Annaly Capital Q3 2026: GAAP Loss of $1.36 as Rates Bite, but EAD of $0.80 Covers Dividend

Annaly Capital Management (NYSE: NLY), the New York mortgage REIT running a $146.1 billion leveraged portfolio of Agency MBS, mortgage servicing rights and loans, reported a third-quarter 2026 GAAP loss of ($1.36) per share, swung from +$1.21 a year ago by $4.72 billion of investment losses as rising rates marked down the MBS book. But the number Annaly shareholders live on — earnings available for distribution — rose 9.6% to $0.80 per share, covering the $0.75 dividend 1.07 times.

This is the mortgage-REIT split screen in its purest form. GAAP says the quarter destroyed value; EAD says the dividend machine ran hotter than ever; book value per share, down 11.4% sequentially to $17.86, says the truth is somewhere between. All three are right — they just measure different things, and the quarter only makes sense held against all three at once.

The Headline Numbers​

The arithmetic of the loss is all mark-to-market: $4,721.7 million of investment losses against $3,074.1 million of derivative gains — the hedges paid, covering 65% of the MBS markdown, but the net $1.65 billion hole plus expenses overwhelmed $699.6 million of net interest and servicing income. Nothing here is a credit loss; it is rates repricing long-duration assets faster than short-duration hedges. Meanwhile the recurring engine improved on every line: net interest income — Annaly's top line, shown as Total revenue in the table above — nearly doubled year over year (+97.1%) as funding costs fell 39 bps while asset yields rose 18 bps, widening the spread 57 bps to 1.24%.

Spreads Widen, Book Value Bleeds​

Two caveats keep the spread story honest. First, excluding purchase-accounting adjustments the margin was flat at ~1.70% — the 57-bp GAAP widening is partly PAA noise, not pure pricing power. Second, leverage rose to fund it: GAAP leverage up to 8.0x from 7.1x a year ago, economic leverage to 5.9x. Wider spreads on a bigger, more leveraged book is the right trade when rates cooperate — and Q3's book value says rates did not.

Book value is where shareholders actually felt the quarter: $17.86, down $2.29 sequentially (−11.4%) and $1.39 year over year (−7.2%). Against the $0.75 dividend, the quarterly economic return was roughly −7.6% (($17.86 − $20.15 + $0.75) / $20.15). The 15.9% dividend yield prices all of this in — it is compensation for exactly this kind of quarter.

The Balance Sheet: MSR Grows Into Its Hedge​

The notable mover is mortgage servicing rights, up 15.2% year to date to $4.20 billion — MSR gains value as rates rise (slower prepayments), the natural offset to MBS losses, and servicing income grew 23.6% year over year to $156.0 million. The portfolio also rotated: securities down 4.8% while securitization vehicles and loans grew, and repo funding rose 4.5% to $85.5 billion. Equity slipped 1.6% year to date despite January-to-September profits — dividends and the AOCI bleed on the securities book consumed more than earnings produced.

The Multi-Year Arc: Two Signatures of a Rate Cycle​

Annaly's history is a rate-cycle seismograph. FY2023's hiking shock drove net interest income negative and produced a $1.64 billion loss; FY2025's steadier curve delivered $2.05 billion of profit on $1.14 billion of NII. Q3 2026's ($1.00) billion is the same pattern at higher frequency — a quarterly rate spike, not a credit event — and trailing-twelve-month earnings remain positive on the FY2025 base. The through-cycle question is whether book value compounds: it has not, with common shares diluted upward from 578 million to 785 million since December 2024 absorbing the earnings.

The One Big Question: Is the $0.75 Dividend Safe at an $17.86 Book Value?​

The bull case is the coverage math. EAD of $0.80 covers the $0.75 dividend with room, EAD return on equity is a genuine 15.86%, and the recurring engine — NII +97%, servicing +24%, spread +57 bps — is the strongest in years. The $4.72 billion loss is unrealized marks that reverse if rates fall, the MSR book (+15.2%) hedges further rises, and the 15.9% yield pays handsomely to wait. GAAP leverage of 8.0x is high but repo-funded Agency paper is the safest collateral in the system.

