in 1H 2026 reached its highest level since 2011. Elevated interest rates continued to limit the supply of fixed-rate MBS.

During the quarter, we shifted our portfolio exposure up in coupon, reducing approximately $4 billion of 4.5% coupon holdings in favor of 5.5% and 6.0% coupons, while new capital was invested primarily in production coupons and Agency commercial mortgage-backed securities (“CMBS”). Our Agency portfolio grew by $2.8 billion during the quarter to $95.0 billion (including TBA exposure), representing 57% of the firm’s capital. Specified pool holdings declined by four percentage points as a share of the aggregate portfolio over 1H 2026, reflecting improved dollar-roll implied financing, elevated valuations, strong early-year demand from the government-sponsored enterprises (“GSEs”), lower rate volatility, and a more benign prepayment outlook. Specified pool valuations became more attractive as the GSEs slowed their purchases and became opportunistic sellers. We expect future Agency investments to be more balanced across to-be-announced (“TBA”) securities and specified pools going forward, even as cheapest-to-deliver pool convexity continued to deteriorate.

Our Residential Credit portfolio ended the quarter at $10.4 billion in market value (on an economic basis), an increase of $35 million quarter-over-quarter, and represented approximately 22% of firm capital. Residential credit spreads moved in line with broader credit markets, with “AAA”-rated spreads ending the quarter at 130 bps over the curve, approximately 10 bps tighter than at the onset, though residential credit modestly underperformed corporate credit amid record non-Agency gross issuance, which exceeded $150 billion year-to-date and was up approximately 50% year-over-year, putting private-label gross issuance on pace for its largest year since 2007.

Our correspondent channel produced $6.7 billion of locks and $5.1 billion of fundings during the quarter, while we purchased $7.1 billion of loans, including whole-loan bulk purchases and partnership securitizations, a quarterly record. The quarter-end locked pipeline reflected a weighted average FICO score of 765 and a combined loan-to-value ratio of 67%. Annaly remained the largest issuer of expanded credit mortgages and the second-largest issuer overall, closing 13 securitizations totaling $6.8 billion in unpaid principal balance (“UPB”) during the quarter, which generated approximately $613 million of proprietary investments. Year-to-date, our securitization platform priced 26 securitizations totaling $14.5 billion across eight forms of residential collateral, including two $1 billion new-origination Non-QM transactions, the largest Non-QM transactions in several years. Our residential credit portfolio continued to benefit from scale across loan sourcing, capital markets, originator relationships, and securitization.

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Item 2. Management’s Discussion and Analysis

In our mortgage servicing rights (“MSR”) business, the portfolio decre

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Item 7. Management’s Discussion and Analysis

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
All references to “Annaly,” “we,” “us,” or “our” mean Annaly Capital Management, Inc. and all entities owned by us, except where it is made clear that the term means only the parent company. Refer to the section titled “Glossary of Terms” located at the end of this Item 7 for definitions of commonly used terms in this annual report on Form 10-K.

This section of our Form 10-K generally discusses 2025 and 2024 items and year-to-year comparisons between 2025 and 2024. Discussions of 2023 items and year-to-year comparisons between 2024 and 2023 that are not included in this Form 10-K can be found in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our annual report on Form 10-K for the year ended December 31, 2024.

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Item 7. Management’s Discussion and Analysis

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Item 7. Management’s Discussion and Analysis

Overview

We are a leading diversified capital manager with investment strategies across mortgage finance. Our principal business objective is to generate net income for distribution to our stockholders and optimize our returns through prudent management of our diversified investment strategies. We are an internally-managed Maryland corporation founded in 1997 that has elected to be taxed as a REIT. Our common stock is listed on the New York Stock Exchange under the symbol “NLY.”

We use our capital coupled with borrowed funds to invest primarily in real estate related investments, earning the spread between the yield on our assets and the cost of our borrowings and hedging activities.

Our three investment groups are primarily comprised of the following:

For a full discussion of our business, refer to the section titled “Business Overview” of Part I, Item 1. “Business” and see the Note titled "Segments" in the Notes to the Consolidated Financial Statements included in Item 15. "Exhibits, Financial Statement Schedules."

Business Environment

The year 2025 saw a meaningful shift in U.S. policy by the second Trump Administration, though the economy saw less impact in aggregate than many had expected early in the year. The Trump Administration pushed changes in several different areas, most notably tariffs on U.S. goods imports, which led to $288 billion in U.S. customs revenues in 2025, nearly three times the average customs revenues of prior years. In addition, Congress passed the One Big Beautiful Bill Act (“OBBB”), effectively extending the majority of the 2017 Tax Cuts and Jobs Act provisions, while offering some additional benefits, including an elimination of taxes on tips and Social Security for some taxpayers. The tax reform passage has buoyed business sentiment and is expected to support investment growth and consumption, mainly through higher tax refunds in the first part of 2026. Finally, the Administration strictly enforced immigration laws and drove efforts to deport more immigrants without proper documentation, which appears to have been one of the factors weighing on the labor market. U.S. employment growth slowed meaningfully in 2025, while the unemployment rate rose slightly to 4.4%.

U.S. economic growth, however, remained robust, with the economy growing 2.5% at a seasonally adjusted annualized rate (“SAAR”) in the first three quarters, above expectations for growth coming into the year. Growth was once again driven by consumption, as consumers showed little pause amid declining sentiment and higher prices from tariffs. Of note, the tariff pass-through to consumers has been slower than most economists expected, though goods inflation increased over the year. Aggregate inflation, as measured by the Consumer Price Index excluding food and energy prices, has moderated somewhat over the course of 2025, with the year-over-year (“yoy”) rate falling from 3.21% to 2.65%.

Meanwhile, the housing market remained relatively weak as measured by aggregate activity levels, with existing home sales averaging 4.1 million annualized units per month in 2025, essentially in line with 2024 activity levels, while new home sales remained subdued. In an environment of modest increases in supply, but continued challenged affordability, home prices were little changed for the U.S. in aggregate, rising 0.10% yoy according to Zillow albeit with meaningful regional disparities. For example, many southern and western states saw continued rise in supply on top of already elevated inventory levels, leading to larger declines in home prices. Meanwhile central states typically saw steadier inventory levels and therefore enjoyed price appreciation above the national average.

Similar to 2024, when the Fed lowered the Federal Funds Target Rate (“Fed Funds Rate”) in the second half of the year, a weaker labor market and rangebound inflation allowed the Fed to further reduce monetary policy rates. With the Fed Funds Rate reaching a range of 3.50-3.75% at the December Federal Open Market Committee (“FOMC”) meeting, officials have signaled a more gradual approach going forward, waiting for additional economic data to lower the rate further. Regarding its balance sheet policy, the Fed ended the $2.4 trillion decline in its securities portfolio in December 2025 by announcing purchases of Treasury bills starting at $40 billion per month. The purchases are designed to maintain a stable ratio of reserves to nominal gross domestic product (“GDP”) of around 10% and alleviate funding rate volatility, which had occurred around quarter end and Treasury security settlement dates.

Fixed income markets ultimately saw a rangebound trading environment that allowed for strong returns, with the Bloomberg Aggregate U.S. Bond Market Index registering a 7.3% total return in 2025, the strongest annual return since 2020. The stellar

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Item 7. Management’s Discussion and Analysis

performance was driven by the 75 basis points (“bps”) of Fed rate cuts that resulted in (i) interest rates close to levels at which monetary policy is no longer deemed restrictive, (ii) robust fixed income fund flows, and (iii) declining interest rate volatility, which has returned to levels not seen since 2021. Markets initially saw a spike in volatility following the Trump Administration’s April tariff announcement that were surprising both in scale and charged rates. However, softer tariff implementation than initially threatened, legal challenges, less volatile economic data than in recent years, and more predictable monetary policy ultimately led to a gradual and meaningful decline in implied and realized volatility between May 2025 and the end of the year. Meanwhile, Treasury yields declined across nearly all maturities – with yields falling between 77 bps in 2-year Treasuries and 40 bps in 10-year Treasuries – apart from the 30-year Treasury bond, which saw a modest rise in yields. The yield changes were primarily driven by expectations for easier monetary policy.

The market and economic environment were beneficial to Annaly’s portfolio and strategy, helping the company deliver a 20.2% aggregate economic return for the year, including a 5.5% book value gain. The strong economic return was achieved while maintaining conservative leverage over the course of the year, with economic leverage increasing modestly to 5.6x on December 31, 2025 from 5.5x a year earlier. Given strong investor demand for mortgage REITs, Annaly was able to raise $2.6 billion in common equity capital through its at-the-market sales program at accretive levels and issued a Series J preferred stock in what marked the first sizeable non-rated preferred stock issuance in several years. Most of the capital was allocated to the Agency business, which saw portfolio assets rise by $22.3 billion yoy to $92.9 billion on December 31, 2025. In line with the asset growth, the Agency business saw its capital allocation increase marginally from 59% on December 31, 2024 to 62% a year later.

Annaly’s Agency MBS portfolio benefited from meaningful tailwinds throughout most of 2025 as Agency MBS supply and demand moved into much better balance. For one, the slow housing market activity reduced MBS supply relative to recent years. Meanwhile, demand broadened across investors as demonstrated by mortgage REIT equity raises and strong collateralized mortgage obligation creation. Mutual fund inflows remained strong as well, maintaining money managers as the anchor buyer. Finally, the Government-sponsored enterprises (“GSEs”) added to their retained portfolios for the first

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