The bear case is the book value. A −11.4% quarterly drawdown against a 3.7% quarterly dividend yield ($0.75 on the $20.15 starting book) is a −7.6% economic return — the dividend did not come close to compensating. Leverage is rising into volatility (8.0x GAAP, 5.9x economic), the ex-PAA margin is flat (no underlying pricing gain), and Annaly's history says rate spikes cluster: FY2023's hikes produced four straight quarters of pain. If rates keep rising, the next marks hit a smaller book at higher leverage — the classic mREIT spiral, and the dividend gets cut to protect what is left.

The tell is book value per share next quarter and the EAD trajectory with it: stable-to-rising BVPS with EAD holding $0.80 says Q3 was a mark, not a wound. A second straight BVPS decline with leverage still climbing says the hedge is slipping. Watch those before anything else.

Tracking a $146.1 Billion Balance Sheet in Plain Text​

A mortgage REIT's balance sheet is where double-entry earns its keep: $85.5 billion of repo on one side, $86.9 billion of securities on the other, and a $795.8 million AOCI hole — every dollar reconciling to $146,147.5 million of assets across 24 accounts. This is how we model every company. The Q3 income statement, exactly as filed (income negative, expenses positive, consolidated net loss absorbed by Equity:Adjustments):

; Check: −543.612 − 173.096 + 17.087 + 4721.745 − 3074.072 − 16.895 + 41.185 + 12.021 + 16.335 − 1000.698 = 0 ✓
2026-09-30 * "Annaly Capital Management, Inc." "FY2026Q3 Income Statement"
  Income:Revenue                                  -543.612 MUSD  ; net interest income (interest income 1,970.425 less interest expense 1,426.813)
  Income:Servicing                                -173.096 MUSD  ; servicing and related income
  Expenses:Servicing                                17.087 MUSD  ; servicing and related expense
  Income:Gains:Investments                        4721.745 MUSD  ; net losses on investments and other
  Income:Gains:Derivatives                       -3074.072 MUSD  ; net gains on derivatives
  Expenses:OtherNet                                -16.895 MUSD  ; other, net
  Expenses:Compensation                             41.185 MUSD  ; compensation expense
  Expenses:GAOther                                  12.021 MUSD  ; other general and administrative expenses
  Expenses:Tax                                      16.335 MUSD  ; income taxes
  Equity:Adjustments                             -1000.698 MUSD  ; consolidated net loss offset (NCI 1.061; attrib. (1,001.759); pref. div. 41.305; common (1,043.064))

The Verdict: Bull vs. Bear​

Bull Case

• EAD of $0.80 (+9.6% YoY) covers the $0.75 dividend 1.07x with a 15.86% EAD return on equity.
• Recurring engine at multi-year highs: NII +97%, servicing +24%, spread +57 bps to 1.24%.
• The $4.72B loss is unrealized rate marks, 65% hedge-covered — it reverses if rates fall.
• MSR book +15.2% to $4.2B is the natural rate hedge, still growing into the position.
• 15.9% dividend yield compensates for exactly this kind of mark-to-market quarter.

Bear Case

• Book value −11.4% in one quarter; −7.6% economic return means the dividend didn't compensate.
• Leverage rising into volatility: 8.0x GAAP (from 7.1x), 5.9x economic — a smaller book, more levered.
• Ex-PAA margin flat at ~1.70% — no underlying pricing gain behind the GAAP spread widening.
• Rate spikes cluster: FY2023's hiking cycle produced a $1.64 billion annual loss on the same mechanism.
• Trailing book value does not compound — dividends plus AOCI bleed consume earnings most years.

Our Take: Believe the EAD, respect the book value. Annaly's dividend is covered by genuinely strong recurring earnings — but shareholders are paid in economic return, and −7.6% is −7.6%. This is a hold-your-nose high-yielder, not a compounder: own it for the 15.9% distribution while EAD covers it, and watch next quarter's BVPS for whether Q3 was a mark or a wound. Watch those before anything else.